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Listing particulars for Precise Biometrics AB (publ)
DisclaimerThis is an unofficial translation of the Swedish prospectus. In case of any differ-ences between this translation and the Swedish original, the latter shall prevail.
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In this prospectus, the term ”Precise Biometrics” or ”the Company” refersto Precise Biometrics AB (publ) or to Precise Biometrics AB and its sub-sidiaries, depending on the context. Handelsbanken Investment Banking isa business division at Svenska Handelsbanken AB (publ).
Financial and other information Q3 report,January–September 2000 30 October 2000
Press release of financial statementJanuary–December 2000 22 February 2001
Annual report 2000 27 April 2001Q1 report,
January–March 2001 27 April 2001Interim report,
January–June 2001 16 August 2001Q3 report,
January–September 2001 31 October 2001
ContentsPrecise Biometrics in summary . . . . . . . . . . . . . . . .3
Background and motives . . . . . . . . . . . . . . . . . . . .5
CEO’s statement . . . . . . . . . . . . . . . . . . . . . . . . . .6
Market overview . . . . . . . . . . . . . . . . . . . . . . . . . .8
Technology/Patents . . . . . . . . . . . . . . . . . . . . . . .11
History/Group structure . . . . . . . . . . . . . . . . . . .16
Description of operations . . . . . . . . . . . . . . . . . . .17
Human resources . . . . . . . . . . . . . . . . . . . . . . . . .23
Financial review . . . . . . . . . . . . . . . . . . . . . . . . . .24
Comments to the financial review . . . . . . . . . . . .27
Interim report 1 Jan. – 30 Jun. 2000 . . . . . . . . . . .29
Financial goals and future outlook . . . . . . . . . . . .35
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Other information . . . . . . . . . . . . . . . . . . . . . . . .39
Shares, share capital and ownership structure . . . .41
Articles of Association . . . . . . . . . . . . . . . . . . . . .44
The Board, Executive Management and Auditors .46
Tax issues in Sweden . . . . . . . . . . . . . . . . . . . . . .48
The Financial Year . . . . . . . . . . . . . . . . . . . . . . . .49
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Auditors’ review . . . . . . . . . . . . . . . . . . . . . . . . .54
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Addresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
An investment in Precise Biometrics is associated with a high level of risk. Anyone considering making an investment inPrecise Biometrics is therefore encouraged to carefully study this prospectus, especially the chapter entitled “Risk factors”.
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Precise Biometrics in summaryPrecise Biometrics develops, markets and sells sys-tems and products for biometric identification. Themarket for biometrics is expected to expand signifi-cantly in coming years and the Company’s goal is tobe a leading player in the market. The Company’score technology is used to identify an individualbased on the curves, pattern and depth of his or herfingerprint. The technology provides security, is easyto use and replaces passwords, PIN codes and keys inareas such as IT security and physical access.
Biometrics for a mass marketBiometrics is the technical analysis of biological data,such as a fingerprint or voice pattern, in order toconfirm a person’s identity. Using a fingerprint is themost common and easiest way, and it is also one ofthe most reliable. Fingerprints have been used tradi-tionally by prison and police authorities in order toidentify criminals. In recent years, however, biomet-ric applications and products have been developedfor mass markets in several market segments. Withinpass systems, for example, fingerprints can replacepasses, keys and codes. Instead of using a card and acode to enter an office, an employee can simplyplace his or her finger on a sensor and then be ad-mitted into the building.
Biometric solutions also enhance security for transac-tions on the Internet when a fingerprint reader is inte-grated with a laptop. In addition to increasing security,the solution also means greater user-friendliness. Inter-est for biometrics within IT security is shown by thefact that Microsoft will provide a standard interfacefor biometrics in future versions of MS Windows.
Mobile phone systems of today and the future willprovide mobile services that demand high security,such as bank transactions. Increased use of these serv-ices places high demands on secure and user-friendlyidentification of the user of the mobile phone.
In summary, biometrics is an attractive complementto, and in some cases substitute for, traditional secu-rity solutions within IT security and pass systems, aswell as within embedded solutions in, for example,mobile phones. The key features of biometric solu-tions are:
• They are more convenient and easier to use thancodes, keys and passes.
• They are more secure, because personal identifica-tion is confirmed.
• They are cheaper to operate, because costs are reduced when there are no keys to lose and nocodes to forget.
Business activitiesPrecise Biometrics was founded in 1997 by ChristerFåhraeus (founder of C Technologies and Cellavi-sion), Mårten Öbrink (formerly with Ericsson) and
Nils Bernhard. Until 1999 the Company was prima-rily a development company for advanced productsand systems using biometric identification. The firstproducts were completed in the second half of 1999and have since been marketed and sold by the Com-pany and its partners.
Precise Biometrics’ technology differs from its com-petitors’ products in the method used to verify the fin-gerprint. The Company’s patented method reads theentire fingerprint, unlike traditional methods whereidentification is sought using different points of the fingerprint. The Company’s method means that moreof the information in the fingerprint can be stored, sothe sensors used for reading the print can be madesmaller. The advantage of smaller sensors is that theycan be integrated into mobile phones and hand-heldcomputers, for example. Smaller units are also cheaper.
The market segments that Precise Biometrics is ad-dressing with its products and solutions are IT secu-rity, physical access and embedded solutions formass-produced electronic products. The Company istherefore divided into three business areas (see dia-gram below). This division enables sales and market-ing to be focused on each main market, and it en-ables customer-focused technical development.
Marketing and sales of the Company’s products un-der its own brand name is performed by the Compa-ny itself and by distributors in several countries.Thus marketing and sales are mainly within the ITsecurity sector. In all areas the Company sells itstechnology via OEM agreements with leading play-ers in each sector. Technology will be licensed to cer-tain customers. The Company’s technology is inte-grated in other companies’ products and in PreciseBiometrics’ own products and systems. The Compa-ny’s products are manufactured by specially selectedsub-contractors.
Precise Biometrics is a rapidly expanding Companywith 48 employees. The parent company, Precise Bio-metrics AB, has two wholly-owned subsidiaries, PreciseServices AB, which handles the Group’s share warrantsprogramme, and Precise Biometrics Inc., which is theCompany’s sales and marketing business in NorthAmerica. Operations are based in Lund, Sweden, butthe Company also performs sales and marketing fromthe Precise Biometrics Inc. office in Washington DC.The Company has been listed on the SBI list of theStockholm Stock Exchange since December 1999 andhas around 1,700 shareholders, of whom ChristerFåhraeus and the SEB funds are the largest.
Precise Biometrics
EmbeddedSolutionsIT Security
PhysicalAccess
Success factors for Precise Biometrics
• The proven uniqueness and quality of, and demand for, the Company’s products and technology:- The US Pentagon has chosen Precise Biomet-
rics’ solution ahead of other solutions on themarket.
- The development, marketing and sales of theCompany’s products on Telia’s behalf.
- Sales of the Company’s products to GemPlus,a leading player in the market for smart cards.
- Installation of the Company’s products in Eu-rope’s first “Intelligent House” (JM Bygg).
- The Company’s first patent has been ap-proved.
• The Company is a leader in the development of technical and commercial solutions withinbiometrics:- In 1999 Precise Biometrics introduced the
world’s smallest fingerprint reader.- Precise Biometrics was the first to introduce a
solution where fingerprints could be matchedusing a smart card.
- Precise Biometrics has won several high-profile awards for best product.
- The first e-commerce transactions with a bio-metric signature featured the Company in as-sociation with Sonera SmartTrust and Miotec.
• Market leaders in several segments build support for biometrics into their products – Intel, Microsoft, GemPlus, Telia, Spyrus, etc.
Summary of income statementAmounts in SEK 000 1997/1998* 1999
Net sales 0 527
Operating loss –2,202 –12,356
Loss after financial items –2,164 –14,742
Equity/assets ratio, % 89 70
Average no. of employees 9 22
Share data following the new share issues completed in 2000 and after full dilution, pro forma1999 pro forma
Number of shares, full dilution 3,531,656
Profit/loss per share, SEK neg.
Cash flow after investment, per share neg.
Equity per share, SEK** 55.5
P/E ratio neg.
* 4 September 1997–31 December 1998
** Costs of the new share issue in September 2000 have not been deducted.
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Precise BiometricsPrecise Biometrics AB develops and markets a tech-nical platform with associated products and systemsfor biometric identification, based on fingerprintidentification. The method replaces in a secure andease-of-use way, older methods that included pass-words, PIN codes and keys. The Company wasformed in July 1997 and was primarily a develop-ment company up to 1999. The first products werecompleted during the second half of 1999 and sincethen have, together with the Company’s technicalplatform, been marketed and sold by the Companyand its partners.
Precise Biometrics’ technology distinguishes itselffrom competing technologies primarily through themethod used to verify the fingerprint. The Compa-ny’s patented method reads the fingerprint in its entirety, unlike traditional methods that use onlycertain points of the fingerprint to achieve identifi-cation. The market segments that Precise Biometricsis targeting with its various products and solutionsare IT security, physical access and embedded solu-tions for mass-produced electronics products.
Sales and marketing of the Company’s technologyand products are performed directly by the Compa-ny through licensing and OEM agreements withleading players in each segment, and via distributorsand system suppliers. During 1999 and 2000 PreciseBiometrics presented four different models of finger-print readers within IT security. These products arenow being sold by the Company and its partners.The market’s growing interest in the security andease-of-use which biometric solutions offer placeshigh demands on the speed with which the Compa-ny can develop its products and platforms.
New share issueAt an Extraordinary General Meeting of Precise Bio-metrics shareholders on 30 June 2000, the Compa-ny’s Board of Directors were authorised to take a de-cision, prior to the next Annual General Meeting andwithout preferential rights for existing shareholders,regarding a new share issue on market terms, of amaximum of 600,000 shares worth a nominal SEK0.40 per share. In accordance with the outstandingauthorisation from the Extraordinary General Meet-ing, the Company carried out a new share issue inSeptember 2000 targeted at institutional investorsand worth SEK 135 million before deductions for is-sue costs.
The purpose of the new issue was to extend institu-tional ownership in the Company. Furthermore, theCompany wished to prepare a strong financial re-serve in order to undertake company acquisitionsand fund its growing requirement for operating capi-tal. During a powerful phase of growth it is primarilycapital tied up in accounts receivable and inventories
plus investments in development, marketing and anexpanding organisation, that constitute Precise Bio-metrics’ capital requirements for the next few years.Greater financial strength will also give the Compa-ny a better foundation when it deals with largerplayers on the market. The new issue thereforestrengthened the Company’s financial position aheadof continued expansion.
O-list quotationThe quotation of Precise Biometrics on the OMStockholm Exchange’s O-list has added to the ap-peal of the shares. A stock exchange quotation meansthat Precise Biometrics will be better known amongcustomers and the general public. Recruitment ofqualified staff will also be made easier.
Quotation will raise interest in Precise Biometricsand improve analysis of the Company. It is also intended to achieve better liquidity for the shares,which will create the conditions for more effectiveprice setting. Quotation on the OM Stockholm Exchange’s O-list is planned for 3 October 2000.
In all other matters the reader is referred to informationcontained in this prospectus, which has been producedby the Board of Directors of Precise Biometrics in con-nection with an application to quote the Company’sshares on the OM Stockholm Exchange’s O-list. TheBoard of Directors of Precise Biometrics AB (publ) is re-sponsible for the contents of this prospectus. An assur-ance is hereby given that, as far as the Board knows,the information contained in this prospectus is in accor-dance with true circumstances and that nothing of sig-nificance has been omitted that could affect the pictureof Precise Biometrics created in this prospectus.
Lund, Sweden25 September 2000
Board of Directors of Precise Biometrics AB (publ)
Background and motives
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Strong partnerships are a key issue for us. By work-ing closely with other companies we can quicklyhelp them onto the market with new products whilewe gain access to their existing customer base andtheir sales force. This is a model we use in all ourbusiness areas. Our partnership with Telia is a goodexample. Telia is using our fingerprint reader in thelaunch of its modern work station. Another exampleis Tai-Hao, the world’s third largest producer of key-boards. Tai-Hao has become an important ally for usin Asia and is adding our technology to its products.
During the summer we have gained strong refer-ences from several customers, of which an invest-ment company was the first. We also received twolarge orders from GemPlus and several thousand fin-gerprint readers have now been delivered. We arevery proud that they chose Precise Biometrics.
Following a lengthy period of testing at the Pentagonof several leading players in the biometrics industry,the US Defense Department finally chose and in-stalled a Precise Biometrics solution. The system is apilot solution for increasing security for the use ofmobile computers. The US Defense Department isprobably the most demanding customer imaginable,and we are therefore very pleased to be able to liveup to their very strict security requirements andtheir demand for user-friendly products. This sametype of solution is highly suitable for private busi-nesses.
Now that Precise Biometrics has sold a reasonablylarge quantity of fingerprint readers, the Company
The Internet today is changing from an informationcentre into a global marketplace for businesses andprivate people. Many of us now do our bank errandson line and B2B transactions are on the increase.New ways of using the Internet place completelynew demands on security, however. Transactionsmust be fast and simple, but there has been a lack ofsolutions that combine security and convenience.
It has proved to be very difficult to perform e-com-merce profitably. One symptom of this is high trans-action costs. The added cost of around 66% that abusiness must charge for a credit card transactiononline, compared with a normal high-street store, isfar too high. In addition, the buyer runs the risk ofhaving to pay for any fraud occurring online1. In thisscenario, IT security is needed by everyone, and thecompany that can offer a secure, convenient and private solution will also be able to offer the lowesttransaction costs. This is precisely what Precise Bio-metrics can offer.
Precise Biometrics is well positioned on today’s mar-ket. We have a well-proven ability to create innova-tive products and bring them to market. This isshown by our Precise 100 product suite, which in-cludes the world’s smallest fingerprint reader andthe world’s first combined fingerprint reader andsmart card. Precise Biometrics was also the first com-pany to perform a secure digital transmission basedon biometrics. The Company has the potential tomake e-commerce secure and easy for a broad mar-ket. Our partners in this area are Sonera SmartTrust(formerly iD2) and Miotec of Finland.
CEO's statement
1 Source: Gartner Group.
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has a good understanding of what customers requireand the performance they expect. This is not onlyimportant for our customers within the IT-securitysector, it is also within physical access and embeddedsolutions. One of our partners, Solid (Assa-Abloy)has completed successful installations of our tech-nology in, for example, Europe’s first intelligenthouse in Stockholm (JM Bygg).
All of our products are based on our unique, patent-ed software for matching fingerprints. The ability toeffectively identify the most relevant information ona fingerprint means that we can use smaller andtherefore cheaper silicon sensors compared to otherproducers. This is a decisive competitive factor forsuccessful integration with mobile phones, for exam-ple. Our base in the Nordic region also gives us agood domestic market with strong customers. We areworking to transfer our success in fixed e-commerceto mobile units, so-called m-commerce.
Within the biometrics field, Precise Biometrics hasattained a respected position and is involved activelywith international standards organisations such asBioAPI, IBIA and Biometrics Consortium. We havechosen to be a spokesman for the use of biometricsvia our “Match” magazine, which has aroused a lot ofattention. Our long-term efforts mean that we areincluded in nearly all of the international lists ofleading biometrics companies. We are a member ofBluetooth SIG and we will be offering innovativeproducts – with or without cables – in the comingyear.
Following a dynamic recruitment process, PreciseBiometrics now has a strong team of experiencedmanagers and business specialists who, together withambitious young talent, provide us with cutting-edgeknowledge. We know what we want to achieve andwe have a strong position from which to shape avery successful and profitable company based aroundunique expertise. The support for biometrics an-nounced by Microsoft and Intel shows that marketacceptance is increasing. We foresee a period of verystrong growth ahead of us and we are ready to takeon the leading position in Europe for biometric solu-tions within IT security, physical access and built-insecurity solutions for mass-produced electronicsproducts.
Lund, Sweden25 September 2000
Peter HöjerbackCEO
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Secure ways of storing and transporting importantdocuments and valuables have been developed andimproved over many centuries, as individuals andgroups have sought to protect their most importantassets. In the past century the bank vault, safe andsecurity guard have largely been replaced by com-puterised systems and digital transactions. Securityguards have given way to electronic security systems,PIN codes have taken over from keys. These techno-logical developments have led to a demand for newtypes of solution that must give enhanced securitybut still be easy to use – which is often a difficultbalance to achieve. In addition to pass systems andkeys, people are now expected to remember an in-creasing number of codes for cashpoint machines,mobile phones, personal computers, office doors, In-ternet sites, etc. New systems that are not user-friendly run the risk of security breakdowns due tothe fact that they are used incorrectly.
The driving forces in the security market are increas-ing prosperity, growing awareness of crime and tech-nological advances. The evidence shows increasinginvestment in IT security, in surveillance and alarmsystems, especially among businesses. Within IT se-curity, growing use of the Internet and increased mo-bility throughout society are the main driving forces.
The use of biometrics in security solutions is notcurrently especially large because the price of com-ponents has been high and the technology has notpreviously been able to meet requirements. By 2001,however, the market for biometric solutions is ex-pected to be worth around USD 1 billion4.
Three methods for identifying an individualThe identity of a person who wants to enter an of-fice or a home, or make a bank transaction via theInternet, can be confirmed using one of the threefollowing methods:
Market overview
4 Source: Salomon Smith Barney5 Source: International Biometric Group, US market
Biometrics is thetechnical analysis ofbiological data. Forexample, the use of afingerprint or voicepattern to confirmsomeone’s identity.
The history of identi-fication
3000 BC: Clay seal used by theSumerian people.
0 AD: Wax
End of 18th century:Signatures used inWestern civilisation
Middle of 19th century: Photographs
1960: Digital signa-tures on computers
1962: PIN codes
1970: Biometrics forsmall applications
1999: Biometrics forconsumer electronics.
Revenue within world biometric industry
0.00
0.25
0.50
0.75
1.00
1999* 2001**
USD billions
AA * Source: Interna-tional BiometricGroup. (revenue excludes the use ofautomated searchesfor fingerprints used by police authorities)
** Source: SalomonSmith Barney
B CAGR1999–2004 107%.
Source: Business-to-business e-com-merce, DurlacherResearch Ltd.
• Via something that the person has, e.g. a key orpass card.
• Via something that the person knows, e.g. a password.• Via something the person is, e.g. via a fingerprint
or via face or voice recognition.
These different methods have different traditions.Keys have existed since around the 5th century. Inmany companies, employees still gain access to theiroffice after a guard at reception has recognised them.In recent years, however, security systems have in-creasingly become automated. Keys have been re-placed with pass cards and the number of guardsemployed has fallen as surveillance cameras have be-come more common. However, lost keys and passcards and passwords written for everyone to seecompromise security and entail significant adminis-trative costs.
Biometrics proves who you areInterest in the opportunities presented by biometricshas grown over the years. The elements for biometricmeasurements that are discussed are the eye’s iris,the voice, face, fingerprint and hand. Of these it isthe iris and the fingerprint that are the most reliable.Using the iris as a means of identification is currentlyexpensive and studies show that people find it intru-sive and unpleasant. It is therefore the fingerprintthat has emerged as the accepted basis for biometricsecurity solutions.
Up to now the use of biometric solutions in securityproducts has been limited. However, it has increasedin recent years within physical security (doors andbuildings) and communications (computers and net-works). Above all, the use of fingerprint readers is in-creasing. In 1999 fingerprint readers accounted for34% of revenues in the biometrics industry in theUS5. An important reason for the increase is a grow-ing need for secure and easy-to-use solutions and thefact that the technology for fingerprint recognitionhas improved considerably in just the past few years.
Development of B2B e-commerce in Europe
0
300
600
900
1,200
1,500
1999 2000 2001 2002 2003 2004
USD billion
129% 111%
130%
110%
68%
B
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Furthermore, fingerprint recognition has becomecheaper and user-friendlier as the price of compo-nents has fallen and computer processors and memo-ry have improved in performance. The solutions thatare on offer today are therefore very attractive for abroad market. Both Microsoft and Intel are addingsupport for biometrics in their products, which is ev-idence that biometrics is gaining ground.
Biometrics, therefore, is proving to be an attractivecomplement to, and in many cases, substitute for, tra-ditional security solutions for embedded solutionswithin electronics products, IT security and pass sys-tems. The main reasons for the progress made bybiometrics are:• Biometrics is more convenient and easier to use
than codes, keys and passes.• Biometrics is more secure, because a person’s iden-
tity is confirmed.• Biometrics is cheaper to operate, because adminis-
trative costs are reduced when there are no keys tolose or passwords to forget.
The Internet and IT solutions mean increased demands for security
Access to computersWe live in an information society where vastamounts of vital information are stored in digitalform. Correspondence nowadays is often via emailand a break-in into a company’s data system couldhave catastrophic consequences. Nowadays hugeamounts of information are protected by log-in sys-tems that require user names and passwords. Pass-words, however, are not always kept secret and areoften forgotten, so they are by no means foolproof.Computer departments at large companies spend be-tween 20% and 50% of their time solving password-related problems7. Biometric log-in solutions in theform of fingerprint readers linked to desktop andportable computers are being tested by an increasingnumber of organisations and businesses in order toimprove security and reduce the administrative cost
of support desks. External fingerprint readers are already being sold on the market and prototypes ofportable computers, computer screens and keyboardswith integrated fingerprint readers have beendemonstrated at technology exhibitions. Microsofthas begun a partnership with I/O Software Inc. thataims to integrate an interface for a biometric log-ging-in system for its operating system. The conse-quence of this will be that in future it will be just aseasy to add different types of biometric products toMicrosoft Windows as it now is to add a CD playeror printer. In 1999 the market for personal comput-ers was estimated at 110 million units6.
MobilityIn recent years the concept of the mobile society has become widely accepted. New applications andservices are being launched continually to meet in-creasing demands for mobility. The working environ-ment of key people in an organisation is becomingless and less office-based. As more and more employ-ees use portable computers with external hardwarelinking them to their colleagues, there is an increas-ing demand for greater security when the user connects up and logs on. Mobile phones are gaininglarger screens in order to display more informationand offer more services via an Internet connection.Meanwhile demand seems to be increasing for theJapanese equivalent of WAP – i-mode. Using WAP itis now possible to do bank errands, for example, viamobile phone, and with the third generation of mobile phone systems, UMTS, which is expected incoming years, there will be greater scope to use moreadvanced applications. Before then we will see GPRSand similar solutions that will improve capacity inthe mobile network. The expected flourishing ofservices will intensify demands for higher levels ofsecurity than those currently available for productsand services within the mobile segment. Sales of mobile phones and so-called smartphones are expected to reach around 900 million units by 2003(see graph on next page).
The InternetIn just a few years the Internet has developed frombeing a simple means of communication into being
6 source: IDC Corp and Gartner Group.7 source: Affärsvärlden, 15 June 2000.
Biometrics receivesgreat attention at security exhibitionsand revenue for theindustry is expectedto rapidly rise in2001
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the global market platform for the next generation.Individuals and businesses use the Internet daily foractivities such as private banking and purchase of pro-duction materials. Security for information transac-tions has thus become a matter of central importance.The market for software-based security products forthe Internet is expected to grow from USD 3.1 billionto USD 8.5 billion between 1999 and 20038.
In these systems users are most commonly identifiedvia passwords and PIN codes. In practice this meansthat it is possible to check that a person on an Inter-net site knows a code, but it is not possible to identi-fy who the person is. With a biometric solution,however, it is possible to confirm personal identity.Anonymity can still be maintained if required by al-lowing a third party to guarantee the transaction.
Banking via the InternetBanks use a combination of security measures, every-thing from encryption programs downloaded fromthe Internet to small devices on which a code can beentered when a service is used. The common factorhere is that the user must in some way enter a codefor every transaction. Many people think that thesesystems are awkward and several banks are now test-ing fingerprint readers to simplify identification ofits customers and thus enhance security for financialtransactions performed via the Internet. In Swedentoday there are around 1.8 million users of Internetbanking services9. By 2003, 34 million users are fore-cast in Europe10 and 26.3 million in the US11.
e-commerceWithin e-commerce too, there is a great need foruser identification. An increasing part of a company’spurchasing is performed via e-commerce and there istherefore a growing need for protection againstfraud. Security is usually mentioned as the greatest
concern regarding e-commerce. These fears are driv-ing the development of specialist security applica-tions. The development of interfaces for biometricidentification gives the user the opportunity to perform a secure e-commerce transaction using abiometric application. With the Internet and increas-ing mobility as the driving forces, a new form of e-commerce will emerge in coming years. This is m-commerce, where the m stands for mobile.
Trading between businesses, or B2B, is expected tobe worth over USD 7,000 billion on a global scale by200412. Within B2C, or consumer buying, there iscurrently a proposal being discussed in the USwhereby identification via a biometric applicationwould be a requirement for purchase of sensitiveitems, such as prescription drugs.
Traditional locks replaced by electronic pass systemsThe traditional lock market follows local standards,so very strong local businesses tend to dominatealong with a large number of relatively small nichecompanies. New players find it difficult to enter themarket without linking up with partners. Productson the market often have a long life sales and are tomore than 50% further development of and extensionsto existing systems. The lock market is expected toreach a higher level of security than is currently thecase today.
The lock and pass systems that are being used anddeveloped today are primarily controlled electroni-cally and are centralised, in order to limit administra-tion costs. Most larger organisations use pass cardsystems instead of traditional keys to control entry toa building. Pass card readers can be exchanged forfingerprint and smart card readers without having tomodify the existing system in any significant way. Se-curity is enhanced and the cost of lost cards and for-gotten codes would be reduced considerably. Themarket for security products and systems is expectedto exceed USD 9 billion by 2004 in the US alone13.The traditional lock market is also well suited forbiometric security products considering the specialfunctions and advantages that these products offer.
8 Source: Warburg Dillon Read.9 Source: Handelsbanken, SEB, Nordbanken, Föreningssparbanken, Skandiabanken, Stadshypotek and JP-bank.
10 Source: Jupiter Communication, 2000.11 Source: Jupiter Communication, 2000.12 Source: Gartner Group.13 Source: Freedonia Group Inc.
Development of mobile phones and smartphones
0
300
600
900
1,200
1,500
1,800
1994 1995 1996 1997 1998 1999 2000e 2001e 2002e 2003e 2004e 2005e 2006e 2007e 2008e
Millions of units
SmartphonesMobile phones
Smartphones is thecollective term for anew category of mo-bile phones with larg-er displays and en-hanced functionalityincluding WAP,GPRS, UMTS and i-mode. Smartphonesare one of the possi-ble applications of thefuture that can be in-tegrated with biomet-ric security products.
Source: Handels-banken InvestmentBanking
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Technology/PatentsBiometric methodsMost of the technical applications that are being de-veloped today for identification with a biometricmethod are based on one of the following distin-guishing features:• Fingerprint• Eye’s iris• Voice• Hand• Face• Veins on upper hand• Signature
Irrespective of which distinguishing feature is used,methods can be divided into four stages (see picturebelow for fingerprint example).
1. Capturing a picture. Different methods are useddepending on the distinguishing feature: an opti-cal or silicon sensor for a fingerprint, for example,or a camera for the hand. The accuracy and sizeof the picture, i.e. how much information is re-quired to confirm identification, depends onwhich method is used in stage 2.
2. Extracting characteristics for digital storage. Storinga complete picture of a fingerprint takes up a lotof space, which leads to inefficiency. Advancedmethods are therefore needed that sort out unnec-essary information and extract the unique charac-teristics of each individual. The more unique in-formation that is extracted, the safer the identifi-cation. The amount of information captured instage 1 can also be reduced to achieve a fixed lev-el of security when the algorithm for producingcharacteristic features is improved. In practice thismeans that, for example, sensors for fingerprintscan be made smaller and thus integrated into amobile phone without compromising security.
3. Matching of a picture using one or several storedcopies.Stage three can be divided into two areas:a) An identification system means that a finger-
print is compared with several others to con-firm identity. Advanced algorithms are used tomake an efficient search. A pass system for amain door to an office, for example, must beable to compare several thousand fingerprintsin less than a second if the system is to be user-friendly, unless the system is also equippedwith a smart card containing the owner’s print.
b) A verification system means that a new finger-print is compared with an established finger-print to confirm identity. An example of thissystem is when a fingerprint is stored on asmartcard that the user presents to confirm hisor her identity. Security within a verificationsystem can be made significantly higher thanwithin an identification system.
4. Decision to accept. A level must be defined forwhich requirements must be met before identifi-cation is confirmed. If the requirements are toolow, there can be gaps in security; but if require-ments are too high, the system become less user-friendly (see picture on page 12).
Core technology of Precise BiometricsPrecise Biometrics’ technology is based on biometricidentification of a fingerprint. The Company believesthat it is this technology that will be the basis for itsbusiness units’ operations. The core technology fo-cuses on identifying characteristic features of a fin-gerprint for digital storage, matching of fingerprintsand a decision to accept or reject (see above). TheCompany is not dependent on any method for cap-turing an image, which provides flexibility in adapt-ing the capturing method to the application area and
1
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3a
3b
then choosing the components that are currentlycheapest or best.
This flexibility means that it will be possible in thefuture to adapt the technology for use with the iris,for example.
The method mainly used for capturing and matchingfingerprints is called feature extraction, which isbased on the identification of start and end points inthe fingerprint. The method was first developed bythe FBI in the US in the 1970s and is mainly suitedto finding similar prints among a large number ofprints stored in a database.
Precise Biometrics’ method for capturing and match-ing fingerprints is different. It reads the entire finger-print, including the curvature of the fingertip, inthree dimensions. This unique information can thenbe stored, along with special areas of the print thatare rich in information. The amount of unique infor-mation that is entered is 3-10 times greater than waspreviously possible with other methods. In additionto significantly raising security, the Company’s
method also works if the finger has been injured.The reading is performed by a silicon or optic sensor,and mathematical analysis is performed using a se-lection of algorithms which are then converted intodigital form. Irrelevant information is discarded. Areading with such a high level of accuracy would nothave been economical three to five years ago. It ispossible today because the fast pace of electronicsdevelopment has reduced costs. The captured imageis matched with a template that can be stored on asmart card or hard disc.
Secure informationSecurity comes first at every stage of product devel-opment within Precise Biometrics. All information isencrypted before it is stored or distributed. Informa-tion about a fingerprint can be stored locally on ahard disc or server. If an extra curtain of security isrequired, the encrypted information can be stored ona smart card. In this case, the user enters the smartcard into the reader prior to verification. To ensurethat the Company’s products are guaranteed to workwith both current and future systems, all existingstandards and procedures have been followed very
Approval decision
A B
Number of errors
Sensitivity of assessment
False acceptance rate (FAR) False rejection rate (FRR)
Number of false approvals when no false rejections are allowed.
Number of false rejections when no false approvals are allowed
The vertical axis represents thenumber of errors made by the sys-tem, and the horizontal axis repre-sents the sensitivity of the system. Ifsensitivity is too weak (the left sideof the diagram), many unautho-rised people will be accepted. If sen-sitivity is too strong (the right sideof the diagram), then no unautho-rised people will be accepted, butmany authorised people will be re-jected. The system must be modi-fied so that it functions between thepoint (A) where nobody is wronglyrejected and the point (B) wherenobody is wrongly accepted. Thevertical arrows above points A andB indicate the level of errors ateach point.
A Feature extraction is based on avector that is positioned betweenpeaks in the fingerprint. Informa-tion about the vector is stored andused for matching. The problemwith this method is that each indi-vidual has a different number ofpeaks, so that a fingerprint from aperson with many peaks can oftenbe indistinguishable from anotherfingerprint that has just a fewpeaks. It is therefore possible tomake a false identification.B Precise Biometrics’ method isbased on pattern recognition.Several small pictures of the finger-print are stored. The pictures aretaken of surfaces on the fingerwhere there is plenty of informa-tion. When matching is performed,the entire pattern is used, alongwith the curvature of the finger and depth in the picture.
A B
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Internet PKI structure PKI structure with biometric
7 6 8 5
2 3 6 4
In a PKI solutionwithout biometrics,one party in a dia-logue is informed thatanother party knowsthe code for a certaincertificate. Only thebiometric solutioncan guarantee thatthe other party actu-ally is the personnamed on the certifi-cate.
The illustration onthe next page ex-plains how a PKI so-lution works.
carefully. Together with Intel and over 20 other bio-metric companies, Precise Biometrics is developing astandardised interface for biometric products. Mostnew computer programs, including MS Windows,will feature a special interface for biometric productsin the future. This means that traditional Public KeyInfrastructure (PKI) solutions (PKI is explained onnext page) can be combined with biometrics to pro-duce a solution that has far greater security and user-friendliness than is possible today. The biometric so-lution is added as an extra layer of security on top ofthe existing PKI solution (see picture above). Fur-thermore, the development of a standard interfacemeans that it will be just as easy adding a biometricproduct to a system as adding a printer or CD player.
Technological platformThe Company’s technological platform is the basisfor those products that the Company has developedand it has been designed so that the Company’stechnology can be integrated with other products.The technological platform consists of the followingmain components.
Image processing and fingerprint matchingThe Company has received a patent for its advancedalgorithms for real-time image processing. These al-gorithms can be used to compare pictures of finger-prints (see illustration on page 12). The first patentwas received in the summer of 2000.
SensorsIn several applications Precise Biometrics uses siliconsensors to capture a picture of a fingerprint. Siliconsensors are becoming standardised components andare purchased from different partners and supplierswho are themselves large international companies.The advantage of a silicon sensor as opposed to anoptic sensor is that it senses the electrical field onthe fingertip so it cannot be fooled by a photographof a fingerprint. It is also small and cost-effective.Optical sensors are bigger, but also more robust thansilicon sensors and they are normally used in applica-tions that are outdoors and exposed to wear and tear.Optical sensors are not developed by the Companybut are instead purchased from various suppliers.
Hardware integrationPrecise Biometrics’ products offer complete integra-tion of a silicon sensor for fingerprint identificationand an associated Field Programmable Gate Array(FPGA) and memory. Built-in components in mobilephones and Smart Handheld Devices (SHD) mustbe small and robust, with low energy consumptionand low cost, which are features that Precise Biomet-rics has taken into consideration ever since the startof product development.
Application softwareUsing the Precise Biometrics logging-in software it ispossible to log into a work station and network usingjust a fingerprint. This software, combined with theBioManager administration tool means that all pass-words can be replaced with fingerprints to obtainhigh security and user-friendliness. Microsoft is devel-oping an Application Programming Interface (API)for biometric products, which will further facilitateintegration in future versions of MS Windows.
Communication protocolThe Precise 100 series is connected to a PC’s parallelor USB port. To achieve the desired transmissionspeeds, Precise Biometrics has developed its owndrive procedures for all modern versions of the MSWindows operating system (95, 98, NT, 2000). TheCompany has also developed drive procedures forreading of smart cards via the standard PC/SC. De-velopment of addition protocols is taking place toextend functionality even further. Drive procedurescan be configured for implementation in mobilephones, SHDs and pass systems.
Current technical developmentMost of the technical development described belowis being carried out on Precise Biometrics’ behalf.To ensure long-term success, a large amount of development is covered by exchanges of informationwith partners and potential customers.
Application Specific Integrated Circuit (ASIC)ASIC development is a strategically important in-vestment. The Company’s ASIC is called Bio-CORE™ and has been developed primarily for solu-
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The Company’s ASIC is launched.
1999 2000 2001 2002
Precise 100A, the world’s smallest fingerprint reader is launched.
Precise 100SC, a fingerprint reader with an integrated smart card reader, is launched.
Precise Biometrics wins first prize for its fingerprint reader with smart card at Smart Card 2000.
Matching of fingerprint using smart card.
The first e-commerce transaction using a biometric signature is performed by Precise Biometrics in association with Miotec and Sonera SmartTrust.
Precise Biometrics secures its first major order (GemPlus).
A pass system featuring the Com-pany’s technology is installed in Europe’s first “Intelligent House”.
Precise Biometrics has its first patent approved.
Bluetooth technology integrated in selected products.
The Pentagon selects a Precise Biometrics solution.
Public Key Infrastructure (PKI)
*• User’s name• Publisher’s name• Serial number• Period of validity• Extension of validity period• Signature of the authority that published the certificate
A bank transaction1. The user creates a message for a bank transaction.2. 3. A hash generator creates a unique “digest” of the message.4. The digest is encrypted with the user’s private key.5. The encrypted digest is sent to the bank along with the message.6. The bank decrypts the message with the user’s public key.7. A hash generator creates a further unique digest based on the message.8. The two digest are compared. If they are identical, the user is confirmed as the person he or she claims to be.
A: Certification authority1. Application for a digital ID.2. Identity check. Data entry and certificate request.3. Guidelines and policies.4. Secure access.
B: Certificate manager1. Private key generation.2. Certificate* generation.3. Storage of the private key and the certificate on a hard drive or smart card.
PKI is a system that uses asymmetric encryption and digital certificates to ensuresecure transmissions of information on the Internet. The system has become a standard for secure transmissions and is expected to become widely used in coming years. The way the system works is described below.
C: Authentication1. The user enters his or her private key into the reader.2. The bank generates a random number and sends it to the user.3. The user’s computer encrypts the number using the private key.4. The encrypted number is sent back to the bank, which decrypts it using the user’s public key.5. The sent and received numbers are compared. If they match, the person’s identity is confirmed.
Sending an email1. The user creates a confidential message.2. A special session key is created for this session alone. The session key is used to encrypt the message while the receiver’s public key is used to encrypt the session key.3. The encrypted message and the encrypted session key are sent to the receiver.4. The receiver’s private key is used to decrypt the session key.5. The session key is used to decrypt the message.
1
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78
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Verification of certi-ficate and signature
Server
Certificate is signed
Central database
Directory**
Number
Random number
Start here/User/End-user
Smart card
Receiver
**• Certificate• List of invalid certificates• Public keys for end-users
B
C
A
tions built into electronics products, such as mobilephones. This is a long-term investment aimed atachieving the following: (a) minimising manufactur-ing costs for high-volume products; (b) maximisingperformance and speed; and (c) protecting the de-sign for unauthorised copying and thus consolidatingintangible assets. The Company has formed a high-competence ASIC group to develop the next genera-tion of cost-effective products.
Image processingThe Company’s technology for image processing isbeing improved continuously in order to enhance the relevance of the information that is extracted.This leads to higher security and the Company canminimise the amount of information that needs tobe saved. Feedback from the Company’s customers is a valuable ingredient of product development.
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Smart Card developmentPrecise Biometrics was the first company in the worldto present a secure digital transaction based on thematching of a fingerprint on a smart card (match-on-card). The method was presented in May 2000 in association with Miotec and Sonera SmartTrust and isnow being developed for integration in PKI and othersolutions. Development within the smart card sectoris being performed to a large extent in associationwith partners.
BluetoothBluetooth is a standard for high-speed wireless trans-mission of data. Bluetooth is supported by Ericsson,Motorola, Nokia, Intel, Microsoft and other companies.Precise Biometrics is developing solutions that willintegrate Bluetooth into its products. In practice thiswill mean that no cables will be required to connectthe Company’s products to a PC, mobile phone or adoor.
Embedded systemsTo facilitate integration of the Company’s productsin other products and systems, a standard code isbeing developed that can be configured for all typesof operating system.
New sensor technologyPrecise Biometrics does not develop sensors. It ishowever developing ways to adapt the Company’stechnology to new types of sensor which can readpressure, heat and other important elements. TheCompany’s software is also very useful for sensormanufacturers and helps to make sensors cheaper.This is decisive for integration in mobile phones, forexample.
PatentsPatent strategyThe Company’s strategy regarding patents continuesto be highly proactive. The opportunities that comefrom further development of the technology must beprotected by patents as far as possible. The purposeof patenting is:• To secure rights to the Company’s own products• To create the structural capital for future businessand agreements• To maintain a robust defence against competitors.The Company believes that it can maintain a strongprotection through its patents.
Patent applicationsPrecise Biometrics has sought a patent for its advancedalgorithms for picture management and matching offingerprints in real time. The patent application re-garding the matching algorithm was approved inSweden in June 2000. An application for a generalpatent was made in the US in 1998 and concerns theCompany’s matching technology. This applicationwas followed by an international application for protection in over 90 countries.
A total of 19 applications for patents have been made,of which one has been approved (see above), concern-ing ten different methods primarily within fingerprintmatching and processing of biometric data. These applications have been made in Sweden and abroad.
The Company employs patent agency AWA PatentAB in Sweden and Cooper & Dunham in the US.
Patent insuranceBased on the Company’s patent strategy and its patentportfolio, the normal patent insurance policies havebeen set up. The Company’s management considersthat patent insurance protection will be considerable,taking into account the size of operations.
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Milestones in Precise Biometrics’ history
1997Christer Fåhraeus, doctoral candidate in neurophysi-ology and the founder of C Technologies AB andCellaVision AB, conceives the idea of using advancedimage management to confirm identification via fin-gerprints. The Company is formally registered on 4September 1997. Mårten Öbrink is recruited asmanaging director. The Company receives an SEK200,000 grant from Sweden’s National Board for In-dustrial and Technical Development. A feasibilitystudy is performed by three students at Lund’s collegeof technology and proves that fingerprint matchingis possible.
1998Two more engineers are signed up to develop methodsfor storing fingerprints on smart cards. Contacts aremade with suppliers. A software prototype for theentire matching process, including storage of finger-prints, is established. The first hardware prototype iscompleted and tests prove successful. A project con-necting fingerprint technology with a logging-in pro-gram for MS Windows is carried out. The results arepresented at two IT security exhibitions and demon-strated in front of a large number of potential cus-tomers. A large-scale patent application for matchingtechnology is made in the US. More engineers, proj-ect managers and the current CEO, Peter Höjerback,are recruited. Three new share issues worth SEK 1.8,4.2 and 6.7 million respectively are completed.
1999At Cebit ’99 the company introduces the Precise100 SC, the world’s first fingerprint reader featuringan integrated smart card reader and silicon sensor. AtComdex in the US in November the company intro-duces Precise 100 A, the world’s smallest fingerprintreader. There are now over 200 pilot installations atcustomers all over the world. Partnership agreementsare signed with GemPlus, iD2 (now Sonera Smart-Trust) and Solid/ASSA ABLOY. The company re-ceives awards for its products at international exhibi-tions. The marketing organisation is extended duringthe year and the company is now represented inaround 15 countries. Capital requirements are safe-guarded via a new share issue in June that raises SEK22.7 million. The company is quoted on the SBI-listof the Stockholm Exchange in December 1999. Salesreach SEK 527,000 and there are 30 employees atyear-end.
2000A new share issue targeted at institutional investorsraises SEK 39 million after costs. An office for salesand marketing is opened in Washington DC, USA.
The Company makes a technological breakthroughin the form of verification of a fingerprint on a smartcard (match-on-card). GemPlus of France places anorder for 1,500 fingerprint readers, the largest so farin the Company’s history. A second order fromGemPlus is worth SEK 1.3 million. The Company’smain products wins Best Biometric Product at IT Se-curity 2000, Europe’s largest IT security exhibition.The Company’s first patent for fingerprint verifica-tion is approved. The US Defense Department se-lects Precise Biometrics ahead of other competitors.The order is for a pilot installation. The Company isdivided into three business areas and appoints newlyrecruited business area managers. In September anew share issue targeted at institutional investorsraises SEK 135 million before costs. In mid Septem-ber the Company has 48 employees.
Legal structureThe parent company, Precise Biometrics AB, has twowholly-owned subsidiaries, Precise Biometrics Ser-vices AB1, which manages the Company’s optionsscheme, and Precise Biometrics Inc.2, which is theCompany’s sales and marketing office in NorthAmerica. Neither Precise Biometrics Services AB orPrecise Biometrics Inc. currently have any employees.
Operational structureAll activities are currently carried out by the parentcompany, which is divided into three business areas(see below). The structure is adapted to meet marketand administrative requirements, and to ensure cus-tomer-focused development of the Company’s tech-nological platform. The organisation enables concen-tration and clarity within each market segment interms of development, marketing and sales. Market-ing and sales in different geographic markets will behandled by international distributors and partnersand by the Company’s own international sales andmarketing offices. At the present time the Companyhas a separate subsidiary in Washington DC, whichtogether with partners and distributors will handlethe Company’s sales and marketing in North America.
History/Group structure
Precise Biometrics AB
Precise Biometrics Inc.Sales & Marketing
Precise Biometrics Services ABOptions scheme
1 Registered in April 2000 (PRV).2 Registered in August 2000.
Precise Biometrics
Embedded SolutionsIT Security Physical Access
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Description of business activitiesBusiness conceptPrecise Biometrics AB will develop, sell and licenceproducts and systems based on unique biometrictechnology that enhance security and ease-of-usewhile reducing the cost of using computers, mobilephones and pass systems. The company will therebycreate good, long-term growth for shareholders.
VisionUsing its knowledge of biometrics and IT security,Precise Biometrics AB will actively contribute to cre-ating sophisticated security solutions for businesses,organisations, authorities and private individualswherever reliable identification is required. The sametechnology that makes it simple and safe to use fixedand wireless Internet will be used to open doors intohomes, offices, cars and other items of property. Pre-cise Biometrics will be one of the leading interna-tional players in biometric security solutions.
Goals and strategies
ObjectivesPrecise Biometrics AB will be the leading supplier ofbiometric security solutions in Europe and one ofthe leading international players. The company willoffer innovative products designed to enhance IT se-curity and physical access and be integrated intohigh-volume electronic products, such as telecomproducts.
StrategiesSummaryThe company will sell its technology in the form ofits own finished products, as components that can bebuilt into other companies’ products, as systems andas licensed technology.
ProductsPrecise Biometrics’ products and technology musthave the best performance on the market in terms ofsecurity and ease-of-use for fingerprint identification
while never intruding on the user’s personal integri-ty. It must be possible to adapt the level of securityto the application. The Company will also developtechnology so that products can be made smaller andproduced at even lower cost.
Technical development and competence assuranceThe company’s development work focuses on thecompany’s core competencies in order to maintainthe technological advantage. Core competencies con-sist of methods for describing and comparing finger-prints, hardware integration and the development ofsilicon cards. Precise Biometrics aims to provide astimulating environment for the development of cut-ting-edge technology. The Company operates variousreward schemes such as share options in order to re-cruit and maintain staff with core competence. Thecompany also wishes to foster a good working envi-ronment with a good mix of young and old, men andwomen.
Cost efficiency and large volumesThe company seeks optimum cost efficiency in orderto serve high-volume international markets.
PartnershipsThe company’s identification software can be li-censed to international businesses that market prod-ucts and systems that require electronic personalidentification. Precise Biometrics can create com-plete software solutions for customers and ensurefull integration. Through technical co-operation re-garding hardware, combinations can be created thatmean greater added value. Partnerships with suppli-ers of sensors are especially important.
OrganisationPrecise Biometrics employs 48 people. The Companyis divided into three business areas: IT security, phys-ical access and embedded solutions. There are alsodepartments for research and development, finance,marketing and communication, plus the post of tech-
Peter Höjerback, CEO
Technical directorFinance
Research and developmentMarketing
and communication
Physical Access Embedded SolutionsIT Security
nical director. The senior management team includesthe CEO, heads of the business areas and the headsof the departments named above.
Technical directorThe technical director is responsible for the develop-ment of future products being adapted to meet mar-ket demand, and that co-operation is establishedwith partners who are of strategic importance for theCompany. The director is also responsible for ensur-ing that developed solutions receive patents, whenthis is possible.
FinanceThe finance department is responsible for financialreporting and the accounts, the budget and generaladministration and personnel administration. Proce-dures have been established for financial control andinternal auditing processes.
Research and developmentThe research and development department consistsof project managers with several years of experienceof technical development, and of qualified engineerswith well-documented competence in programming,semi-conductors and image management. Develop-ment takes place within defined projects (see currenttechnical development). The department is also re-sponsible for purchasing, logistics and productioncontrol.
Marketing and communicationThe marketing and communication department is re-sponsible for marketing and for providing informa-tion, internally and externally. Marketing is targetedat the Company’s customers, investors and the gen-eral public, in order to increase awareness of and un-derstanding for the Company in particular and bio-metrics in general.
Business areasPrecise Biometrics is divided into three business ar-eas: IT security, physical access and embedded solu-tions. This division is primarily intended to focus
sales and marketing in each respective market, andto ensure customer-focused technical development.Business logic and the Company’s strategies for eachbusiness area differ, so this division is therefore nec-essary to ensure the right structure for reaching avery broad market in the most effective way.
IT securityPrecise Biometrics has developed products for biometric identification that can be connected to,or integrated in, stationary or portable computers.Logging in takes place via the Company’s own logging-in system, which ensures secure and easylogging in, with lower administration costs than current password-based solutions.
Precise Biometrics’ products can also be used to en-sure secure transactions on the Internet. The Compa-ny’s solutions differ from traditional solutions in thatthey ensure verification of a person’s identity, ratherthan just a check that a person knows a code. User-friendliness is increased significantly because theuser does not need to use pre-programmed devicesand/or single-use passwords, as many banks do todaywith their Internet bank solutions.
Target groupThe target group is everyone who uses a computerwith a logging-in code and/or anyone who performsfinancial transactions via the Internet. This includesorganisations, businesses and private individuals. Ex-amples of organisations that have a large need for se-curity products are banks, military organisations, au-thorities and businesses performing e-commerce.
Market strategyThe Company’s technology is marketed under theCompany’s own name and is also licensed for saleunder other names. Various distribution channels inthe form of system integrators and retailers are usedfor the Company’s own products. Some sales aremade directly to prioritised customers. Licensed salesare made to global players with well-establishedsales organisations and a large customer base.18
When the user startsher computer the nor-mal logging-in box ap-pears on screen. In-stead of a normalpassword, a finger-print is required.When the correct au-thorised user placesher finger on the Pre-cise Biometrics reader,she is immediatelylogged in.
Installation of the Pre-cise Biometrics systemis easy and takesaround 20 minutes.
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A Precise 100 SC –the world’s firstcombined finger-print reader andsmart card. Match-ing is performed onthe card.
B Precise 100 A – theworld’s smallest fin-gerprint reader.
A B
ProductsThe first generation of products – Precise 100 A,Precise 100 SC and Precise 100 SC SDK – waslaunched in 1999. These are different variations of alogging-in system for MS Windows NT network.Support for all modern versions of Windows is nowbeing developed.
Precise 100 SC and Precise 100 SC SDK are theworld’s first systems to combine a smart card and sil-icon sensor for fingerprint identification, a combina-tion that yields very high security.
The system consists of a fingerprint reader connect-ed to a PC running Precise Biometrics’ software forfingerprint matching plus an easy-to-use program foruser administration. The software is installed on thecomputer and the fingerprint is stored in encryptedform on the computer’s hard disc or on a smart card– everything to make it impossible to recreate thefingerprint.
The system also includes a program that makes ad-ministration of user authorisation easier and more ef-ficient. Because traditional administration of pass-words disappears, great savings are made possible.Matching is performed in the computer or on thenetwork server. Data processing is done in real time,which guarantees a response in less than one second.
The reader and the software can be integrated intoother applications. Precise 100 SDK contains soft-ware that is demanded by system integrators andOEM customers. In certain cases the Company willalso license applications from software providers andsell these together with its readers.
ManufacturingPrecise Biometrics’ products are manufactured byspecially selected sub-contractors. Rational and cost-effective production is important for effective pricesetting, for maintaining high quality and for meetingrapid changes in demand. Manufacturers must be
ISO 9000 certified before Precise Biometrics will dobusiness with them.
Electronics production is initially performed by aSwedish company, Vellinge Electronics. Other sub-contractors work on the mechanical aspects and de-sign of the products. The silicon sensors that are usedfor fingerprint capture are purchased from Veridicomof California, USA, and from Infineon of Germany.Several other sensors have also been integrated toensure high technical and commercial flexibility. Asproduction volumes increase, an increasing amount ofproduction will take place outside Sweden.
Distribution and salesPrecise Biometrics sells products, OEM-integrationkits and licenses for the Company’s identificationsoftware. The Company is currently focusing on es-tablishing contacts and signing agreements with in-ternational businesses marketing products that re-quire electronic personal identification. Precise Bio-metrics is also seeking IT businesses with reliabledistribution channels, good knowledge of integrationor powerful software that can improve the Compa-ny’s technology. Around 15 agreements with distrib-utors in several countries have been signed. In addi-tion to sales and storage, distributors help to marketproducts and offer service to end-users.
Physical accessThe Company’s technology is used to identify peopleentering or leaving a room or a building. It meansthat access is linked to an individual rather than to acard or a key. Security is significantly enhanced be-cause unauthorised people cannot gain access withsomeone else’s pass or code. Control over who usesthe system is increased, while administration costsare reduced, because there are no codes to forget orkeys to lose.
The Company’s technology is well suited for integra-tion in various pass systems. Integration requires lit-tle adaptation of the existing security system and can
be applied to all of or just parts of the system. Thesystem can consist of a fingerprint reader combinedwith a smart card – with verification taking place onthe smart card – or fingerprint reader alone, withidentification confirmed via a database on the system.When the system is integrated to include smart cardverification, it is only the card reader that needs tobe replaced in the existing system – no other alter-ations are required. The Company’s technology canbe used to unlock a car door, switch on an ignition,or open a door into an apartment, etc. Silicon sensorsare used for indoor applications, and more robust op-tical sensors are used for outdoor applications.
Target groupThe Company’s products are suited to suppliers ofphysical access or time-reporting systems whose cus-tomers are primarily organisations that today usepass card systems and/or need to control who passesin or out of a building. Examples of end-users aremedium and large businesses in most sectors but especially banks and hotels, military sites, prisons andhospitals.
Market strategyThe Company reaches its end customers in partner-ship with suppliers of security systems and manufac-turers of time-reporting systems and smart cards.Partnership agreements have already been signed withSolid (Assa Abloy) and GemPlus (see partners, page21). Precise Biometrics markets its technology to otherleading suppliers within the above-named groups.
Manufacturing and distributionPrecise Biometrics does not intend to build up itsown manufacturing operations. It will use a networkof sub-contractors who will provide manufacturingand distribution services. By collaborating with in-dustrial partners and using ASICs, production costscan be kept low and it will be possible to scale upvolumes quickly.
SalesSales of the Company’s technology are performedthrough licensing to established security systemcompanies and OEM agreements with manufactur-ers of smart card readers. This enables the Companyto reach large parts of the global market as thesepartners are leading players in their respective fields.
Embedded solutionsUsing the Company’s patented technology, sensorsfor reading fingerprints with associated componentscan be made suitably small and low on energy sothat they can be integrated in mobile phones orSHDs. The technology provides a high level of secu-rity, which for example gives service suppliers theability to offer their customers secure banking serv-ices from a mobile phone.
Target groupThe target group is mobile people who use their mo-bile phones and SHDs daily at work or in the home.The customer group is the same one that is expectedto use the new services that will be offered via thenext generation of mobile phone systems such asWAP, GPRS or UMTS.
Market strategyThe strategy for reaching a mass market is to dealwith large businesses that develop and manufacturemobile phones, SHDs and PCs. Through these part-ners the Company expects to sell its technologythrough OEM and license agreements.
ProductsThe Company’s products are based on a platformthat includes a sensor, memory and FPGA. The nextgeneration will feature the Company’s own perma-nently programmed data chip, or ASIC. Develop-ment of the ASIC will mean that fingerprint tech-nology can be integrated relatively easily and cheaplyinto a large number of electronic products, such asmobile phones and SHDs.
ManufacturingThe Company does not intend to have its own manu-facturing operations (see above under Physical access).
Distribution and salesPrecise Biometrics’ sales of OEM integration kits andlicenses for the Company’s identification softwareare focused on internationally active businesses thatsell mass-market electronic software that requires se-cure user identification. One example is third gener-ation mobile phones using services that demand highsecurity levels, such as Internet banking.
New projects
Refined core technology – Match-on-cardTo retain its position as an innovative leader withinbiometrics and smart cards, the Company is now de-veloping the next generation platform for computersecurity products. Within the framework of this plat-form, the PKI structure and smart card solution willbe tied in more closely to the biometric system.Matching currently performed in a PC will be movedto the processor on a smart card.
This apparently small change will significantly en-hance the security of the system and will mean thatPrecise Biometrics’ fingerprint reader will fit intostandardised PKI systems. The current Precise 100SC can be upgraded to include this new method. Itwill not be necessary to change reader. Productsbased on Match-on-card technology will be madeavailable on the domestic market next year.
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The trend of focusing on the smart card is somethingthat Precise Biometrics shares with both current andfuture mobile phone systems (GSM, GPRS, EDGEand UMTS). Furthermore, there is plenty of evi-dence that ID cards, credit and bank cards will be-come smart cards in the future. The most recent ex-amples are the electronic ID cards in Finland andAmerican Express’ new “Blue card”, both of whichare smart cards. A patent has been sought for themethod for transferring matching to a smart card.
Profiling the brandThe Precise Biometrics brand and logo are used in aconsistent way throughout the annual report, web-site, Match newsletter, advertisements, on productsmade by the Company, in marketing and on otherexternal materials. Products are called Precise plus anumber or letter to indicate the product series andthe specific product. This consistent use of the Com-pany name, logo and colours makes it easy to recog-nise the Company and enhances internal and exter-nal profiling.
Partners
Sonera SmartTrust (iD2)A partnership agreement was signed in 1999 withiD2 Technologies (now called Sonera SmartTrust), acompany that develops software for secure Internetidentification based on Public Key Infrastructure(PKI) and smart cards. The purpose of the venture isto replace traditional PIN codes with fingerprintsand thus enhance security levels and user-friendli-ness for e-commerce. The new method for matching-on-card has been developed and demonstrated in association with iD2 and the Finnish smart cardcompany, Miotec. iD2 was recently acquired by Sonera, a Finnish telecom operator.
GemPlusA partnership was started during the year with Gem-Plus of France, the world-leading manufacturer ofsmart cards. GemPlus extended its product portfoliowith a smart card reader with an integrated finger-print reader from Precise Biometrics. This partner-ship is very proactive both technically and commer-
cially. In June the Company received its first majorcustomer order from GemPlus – for 1,500 finger-print readers. This order was followed up by anotherorder worth around SEK 1.3 million in August.
Solid (Assa Abloy)In December 1999 Precise Biometrics announced anagreement with the security company, Solid, a sub-sidiary of the Swedish company, ASSA ABLOY, con-cerning a pass system combined with biometrics. Theproduct provides increased security combined withsimplicity for the user, and is the first commercialsolution of its type in the world. A series of proto-type installations have been made. The system wasofficially launched by Solid at the Skydd 2000 exhi-bition held in September 1999.
BioNetrixBioNetrix formed the BioSEC alliance during 1999and Precise Biometrics became a member in May2000. The alliance consists of developers and pro-ducers of identification solutions who support thedevelopment of an open platform for solutions thatcontain, for example, readers for smart cards andbiometrics. BioNetrix is an Austrian company thatprovides infrastructure for control of personal identi-fication technologies.
Miotec OyIn May 2000 together with Miotec Oy, Precise Bio-metrics presented a combined fingerprint and smartcard reader in which fingerprint verification takesplace directly on the smart card’s operating system.Miotec is a Finnish company that develops and pro-duces smart cards. The company also provides PKIsolutions.
SpyrusSpyrus and Precise Biometrics have together devel-oped a system for access to networks and computersthat combines Precise Biometrics’ fingerprint readerwith Spyrus’ reader for smart cards. The system iscertified with the Federal Information PublicationStandard (FIPS). Spyrus develops readers for smartcards and PKI solutions.
Tai-Hao EnterpriseTai-Hao Enterprise is the world’s third largest manufacturer of Keyboards for PCs. During CeBit2000 in Hannover, Tai-Hao and Precise Biometricsdemonstrated a keyboard with an embedded finger-print reader.
TeliaTelia will develop, market and sell Precise Biomet-rics’ fingerprint reader as a key component of itsTelia SmartTouch security concept, which providessimple and safe personal identification.
Other players on the marketThe market for biometric products is relativelyyoung, but it is expected to expand rapidly in thenear future. The growing interest in biometrics is ex-pressed in the form of start-ups and major compa-nies that are adapting their systems in order to inte-grate biometric solutions. This is a key developmentfor Precise Biometrics. Awareness of biometrics andits opportunities is increasing, while the Company’scompetitors and potential partners are helping toraise demand for biometric solutions.
There are today an estimated 100 companies activein the biometric field, of which most are relativelysmall and new. Most are in the US and around 70 ofthem use fingerprint technology. Many of these com-panies, however, are integrators, buying products andtechnology from companies such as Precise Biomet-rics. Several companies make software adapted tobiometrics. This often includes applications for log-ging in, password databases, application protection,screensavers and file encryption. Examples of thesecompanies include Keyware (Belgium), I/O Software(US) and BioNetrix (US). These companies are rela-tively large in the biometrics industry, but they aremore like complements to and potential partners ofPrecise Biometrics rather than direct competitors.Among sensor manufacturers, several players haveindicated that they are competitors, such as Veridi-com (US) and Fingerprint cards (Sweden), whileothers have openly declared that that they intend tobe solely component suppliers, e.g. Infineon (Ger-many). Several sensor manufacturers are currentlysuppliers to Precise Biometrics. The number of direct
competitors, therefore, is much smaller than the to-tal number of players in the industry. These competi-tors use different biometric identification methods.The Precise Biometrics method, pattern recognition,differs from competing methods by using a largeramount of the information contained in a finger-print. This enables a higher level of security than waspreviously possible. The method also means that thesensor can be smaller, which has cost advantages, andit can be integrated in a mobile phone. Nearly allother commercially available systems use the featureextraction method that was developed in the 1970sand is still used today by the American FBI, for ex-ample.
There are competing companies within most appli-cations and potential business areas. In addition tousing different methods, different suppliers use dif-ferent parts of the biometric security system. Thisfactor, plus the fact that the market is young makesit difficult to compare players in the market. The fol-lowing is a summary of observations made by theCompany.
One company that is similar to Precise Biometrics isthe American company, Biometric Identification,which specialises in image management of a part ofthe fingerprint and uses a technology similar to Pre-cise Biometrics’. Biometric Identification focuses onproducts within the pass system segment.Other major competitors include Identix/Identicator(US), ABC, American Biometric Corporation (US),Sony (Japan) and others.
In summary it can be stated that the large marketpotential has encouraged a relatively large number ofplayers, and that their roles in the market have notbeen crystallised. An increased amount of integrationand consolidation is a probable consequence whenthe market for biometric products begins to take off.Precise Biometrics intends to be a leading player inthe development of the biometric market.
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Human resourcesRecruitment, growth and the company’s business culturePrecise Biometrics’ single most important asset iscompetent and motivated employees, because activi-ties place high demands on technical skills and thecommercialisation of the Company’s products is tak-ing place very rapidly. Since start-up the Companyhas expanded at a fast pace and it is expected thatthis pace will continue. As a result, investment insupport systems, training, administration and recruit-ment has received, and will continue to receive, highpriority within Precise Biometrics, in order to ensurecontinuing rapid yet controlled growth that can bemaintained at a profitable level.
The challenge is to continue to attract, recruit andkeep employees with specialist knowledge and man-agers with solid experience, both in Sweden andabroad. However, there is a shortage of people withspecialist skills in the biometric field. The Companycontinually assesses its recruitment needs and adaptsits recruitment process accordingly. In the future, op-erations will be conducted at several locations withinSweden and abroad, so the recruitment base willhave to be extended. Employee turnover within theCompany has always been low.
It is extremely important that the right type of em-ployee can be recruited and integrated quickly intothe Company’s business culture. Precise Biometricscontinues to successfully recruit employees withhigh levels of competence, including recently quali-fied engineers, doctoral candidates with cutting-edgeknowledge and people with extensive experience ofthe IT and electronics industries.
The sales and marketing department has beenstrengthened with the recruitment of several highlyqualified employees as the pace of commercialisationintensifies. The finance department, too, has expand-ed its team to meet increased demands from share-holders and investors in connection with the quota-tion of the company’s shares.
Gender CompetenceAge of employees
<30 years, 47%
>40 years,15%
30-40 years, 38%
Sales and marketing, 35%
Men, 79%
Women, 21%
Research and development, 44%
Administration and other, 21%
Education
University-education, 87%
Other, 13%
In the next few years as the Company’s products arebrought to market, the main recruitment require-ment is for experienced sales and marketing staff.Ongoing technical development will also requirenew engineers with specialist skills. Recruitment ismainly done through personal contacts and net-works, but recruitment agencies, Internet and tradi-tional advertisements are also used.
The company’s new premises next to Lund’s technicalcollege, Lund University and the Ideon research villagefacilitate recruitment of highly qualified employees.Well-being at work is an important factor when re-cruiting and retaining employees. The Company’s busi-ness culture is characterised by creativity and compe-tence, a decentralised organisation with short paths fordecision-making, speed, flexibility and youth.
Competence profileExperience of the biometrics industry among theCompany’s employees varies. The Company employsnew graduates and people with proven experience oftechnology, finance, sales and marketing within theCompany’s business areas. This produces a mix ofacademic knowledge and practical experience. In1999 Precise Biometrics doubled its workforce, from15 to 30. Recruitment has continued during 2000,mainly of sales staff, and the total number of employees is now 48, of which 10 are women.
Incentive schemeDifferent types of incentive are an important part ofPrecise Biometrics’ human resources policy. In addi-tion to market-based salaries, Precise Biometrics intends to implement various incentive schemes inorder to attract, recruit and keep the best people onthe market. Via an options scheme, employees areoffered indirect ownership in the Company (see further under “Shares, share capital and ownershipstructure”). Several key people who are responsiblefor the Company’s technical progress and productdevelopment are among the Company’s larger own-ers. Several senior managers and key staff within salesand marketing have an ownership interest in PreciseBiometrics in the form of either directly throughshares or indirectly through warrants.
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Financial reviewIncome statement in summaryAmounts in SEK 000s 1997/1998* 1999
Operating income etc. 3,839 9,081
Operating expenses exc. depreciation –5,701 –19,712
Depreciation according to plan –340 –1,725
Operating loss –2,202 –12,356
Net financial items 38 –2,386
Loss after net financial items –2,164 –14,742
Tax — —
Deduction of minority shares — —
Loss after tax –2,164 –14,742
*4 Sep. 1997 – 31 Dec. 1998
Balance sheet in summaryAmounts in SEK 000s 31 Dec. 1998 31 Dec. 1999
ASSETS
Intangible fixed assets 5,906 18,934
Tangible fixed assets 854 1,711
Total fixed assets 6,760 20,645
Other current assets 396 2,790
Current investments 0 6,000
Cash and bank 5,559 1,913
Total current assets 5,955 10,703
Total assets 12,715 31,348
SHAREHOLDERS’ EQUITY AND LIABILITIES
Shareholders’ equity 11,311 21,891
Long-term interest bearing liabilities — 6 000
Short-term non-interest bearing operating liabilities 1,404 3,457
Total liabilities 1,404 9,457
Total shareholders’ equity and liabilities 12,715 31,348
Cash flow statementAmounts in SEK 000s 1997/1998* 1999
Loss after financial items –2,164 –14,742
Adjustments for items not included in cash flow –5,566 –12,300
Tax paid 0 0
Changes in working capital 1,008 –341
Cash flow from current activities –6,722 –27,383
Cash flow from investment activities –1,194 –1,585
Operation’s cash flow after investments –7,916 –28,968
Cash flow from financing activities 13,475 31,322
Cash flow for the year 5,559 2,354
*4 Sep. 1997–31 Dec. 1998.
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Key figures1997/1998* 1999
Sales growth, % n.a. n.a.
Gross margin, % neg. neg.
Operating margin, % neg. neg.
Profit margin, % neg. neg.
Capital employed, SEK 000 11,311 27,891
Operating capital, SEK 000 5,752 19,978
Return on capital employed, % neg. neg.
Return on operating capital, % neg. neg.
Return on shareholders’ equity, % neg. neg.
Share of risk-bearing capital, % 89% 70%
Equity/assets ratio, % 89% 70%
Net debt/equity ratio, times –0.49 –0.09
Interest cover ratio, times neg. neg.
Net debt1, SEK 000 –5,559 –1,913
Average number of employees, 9 22
Sales per employee, SEK 000 0 24
Salary costs inc. soc. sec. contributions, SEK 000 3,764 10,561
(of which pension premiums) 122 419
R&D costs that affected the profit, SEK 000 — —
R&D expenditure set up as an asset in the balance sheet, SEK 000 5,906 14,025
1 (- = net receivable claim).
Data per share after full dilution1997/1998* 1999
Number of shares at period’s end (before full dilution), 1,623,700** 2,343,700
Number of shares at period’s end (after full dilution), 1,761,739** 2,636,228
Average number of shares (after full dilution), st 1,364,686** 2,268,742
EPS, SEK neg. neg.
Operation’s cash flow after investments per share, SEK neg. neg.
Shareholders’ equity per share, SEK 6.4 8.3
Dividend per share, SEK — —
P/E ratio, times neg. neg.
Price, SEK n.a. 190
Price/shareholders’ equity, times n.a. 22.9
Data per share after new issues carried out during 2000 and after full dilution, pro forma
1999
Number of shares after full dilution, 3,531,656
EPS, SEK neg.
Operation’s cash flow after investments per share, SEK neg.
Shareholders’ equity per share, SEK*** 55.5
P/E ratio, times neg.
*** 4 Sep. 1997–31 Dec. 1998
*** The calculations include 223,700 shares paid for in 1998 but registered in February 1999.
*** With reference to the new issue September 2000 the issue’s costs have not been deducted.
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Definitions
Sales growthIncrease in nets sales as a percentage of previousyear’s net sales
Gross marginGross profit as a percentage of the financial year’snet sales.The gross profit is defined as net sales less the cost ofgoods sold.
Operating marginOperating profit/loss after depreciation as a percent-age of the operation’s net sales.
Profit marginProfit after net financial items as a percentage of theoperation’s net sales
Capital employedBalance sheet total less non-interest bearing alloca-tions and liabilities, including deferred tax liabilities.
Operating capitalCapital employed less liquid assets and current in-vestments
Return on capital employedProfit/loss after financial items plus interest expensesas a percentage of the average capital employed.
Return on operating capitalOperating profit/loss as a percentage of the averageoperating capital
Return on shareholders’ equityProfit/loss for the year as a percentage of the averageshareholders’ equity.
Share of risk-bearing capitalShareholders’ equity, minority shares and deferredtax at the end of the year as a percentage of the bal-ance sheet total.
Equity/assets ratioShareholders’ equity as a percentage of the balancesheet total.
Net debt/equity ratioNet debt divided by shareholders’ equity includingminority shares.
Interest cover ratioProfit/loss after financial items plus interest expensesas a percentage of interest costs
Net debtInterest bearing liabilities with deductions for liquidassets and current investments.
Average number of employeesAverage number of people employed over the year.
Sales per employeeNet sales in relation to the average number of em-ployees.
Average number of sharesNumber of shares at the start of the year plus aweighted average of the increase in the number ofshares during the year adjusted for the split, bonusissue, and full dilution of the warrants. The dilutionof the warrants is based on the market value of theoptions and shares.
Earnings per shareProfit/loss after tax in relation to the average num-ber of shares
Operation’s cash flow after investments per shareOperation’s cash flow from current activities in rela-tion to the average number of shares.
Shareholders’ equity per shareShareholders’ equity in relation to the number ofshares at the end of the year.
Dividend per shareDividend paid in relation to the average number ofshares.
P/E ratioSale price per share in relationship to profit after taxper share
Price/shareholders’ equityThe company’s share price in relation to sharehold-ers’ equity after full utilisation of remaining warrants.
Comments to the financial reviewGeneralThe following account deals primarily with the 1998and 1999 financial years and refers to the parentcompany (since the Group was not formed until 7April 2000). The financial year for Precise Biomet-rics is the calendar year. Operations actually began in1997 and figures for that year are therefore includedin 1998’s figures, which is therefore treated as an extended financial year. The annual report followsthe Annual Accounts Act.
SalesDuring 1997/1998 Precise Biometrics had no earn-ings. The Company was purely in a phase of develop-ment. Earnings from sales of products began in Q31999. Net sales for 1999 amounted to SEK 527,000.Activated development work for own account, SEK8.6 million in 1999 and SEK 3.6 million in1997/1998, was reported gross in the income state-ment and was thus included as both operating in-come and operating costs. Other development costswere activated directly as intangible assets and werenot therefore included in the financial statement.
Results and profitabilityPrecise Biometrics has made losses since start-up in1997. The operating loss was SEK 2.2 million in1997/1998 and SEK 12.4 million in 1999. This mustbe seen against the background of large resourcesput into R&D and the building up of an organisa-tion. Costs in 1999 include the cost of producingsamples for pilot installations. New share issue costsof SEK 2.5 million were incurred in 1999. The oper-ating losses have been in line with the calculationsmade by the Company.
Liquidity and equity/assets ratioAt the end of 1999 the Group’s liquid funds andcurrent investments amounted to SEK 7.9 million.The same item was SEK 5.6 million in 1998. At theend of 1999 shareholders’ equity was SEK 21.9 mil-lion, and at the end of 1998 it was SEK 11.3 million.The equity/assets ratio was 70% at the end of 1999.
The completion of new share issues has made astrong contribution to the Company’s financial posi-tion, in terms of both liquidity and the equity/assetsratio. The issues have been completed at low risk, inline with the Company’s finance and foreign curren-cy policies.
InvestmentThe Company’s net investment was SEK 1.2 millionin 1998 and SEK 1.6 million in 1999. Net invest-ment in tangible assets primarily covers the purchaseof computer equipment.
Intangible assetsThe intangible assets item in the financial statementrefers solely to the Company’s development workbeing set up as an asset (capitalized). Capitalizedcosts consist of costs for the development of equip-ment for biometric fingerprint identification. TheCompany has capitalized personnel costs and fixedcosts for development work. The Company’s totalinvestment in development work that has been capi-talized as an intangible asset amounted to aroundSEK 14 million in 1999 and around SEK 5.9 millionin 1998. Depreciation for capitalized developmentwork was started during Q4 1999 and amounted toaround SEK 1 million in 1999. If investment in in-tangible assets had been reported as a direct cost inthe financial statement, and had not therefore beencapitalized in the balance sheet, the operating losswould have been SEK 8.1 million in 1998 and SEK25.4 million in 1999. At the end of 1999 the Com-pany’s intangible assets amounted to around SEK 19million.
FinancingFinancing of Precise Biometrics’ progress up untilJanuary 2000 has been achieved by five new share is-sues which have raised a total of SEK 74.4 millionafter costs. The first three new share issues werecompleted in 1997/1998 and raised SEK 1.8 million,SEK 4.2 million and SEK 6.7 million respectively af-ter costs.
Breakdown of operating costs, 1999
Materials, 4%
Other external costs, 30%
Depreciation according to plan, 8%
Personnel costs, 52%
Other operating costs, 6%
Breakdown of operating costs, 1998
Other external costs, 27%
Depreciation according to plan, 6%
Personnel costs, 67%
In 1999 a new share issue raised SEK 22.7 millionafter costs. In January 2000 a new issue of 250,000shares targeted at SEB-fonder and the founders ofIcon Medialab raised SEK 39 million after costs.In 1999 the Company was approved a grant fromSweden’s Industrifond worth SEK 6 million. Thegrant is linked to detachable warrants for subscrip-tion to 80,000 shares (see also chapter entitled“Shares, share capital and ownership structure”).
New share issueAt an Extraordinary General Meeting of Precise Bio-metrics’ shareholders on 30 June 2000, the Board ofDirectors was authorised to make a decision, prior tothe next Annual General Meeting and without pref-erence for existing shareholders, regarding a newcash issue on market terms which would increaseshare capital by a maximum SEK 240,000 throughthe issue of a maximum 600,000 class A sharesworth a nominal SEK 0.40 per share. Using this authorisation Precise Biometrics’ Board of Directorscarried out a new share issue in September 2000 targeted at institutional investors and which raisedSEK 135 million before costs.
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After the new share issue the total number of sharesis 3,267,700. Equity per share is SEK 55.5*pro for-ma 31 December 1999, after full dilution and in-cluding new share issues in 2000. The equity/assetsratio was 95.4% pro forma on the above date (notincluding costs of September 2000 new share issue).
1 The costs of the September 2000 share issue have not been deducted.
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Interim report for Precise Biometrics AB (publ) 1 January–30 June 2000
• Sales totalled SEK 2.6 million (0) and the loss afterfinancial items was SEK –18.7 million (–2.6)
• Technical breakthrough in the form of the first se-cure commercial transaction using a biometric sig-nature and fingerprint matching on a smart card
• The company received its largest order to date –1,500 fingerprint readers from the French compa-ny GemPlus
• The first patent for the company’s core technologyhas been approved
• The company has been organised into three busi-ness areas and newly recruited managers have beenappointed
• Flotation on the Stockholm Exchange’s O-listplanned for the autumn
Description of the companyPrecise Biometrics was formed on 4 September 1997and develops, markets and sells systems and productsfor electronic identification using fingerprints. Thecompany is organised into three business areas:
• IT Security (computer access, verification of digitaltransactions, etc.)
• Physical Access(for opening doors, time reportingsystems and accessing buildings)
• Embedded Solutions (e.g. for mobile phones andportable computers)
Corporate organizationThe company, which has been divided into threebusiness areas to make sales and marketing more ef-fective, has been strengthened by the addition of twonew very sector-knowledgeable business area man-agers. Erling Faxø Nielsen, previously with TelenorSecurity and with many year’s experience from thesecurity industry, including being CEO of TelelarmAB, will run Physical Access. Ola Andersson, whowas previously Global Account Executive at Infi-neon/Siemens, will run Embedded Solutions.
MarketsBoth Microsoft and Intel announced their active sup-port for biometric access solutions for PCs and theInternet during the period, which the company andthe industry judge as favourable for demands for thebiometric products the company sells. Greaterworldwide acceptance of smart cards is also positivefor the company as it is the only one in the worldthat has an integrated reader for smart cards with asilicon sensor fingerprint reader, available for sale.
In the IT Security business area, significant interest inthe company’s products has been noted from majorcompanies and authorities. The company’s largest orderto date from the French company GemPlus, the world’sleading supplier of smart card-based solutions, consisted
of 1,500 biometric fingerprint readers for a smart cardproject in Mexico. In Sweden and the Nordic regionthere is considerable interest from the banking and financial services sector, and an important order was received from Matteus Fondkommission in the spring.
In the Physical Access business area, the companyhas extended its technological and commercial linkswith the security company Solid, part of the ASSAABLOY Group.
The Embedded Solutions business area has had dis-cussions with several of the markets’ major players.The aim is to replace PINs and passwords with thecompany’s biometric solutions for products such asmobile phones and portable computers.
The company has received a lot of attention for itstechnical breakthrough in the form of the first biomet-rically signed transaction with a fingerprint matchedon a smart card. The solution, which makes it possibleto easily create a legally binding digital signature, wasintroduced in association with Miotec, the Finnishmanufacturer of smart cards and the IT security company Id2, at CardTech/SecureTech in the US, theworld’s largest biometrics and smart card exhibition.
The company’s products have continued to achievemajor successes at exhibitions and in tests. Duringthe reporting period the company’s Precise 100 SCwas voted “Best Biometric Product” at Europe’slargest IT exhibition, IT Security 2000, in London.
Increasing interest from the US market has been aconsequence of the work being carried out by ourown office in the vicinity of Washington DC. In theUS, contacts have been formed with a number of organizations for standardizing secure identificationsolutions, and the company is a member of BioSEC,IBIA and BioAPI, for example.
Sales and resultsSales for the period totalled SEK 2.6 million (0). Theloss for the period was SEK –18.7 million (–2,6).The loss is due to the small sales figures in relationto the high development and marketing costs. Thegoods for resale figure also includes the costs of testproducts used in association with pilot projects. Thesales and results are in line with the company’sbudget for the period.
PatentsThe company has had its first patent approved. Thepatent refers to the company’s unique core technolo-gy, the matching of fingerprints, and is valid until2017. The company has submitted nine furtherpatents for approval.
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EmployeesAs of 30 June 2000 the company had 40 employees,of whom 7 are women. The company is continuingsuccessfully to recruit qualified staff. The new re-cruits have strengthened the company’s cutting-edgetechnical competence and management skills. Theemployees have been invited to take part in thecompany’s options scheme as a step in securing keycompetencies.
Financing and liquidityAt the end of January 2000 the company issued newshares to SEB, among others. The total number ofshares issued was 250,000 and SEK 39 million wasraised after issue costs. Shares were also issued dur-ing the period in connection with an options scheme,which raised an additional SEK 2.7 million.
During the autumn, new staff will be given the op-portunity of taking part in a new options scheme. Asa step in this options scheme, the parent companyhas issued a promissory note with detachable war-rants to subscribe for shares in the subsidiary PreciseBiometrics Services AB, which was started in thespring. The premium for the issue of the promissorynote, SEK 1.5 million, has been transferred by theparent company to the share premium reserve andthe subsidiary has reported it as a “warrant deposits”.
InvestmentsDuring the period SEK 1.2 million (0.4) has been in-vested in tangible assets, primarily computers. A fur-ther SEK 7.3 million (6.1) has been activated forR&D costs. Depreciation of activated costs for R&Dbegan during Q4 1999 and totalled during the peri-od SEK 2,4 million (0).
SharesThe price movement for the period is shown in thediagram below.
OutlookThe future for biometric solutions is generallyjudged to be very bright. The reason is that demandfor secure, convenient identification methods is con-stantly growing in line with the modern world’s in-creasing use of the Internet on a daily basis at work,in the home and in mobile solutions. This is happen-ing on a global scale. The company believes that in-creased Internet usage by businesses often has itsbackground in a desire for increased efficiency andto enable new business models to be implemented.Both of these factors should boost demand for thecompany’s products.
Underpinned by a new business area organization,significant recruitment and a stronger focus on mar-keting, the company will continue to see good salesgrowth. Current and future partnerships in all thebusiness areas are expected to further strengthen thecompany.
The company’s technical development will be divid-ed between further developing the company’s cur-rent products, new products, the technique ofmatching cards for secure e-business transactions, aswell as further refining integrated solutions.
The company is planning a flotation on the Stock-holm Exchange’s O-list, and a new share issue, dur-ing the autumn. The board's reasoning behind theproposal is to create better trading conditions for thecompany's shares before the planned O-list flotation,by spreading ownership and creating a wider institu-tional owner base.
The parent companyThe accounts of the Group’s business activities andearnings trend coupled with investment activitiesand changes in liquidity and financing, tally with thecorresponding figures for the parent company
Future reportsThe Q3 report 2000 will be released on 17 October2000.
This interim report has been reviewed by the com-pany’s auditors.
Peter HöjerbackCEO, Precise Biometrics AB
Lund, 31 July 2000.
Consolidated income statementAmounts in SEK 000 Jan.–Jun. 00 Jan.–Jun. 99 Full year 99
OPERATING INCOME, ETC
Net sales 2 639 0 527
Capitalised development work 4 842 3 416 8 554
Total income etc 7 481 3 416 9 081
OPERATING EXPENSES
Goods for resale –3 020 0 –947
Other external expenses –8 753 –1 381 –6 456
Personnel costs –10 804 –4 437 –11 109
Depreciation according to plan –2 836 –184 –1 725
Other operating expenses 0 0 –1 200
Other operating expenses –25 413 –6 002 –21 437
Operating loss –17 932 –2 586 –12 356
PROFIT/LOSS FROM FINANCIAL INVESTMENTS
Interest income 456 4 248
Interest expenses –218 –23 –134
Costs for new share issue –1 000 0 –2 500
Total loss from financial investments –762 –19 –2 386
Loss after financial investments –18 694 –2 605 –14 742
Tax 0 0 0
Loss for the year –18 694 –2 605 –14 742
The comparative figures for the period Jan. – Jun. 1999, as well as the full year 1999, refer only to the parent company.
31
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Consolidated balance sheetAmounts in SEK 000 30 Jun. 2000 30 Jun. 1999 31 Dec. 1999
ASSETS
Fixed assets
Intangible fixed assets 23,849 12,026 18,934
Tangible fixed assets 2,416 1,102 1,711
Total fixed assets 26,265 13,128 20,645
Current assets
Inventories 1,098 348 1,231
Accounts receivable – trade 2,444 0 454
Other receivables 3,078 22,982 1,105
Warrant deposits 1,480 0 0
Current investments 15,000 0 6,000
Cash and bank balances 10,103 398 1,913
Total current assets 33,203 23,728 10,703
Total assets 59,468 36,856 31,348
EQUITY AND LIABILITIES
Equity
Share capital 1,061 649 937
Share premium reserve 81,182 12,426 37,460
Current new issue 300 22,400 0
Unconditional shareholders’ contribution 400 400 400
Loss brought forward –16,906 –2,164 –2,164
Net loss for the year –18,694 –2,605 –14,742
Total equity 47,343 31,106 21,891
Long-term liabilities 6,000 3,000 6,000
Current liabilities
Accounts payable – trade 3,197 1,664 1,320
Other short-term liabilities 537 44 775
Accrued expenses 2,391 1,042 1,362
Total current liabilities 6,125 2,750 3,457
Total equity and liabilities 59,468 36,856 31,348
The comparative figures for 30 Jun.1999, as well as 31 Dec. 1999 refer only to the parent company.
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Definitions
Working capitalCurrent assets less current liabilities
Liquid ratioCurrent assets excluding stock as a percentage ofcurrent liabilities
Equity/assets ratioShareholders’ equity on the closing date as a per-centage of the total equity on the closing date.
Cash flow statementAmounts in SEK 000 Jan.–June. 00 Jan.–June. 99 Jan.–Dec. 99
Current activities
Loss after financial items –18,694 –2,605 –14,742
Adjustments for items not included in cash flow –4,461 –5,936 –12,300
–23,155 –8,541 –27,042
Tax paid 0 0 0
Cash flow from current activities before changes in working capital –23,155 –8,541 –27,042
Cash flow from changes in working capital:
Increase in inventories 133 –348 –1,231
Increase in receivables –3,963 –22,586 –1,163
Change in current liabilities 2,670 1,346 2,053
Cash flow from current activities –24,315 –30,129 –27,383
Investment activities
Acquisition of tangible fixed assets –1,160 –432 –1,585
Cash flow from investment activities –1,160 –432 –1,585
Financing activities
New share issue 42,665 22,400 25,322
Loans raised 0 3,000 6,000
Cash flow from financing activities 42,665 25,400 31,322
Cash flow for the year 17,190 –5,161 2,354
Liquid funds at beginning of year 7,913 5,559 5,559
Liquid funds at end of year 25,103 398 7,913
Key figures30 Jun 2000 30 Jun 1999 31 Dec 1999
Working capital (SEK 000s) 27,078 20,978 7,246
Liquid ratio 524% 850% 274%
Equity/assets ratio 80% 84% 70%
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Review ReportWe have reviewed this interim report in accordancewith the recommendations issued by the Swedish Institute of Authorized Public Accountants. A reviewis considerably limited in scope compared with anaudit. Nothing has come to my attention that causesme to believe that the interim report does not complywith the requirements of the Annual Accounts Act.
Lund, July, 2000Öhrlings PricewaterhouseCoopers AB
Per Wardhammar Dan AnderssonAuthorized Public Authorized Public Accountant AccountantAuditor in charge
For further information please contact:Peter Höjerback, CEO Precise Biometrics ABTelephone: +46 46-31 11 10.E-mail: [email protected]
Jonas Källmén, CFO Precise Biometrics ABTelephone: +46 46-31 11 24.E-mail: [email protected]
Precise Biometrics AB markets in-house developedproducts for biometric* identification using finger-prints. The products replace passwords, PIN codes,ID cards and keys in IT, telecom and pass systems.Precise Biometrics was started in Lund, Sweden, in1997 by Christer Fåhreaus and today has 40 em-ployees. The company's shares are quoted on theStockholms Borsinformation´s SBI-list. For additionalinformation please seewww.precisebiometrics.com. Press photographs fordownloading can be found on the company's website.
* Biometrics is the technical analysis of biological data for verifying a person's identity.
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Financial goals and future outlookFinancial goalsThe Company’s objective is to always maintain a lowlevel of financial risk, i.e. to achieve financial stabili-ty and preparedness in the form of good liquidityand a high equity/assets ratio. The long-term objec-tive is to maintain an average equity/assets ratio ofabove 40%.
Forecasts and future outlook
ForecastsThe Company does not make forecasts because ithas primarily been a development company that isonly now entering a commercial phase. Precise Bio-metrics will make forecasts in the future only whenthe right conditions for making forecasts exist.
ObjectivesThe development of Precise Biometrics has beenbuilt on the conviction that fingerprint-based bio-metric solutions will develop to become the predom-inant system for identification and verification sys-tems that are common at present – identificationcards, keys, PIN codes, etc. Based on biometric tech-nology, the Company will develop, sell and licenseproducts and system solutions that create security,ease of use and reduced costs for usage of, for exam-ple, PCs, mobile phones and pass systems. PreciseBiometrics will work actively to replace the use ofpasswords, PIN codes and keys in everyday situationswhere identification is in demand. The Company’saim is to create its own mass-market products and to integrate its technology into other companies’products.
VisionPrecise Biometrics believes that the major break-through for biometrics within IT security, physicalaccess and embedded solutions, for primarily mobileproducts, will occur within the next three years (seealso under Market overview). The Company’s visionis to be one of the top three international OEM sup-pliers of biometric security solutions by the end ofthis period. This will mean that the world’s leadingmanufacturers of PCs, mobile phones, SHDs andpass systems will have Precise Biometrics as theirpartner for biometric applications. At the same timethis means that Precise Biometrics must influenceleading international manufacturers, the Company’sfuture OEM customers, so that they choose to re-place PIN codes and the like with a fingerprint-basedsolution, and that they choose Precise Biometricsand help to make the Company’s solution into astandard for identification and verification.
MarketsThere are several market segments for Precise Bio-metrics’ technology and products. Depending on volume and complexity among other factors, prices
for products and services vary from segment to segment. The trend is that prices fall as technologyadvances and components become standardised.Manufacturing costs for components used in theCompany’s products and solutions are expected tofall significantly in coming years, which is in linewith the Company’s overall strategy of targetinglarge-volume markets. Revenues from product sales,OEM deals and licences for all of the Company’sbusiness areas will be dependent on the depth ofpenetration and the volume scenarios. Precise Bio-metrics’ technology content and its head start, com-bined with a strong patent portfolio, are expected toresult in revenue per sold unit that is above averagefor the biometrics industry.
The commercial target for Precise Biometricsthrough 2000 and into 2001 is to address and pene-trate a mass market within IT security. This appliesspecially for sales of existing products. Within physi-cal access and embedded solutions the aim is to gainwide acceptance for the Company’s technologyamong market leaders in order to be able to sign asignificant number of OEM and license agreements.The development of smart cards and acceptance forBluetooth are examples of important factors thatwill contribute to Precise Biometrics’ success. For the entire Precise Biometrics Group it is importantduring the current year and next year to sign part-nership agreements with international leaders andget tangible benefits from the agreements that havealready been signed. Reinforcement of the organisa-tion will continue within sales and marketing. Salesto direct customers and links with distributors invarious market channels will be two important areasof focus in the coming year.
Revenue and growthDuring the summer of 2000, the Company receivedits first two large orders from GemPlus, the first for1,500 units and the second worth around SEK 1.3million. The Company expects a strong climb in revenue during 2001 based on existing orders, theexisting product suite, new product launches, exist-ing commercial partnership agreements and the factthat sales and marketing organisations will be inplace for all business areas. In 2000 and 2001 saleswill primarily be in the IT security sector, with alower proportion of sales from OEM deals and licensessold within the physical access and embedded solutions sectors. From 2002 onwards based on forecasts for market growth and the Company’s ownvision of penetration depth and its position in thebiometric market, Precise Biometrics expects togrow organically at a faster rate than the average forthe market. When these targets have been reached,the focus will be on continued strong expansion andgrowth with good profitability for the near future.
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In the future, possible complementing acquisitionscan be made regarding technology, competence,customer base and geographic area.
Costs, financing and profitabilityThe Company’s future aims regarding the ongoingdevelopment of technology and products have beendescribed earlier (see chapter entitlesTechnology/Patents). In coming years it is primarilycontinued development of products, services andtechnology (e.g. ASIC), an extended marketingbudget, personnel costs for a rapidly expanding or-ganisation and the Company’s aggressive patentstrategy that will be the main components of thePrecise Biometrics cost structure. The financing ofactivities to ensure the Company’s continued expan-sion is another important element of Precise Biomet-rics’ capital requirements. Examples include thebuilding up of operating capital in the form of inven-tories and in order to secure production via OEMagreements, the opening of offices and subsidiariesoverseas, and the need to have a financial reserve tofinance any necessary acquisitions. Furthermore, sus-tainable financial stability is essential for successfulnegotiations with potential customers regarding major licensing deals and OEM agreements. As Precise Biometrics grows and expands it is expectedthat the Company will gain greater access to tradi-tional bank financing.
Since its start in 1997 Precise Biometrics has gener-ated losses during its phase as a development compa-ny as it focused on research and development andbuilding an organisation. Now that Precise Biomet-rics is earning revenue, and based on its business planand present rate of expansion, the Company expectsto be generating very good profitability within thenext two years. Concerning profitability in thelonger term, the Group’s overall gross margin willdepend on volume and price scenarios for the consumer electronics industry, the spread betweenproduct sales and OEM/license sales and the distri-bution of sales among the Company’s three businessareas. All of these factors are very difficult to predictat present.
Other issuesForecasts are based on the market’s acceptance ofbiometric products and the Company’s success inthe commercialisation of its developed technology,products and services along with economic factorsand market conditions. It is very difficult to make anaccurate estimate and there is therefore a consider-able degree of uncertainty.
Dividend policyIt is not likely that any dividends will be paid out incoming years. The Company’s future dividends poli-cy will be adapted to profit levels, financial positionand investment requirements. Dividend proposalswill be considered in the light of shareholders’ demands for a reasonable return and operationalneeds for finance.
Financial sensitivity analysisPrecise Biometrics has up to now primarily been adevelopment company and it has generated losses(mainly due to personnel costs, rents, etc.). In future,the Company’s profits will be affected by a largenumber of factors. Growth in turnover, gross marginand currency exchange rates are the factors expectedto have the biggest impact on profits. The discussionabout markets, turnover and profits (gross margins)has been mentioned above. Based on the present position of the Company it is not possible to make adetailed and relevant financial sensitivity analysis re-garding these factors. A statistical sensitivity analysiswould be misleading, furthermore, because it wouldnot include the effects of compensatory measuresthat the Company could have implemented if certain events had taken place.
As manufacturing has taken place in Sweden up tonow and all employees have been employed in Sweden, costs have been almost exclusively in SEK.As many of Precise Biometrics’ potential customersare international businesses and as a much largerproportion of the Company’s costs is expected to bein foreign currencies as operations expand, currencyexposure will rise in coming years. In addition toSEK, the Company will be exposed to changes inEuropean currencies and USD. The Company intends to implement and active finance and currency policy.
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The Company does not operate its own production,which can represent a risk of delivery delays in thefuture if there is large global demand on productioncapacity for components that are vital for the Company’s products. If there is a global shortage of components, prices will rise.
Technology, products and delaysThe company has products that have been fully de-veloped, but production has not yet reached a largescale. An acceleration in sales can mean delays, andthus a risk that products will not reach the market intime to achieve the market acceptance that is neces-sary to make the breakthrough that is expected. Newdeals and products from new technology also entail alarge risk of errors and shortages in future productlaunches and integration of the Company’s techno-logy in other products. A combination of the abovefactors can affect the information and forecasts produced by the Company.
Expansion, organisation and employeesSince its start, Precise Biometrics has expandedstrongly and the Company’s management believesthat this fast expansion will continue. Fast growthcan put strains on operations and is always associatedwith risk. Managing growth requires continued in-vestment in administration, support systems andtraining. It is very important that new recruits arequickly integrated into the Precise Biometrics busi-ness culture. There can be no guarantee that existingand future employees of Precise Biometrics, and theadministration systems, will be sufficient at everystage to match the size of operations and the speedof growth. Neither can there be a guarantee that Precise Biometrics profitability will not suffer if anyof these factors should cause problems.
The Company must continually attract, recruit andkeep competent employees and senior managers in a segment of the labour market where demand out-runs supply, especially in large cities and overseas.This is a critical condition for the Company if it is tomeet its promised rate of expansion and deliverytimes. The Company offers a stimulating, dynamicand high-tech working environment. A rewardsscheme is also a key part of the Company’s strategy.
Key personnelThe Company has a few employees that it relies up-on to a very great extent. There can be no guaranteethat these people will stay with the Company, orthat the Company will be able to attract new keypersonnel. However, many of the key people behindthe technological development are also the Compa-ny’s largest owners. Several leading decision makersare employed in sales and marketing and also haveownership interests in Precise Biometrics, either directly through shares or indirectly through warrants.
Risk factorsAn investment in shares entails risk, and an investmentin Precise Biometrics can be seen as entailing an extradegree of risk because the Company is relatively youngand is in a phase of building up operations. Several fac-tors outside the Company’s control can affect its resultsand financial position, along with several factors whoseeffects the Company can control with its own actions.The factors explained below are considered to be theones that can have the largest effects on Precise Biomet-rics’ future. These risks are not listed in order of serious-ness and the intention is not to cover every risk. In ad-dition to information in this prospectus, therefore, eachinvestor should make his or her own assessment of eachrisk factor and its significance for the future develop-ment of the Company.
Brief historyPrecise Biometrics is a young company, founded inJuly 1997. Respect and trust have been built up dur-ing a relatively short period based on the technologyand products that have been developed throughpartnerships and the ownership and customer rela-tions that exist today. If something should happen toaffect the market information and the Company-specific forecasts included in this prospectus, this respect and trust can be seriously damaged.
Technology and market developmentThe market targeted by the Company is under con-struction and characterised by a fast pace of change.New technology, new products, new players andpartnerships are emerging all the time. The Compa-ny’s developed technology in particular, and biomet-rics in general, must therefore be accepted to a largeextent by leading players among both customers andsuppliers. Even though there now appears to be greatpotential for the Company’s technology and prod-ucts, this situation can change, which is somethingthat must be met by continual development of prod-ucts and technology. In turn, this can mean that marketing costs can be larger than expected and thatestimated sales volumes might not be achieved.
Competitors, production and pricesAs the number of players grows in the market wherePrecise Biometrics is active, there is a risk that alter-native technologies will be developed and that theprice of comparable products will fall in the future.Competition in the future can come from globalplayers already established in consumer electronicsor IT security and who have large financial resourcesand strong negotiating position. Competition can also come from new players who address a hightechnology niche. At the same time, the Company isdependent on the success and acceptance of a wideruse of biometric solutions on the global market, andis therefore also dependent on the success of com-petitors.
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PatentsThe pace of technical development within the areawhere the Company operates is very fast, and eventhough the Company has an aggressive patent strate-gy and has already applied for patent protection for alarge number of technological solutions, competingtechnologies that circumvent the Company’s patentscan exist or be developed. There is no guarantee thatthe Company will be awarded the patents it is seek-ing, in addition to those it has already been awarded,or that the Company’s technology and patents donot infringe a third party’s patents. A comprehensiveinsurance policy against patent infringement is underconstruction.
FinancingTo maintain the fast pace of development and expansion within sales and marketing, and thus thehead start against potential competitors, the Compa-ny must meet its capital requirements. There is a riskthat the financial climate can make it difficult to ac-quire risk capital. However, this risk was reduced bythe new share issue completed in September 2000.
Seasonal variationsPrecise Biometrics’ customers are to a large extentbudget-driven, which means that a majority of theminvest large sums during the second half of the yearwhen there is a greater understanding that an indi-vidual investment is economically necessary. Lessbusiness is concluded during the summer months,due to this being the holiday period, and income atthis time is low. As a result of these factors, PreciseBiometrics cannot expect its revenues to be distrib-uted evenly throughout the year. The Company’scosts are expected in the future to follow a moreproportional pattern as the Company expands,which is expected to lead to fluctuating profit andloss development throughout the financial year dueto seasonal variations for customer purchasing.
Foreign currencyThe Company raises capital and has most of its costsin Swedish krona, SEK. As the commercialisationprocess and sales accelerate, invoicing will to a largeextent be in foreign currency, which increase theCompany’s foreign currency exposure. Costs, too,will be generated in foreign currency as the Compa-ny expands and organises its manufacturing abroad.Most of the Company’s potential competitors areoverseas and are relatively less exposed to currencychanges. It is currently difficult to assess currencyrisks because products will be launched on ever larger markets. Precise Biometrics intends to followan active foreign currency policy as its exposure increases.
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AgreementsPrecise Biometrics is not dependent on any individ-ual agreement for its operations. The agreements described below are, however, considered to be veryimportant for the Company.
C TechnologiesPrecise Biometrics has an agreement with C Tech-nologies that primarily gives C Technologies theright in its products, but on commercial terms, to usePrecise Biometrics’ fingerprint technology. In turn,Precise Biometrics has the right to use C Technolo-gies’ patented so-called “pussling” method. ChristerFåhraeus is the main owner of C Technologies.
Credit agreementsThe Company has an unused bank overdraft facilityworth SEK 4 million and an repayable loan worthSEK 6 million from Sweden’s Indstrifond, one half of which is to be repaid by 30 January 2001 and theother half by 30 January 2002.
Distribution agreementsPrecise Biometrics has signed around 15 standarddistribution agreements with Swedish and interna-tional companies regarding the distribution of theCompany’s products. None of these agreements is of an exclusive nature.
Partnership agreementsThe Company has signed partnership agreementswith several companies, including Solid (Assa Abloy)and iD2 (now Sonera SmartTrust) concerning,among other areas, shared sales and marketing.
InsuranceIt is the assessment of the management of PreciseBiometrics that the current insurance policies aresatisfactory regarding the current operations and situation of the Company. Insurance policies are subject to continual updating as requirementschange. A comprehensive insurance policy for patent protection is being established.
DisputesPrecise Biometrics is not involved in any legalprocess or arbitration proceeding that could affectthe Company’s financial position or profits to anysignificant extent. The Company’s Board of Direc-tors is not aware of any claim made by a third partythat could lead to such a legal process or arbitrationproceeding.
Transactions with close contactsNone of the members of the Board, senior managersor Company auditors have, themselves, via the Com-pany or through close contacts, had any direct par-ticipation in business transactions carried out by theCompany, which are or were unusual in their charac-ter or conditions and which took place in the present
financial year or previous year. Neither has the Com-pany made any loan, guarantee or security to thebenefit of any member of the Board, senior manageror auditor of the Company. The chapter entitled“Shares, share capital and ownership structure”reports the ownership transactions and share issuesinvolving the above people.
Tax situationThe accumulated loss deduction liable for tax as of31 December 1999 (2000 taxation year) amountedto SEK 16.8 million.
Information about the CompanyThe Company’s registration number is 556545-6596. The Company was registered at the SwedishPatent & Registration Office on 4 September 1997and has been in operation since then. Precise Bio-metrics became a public company following a deci-sion by the AGM on 7 May 1999, which was regis-tered at the Patent & Registration Office on 26 May1999. The articles of association are regulated by theSwedish Companies Act (1975:1385).
Salaries, remunerations and pension agreementsThe remuneration to the CEO was SEK 642,000 in1999. Remunerations to other senior managers in1999 amounted to SEK 888,000. In addition, pen-sion premiums for the CEO and other senior man-agers corresponding to the Swedish ITP plan havebeen paid. Remunerations to members of the Boardwho are not Company employees amounted to SEK20,000 per person in 1999. Remuneration for exter-nal auditing work amounted to SEK 65,000 in 1999.In addition to this the Company paid SEK 39,000 inconsultancy fees to the Company’s auditors during1999.
The notice of dismissal period for the CEO of either6 or 9 months depends on whether notice comesfrom the CEO or from the Company. If notice is giv-en by the Company, a severance payment represent-ing 3 months’ salary can be deducted from the dis-missal salary. For other senior managers, between 2and 6 monthly salaries will be paid during the periodof notice, depending upon which party gives notice.Current pension agreements correspond to theSwedish ITP plan.
Finance and foreign currency policyPrecise Biometrics has a finance and foreign currencypolicy that regulates how the Company’s financialflows are handled. The main points of the policy are:• Liquid funds from new share issues and other
excess liquidity shall be invested at low risk, i.e.,in Treasury bills.
• Leasing instruments will be considered for all in-vestments exceeding SEK 100,000.
• The Company will mix its financing betweenshareholders’ equity and loans.
Other information
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• The Company will pursue a long-term partnershipwith well-reputed banks and financial institutions.
• The Company will be risk averse in its foreign currency management.
• The main aim of foreign currency managementwill be to secure the value of the Company’s cashflows rather than to maximise returns on foreigncurrency management.
Information policyPrecise Biometrics adheres to the rules and proce-dures for quoted companies in providing informationin accordance with the quotation agreement linkedto the Company’s quotation on the OM StockholmExchange’s O list. The Company also has an infor-mation policy laying out the guidelines for the distri-bution of information for internal use. For externalcommunication the general rule is that the CEO actsas the Company’s spokesman in important issues andhas responsibility for financial information deliveredto the OM Stockholm Exchange, the capital marketsand financial journalists. In the absence of the CEOthe CFO and CIO, in that order, are responsible forinformation. Answers to questions about ownershipissues and other major strategic issues are co-ordinatedby the Chairman of the Board.
Procedures for Board of Directors and instructions to CEOThe Precise Biometrics Board of Directors has estab-lished procedures regarding its division of responsi-bilities and financial reporting in accordance withthe Companies Act and the Company’s articles of association. Procedures govern Board meetings,division of responsibility within the Board, and thenature of matters to be decided by the Board. TheBoard has also produced instructions to the CEO regarding the CEO’s responsibilities and obligationsregarding what is reported to the Board.
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Precise Biometrics’ share capital currently consists ofSEK 1,307,080 distributed over 3,267,700 shares,each with a nominal value of SEK 0.40. Only class Ashares have been issued. Each class A share gives anentitlement to one vote. All shares confer an equal
right to a share of the company’s assets and profits.At the AGM each person is entitled to vote in linewith the number of shares held and/or representedwithout restriction to the number of votes.
Since the company’s formation in July 1997, the share capital has changed as follows:Increase in Nominal Increase innumber of Number of value per share capital, Share capital,
Date Type of issue shares shares share, SEK SEK SEK
Sep 97 Company formed 1,000 1,000 100 100,000 100,000
Dec 97 New issue 220 1,220 100 22,000 122,000
Jun 98 Split 1000:1 1,218,780 1,220,000 0.10 0 122,000
Jun 98 New issue 180,000 1,400,000 0.10 18,000 140,000
Okt 98 New issue 223,700 1,623,700 0.10 22,370 162,370
Maj 99 Bonus issue 1,623,700 0.40 487,110 649,480
Jun 99 New issue 720,000 2,343,700 0.40 288,000 937,480
Jan 00 New issue 250,000 2,593,700 0.40 100,000 1,037,480
* Warrants redeemed 74,000 2,667,700 0.40 29,600 1,067,080
Sep 00 New issue 600,000 3,267,700 0.40 240,000 1,307,080* Warrants redeemed between 2 March and 9 August 2000.
Ownership structurePrecise Biometrics’ ownership structure is based on a printout from VPC’s shareholders’ register on 31August 2000 and any known changes thereafter evident from the table below.
Share of Share of Shareholders Shares capital, % voting rights, %
Christer Fåhraeus 407,667 12.5 12.5
Andante Investment Ltd1 326,500 10.0 10.0
SEB Fonder 191,100 5.8 5.8
Banco Teknik och Innovationsfond 119,000 3.6 3.6
Länsförsäkringar Skåne 100,000 3.1 3.1
Mårten Öbrink 82,070 2.5 2.5
Other shareholders 1,441,363 44.1 44.1
New issue Sep. 002 600,000 18.4 18.4
Total 3,267,700 100.0 100.0
No. of Total share- No. of shares ShareNo. of shares (before new issue carried out Sep. 00) shareholders holders, % held in total capital, %
1–1,000 1,488 87.6 378,247 14.2
1,001–10,000 180 10.6 593,207 22.2
10,001–50,000 18 1.1 407,390 15.3
50,001–100,000 6 0.4 443,170 16.6
100,001– 3 0.2 853,167 32.0
Admin. diff. 3 0.2 –7,481 –0.3
Total 1,695 100.0 2,667,700 100.0
The above table shows how the ownership structure breaks-down into different size of holdings based on theshareholders’ register on 31 Aug. 2000.
1 See also “Nils Bernhard” in the section “Board of directors, executive management and auditors”.2 New issue aimed at institutional investors.
Shares, share capital and ownership structure
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New issue authorisationAt Precise Biometrics’ AGM on 27 April 2000, theBoard was authorised up to the time of the nextAGM, to issue a maximum 400,000 shares withpreferential rights for current shareholders, and tocarry out a new directed share issue of 500,000shares for financing company acquisitions.
Warrant schemeAt the EGM on 15 June 1998, it was decided,following a recommendation by the Board, to issue apromissory note, with 190,000 detachable warrants,giving holders the right to subscribe for the sameamount of class A shares at a subscription rate ofSEK 39 up to and including 31 December 2000. All190,000 options have been transferred to the currentand previous representatives of the Board of PreciseBiometrics.
With the AGM’s authorisation, the Board of PreciseBiometrics decided to issue promissory notes withdetachable warrants in three separate schemes toemployees of Precise Biometrics. The first schemegives the right to subscribe for 64,000 class A sharesat a subscription rate of SEK 50. The subscriptionperiod is from 4 November 1998 to 31 December2000. The second scheme gives the right to subscribefor 35,000 class A shares at a subscription rate ofSEK 39 with a subscription period from 4 November1998 to 31 December 2000. The third scheme givesthe right to subscribe for 21,000 Series A shares at asubscription rate of SEK 43 with a subscription peri-od from 1 December 1998 to 31 December 2000.The employees at Precise Biometrics have subscribedfor all 120,000 warrants.
At a Board meeting on 30 May 1999 it was decided,following authorisation from the AGM, to raise asubordinated loan of SEK 100,000 by issuing twopromissory notes to Industrifonden. The promissorynotes have annual interest rates corresponding to theSwedish Central Bank’s official discount rate plus anadditional 3%. Interest was first payable on 30 Sep-tember 1999 and then quarterly in arrears on 30 December, 30 March, 30 June and 30 Septemberand then annually until the amount borrowed is fullypaid on 30 January 2002. Each promissory note hasdetachable warrants giving the right to subscribe noearlier than 30 January 2001 and no later than 28February 2002 for 40,000 class A shares in the Com-pany at a nominal SEK 0.40, at a subscription rate ofSEK 40 per share. The options agreement with In-dustrifonden is part of the financing totalling SEK 6
million that Industrifonden provided to the Compa-ny in 1999. In total Industrifonden’s options give theright to subscribe for 80,000 shares.
At a board meeting on 7 September 1999 it was decided, with authorisation from the AGM, to issuea promissory note, combined with 33,000 warrantsgiving the right to subscribe for an equivalentamount of class A shares. The subscription rate hasbeen set at SEK 55 per share. The subscription periodis from 1 October 1999 until 1 October 2001. Theemployees at Precise Biometrics AB have subscribedfor all the warrants.
At the AGM on 27 April 2000, it was decided, anddeviating from shareholders’ preferential rights, to is-sue a promissory note with 100,000 detachable war-rants for subscription purposes, to the wholly-ownedsubsidiary Precise Biometrics Services AB. Each optiongives the holder the right to subscribe for 1 class Ashare in the company for SEK 656 per share be-tween 28 October 2001 and 27 October 2002. With-in the framework of an incentive scheme, PreciseBiometrics Services AB will detach and transfer thewarrants at market rates to people who are em-ployed by the Company or future Board members ofthe Company. Within the framework of the abovescheme, 52,300 warrants have been transferred toemployees and Board members of the Company.
In total the company has issued warrants correspon-ding to 523,000 shares. Of the above issued optionsa total of 74,000 have been redeemed, all during2000. Of the redeemed options, 60,000 are from thefirst options scheme, 11,000 from the second and3,000 from the sixth scheme. When all the 449,000remaining options have been utilised, the share capi-tal will increase by SEK 179,600, which correspondsto a dilution effect of about 12.1% of the capital andvoting rights following the recently carried out shareissue.
Shareholders’ agreementAs far as the Board of Precise Biometrics is awarethere are no shareholders’ agreements.
Declaration and commitmentChrister Fåhraeus and Mårten Öbrink, the majorshareholders in Precise Biometrics, see their holdingsas long-term and have therefore pledged not to sellexisting shares in Precise Biometrics before 31March 2001 unless Handelsbanken Investment Bank-ing allows them to.
Listing and price trendPrecise Biometrics’ shares have been traded on theSBI-list since 13 December 1999, with MatteusFondkommission as market maker. The Board of Precise Biometrics has applied for a listing on theOM Stockholm Exchange’s O-list, and the OMStockholm Exchange has approved the listing. Around lot will be 50 shares. The listing is expected to be from 3 October 2000. Since trading began onthe SBI-list and up to 20 September 2000, the aver-age turnover per day has been 8,933 shares or SEK1.9 million. The final price paid in 1999 was SEK190. The price trend can be seen in the chart below.
Precise Biometrics
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§ 1The trading name of the company shall be PreciseBiometrics AB. The company is public (publ).
§ 2The Board shall have its registered office in Lundmunicipality, Malmöhus County.
§ 3The objective of the company’s operations is to develop, manufacture and sell products for personalidentification, and other activities compatible there-with.
§ 4The share capital shall comprise of a minimum sixhundred thousand Swedish kronor (SEK 600,000)and a maximum of two million four hundred thou-sand Swedish kronor (SEK 2,400,000).
§ 5The nominal value of each share shall be forty (40) öre.
§ 6Shares shall be divided into two classes, class A and B.
Class A shares will convey one (1) voting right andclass B shares will convey one tenth (1/10) of a vot-ing right. The number of class A shares can comprisea maximum five million (5,000,000) and the num-ber of class B shares can comprise a maximum onemillion (1,000,000).
In the event the Company resolves to issue new classA and B shares through a cash issue, all shareholdersof class A and B shares shall have the pre-emptiverights to subscribe for new shares in relation to thenumber of the same class of shares held previouslyby the owner (primary pre-emptive right). Sharesthat are not subscribed for pursuant to primary pre-emptive rights shall be offered to the remainingshareholders for subscription (secondary pre-emp-tive rights). In the event such offered shares are notsufficient for subscription which takes place pur-suant to secondary pre-emptive rights, the sharesshall be divided between the subscribers in relationto the number of shares previously held and, wheresuch cannot take place, shall be allotted through thedrawing of lots.
In the event the Company resolves to only issue newclass A shares or only class B shares through a cashissue, all shareholders, regardless of whether theirshares held are class A or class B class shall have the
pre-emptive right to subscribe for new shares in rela-tion to the number of shares they held previously.
The aforementioned shall not constitute any restric-tion on the possibility to adopt resolutions regardingcash issues which deviate from the pre-emptiverights of existing shareholders.
In conjunction with an increase in the share capitalof the Company through a bonus issue, new sharesof both class shall be issued in relation to the num-ber of shares which were outstanding prior thereto.In this connection, old shares of a certain class shallconvey the same rights as new shares of the sameclass in relation to the number of shares in the sharecapital. The aforementioned shall not constitute anyrestriction on the possibility to issue shares of a newclass of share through a bonus issue pursuant to anyrequisite amendment to the articles of association.
§ 7The Board of Directors shall comprise a minimum ofthree (3) and a maximum of seven (7) Members,with a maximum of three (3) Deputy Members.
The Board and Deputy Members shall be elected annually at the Annual General Meeting for the period until the conclusion of the next Annual General Meeting.
§ 8The Annual General Meeting will appoint the Chairman of the Board
§ 9The Annual General Meeting will appoint one ortwo Auditors or one registered public accountingfirm.
§ 10Notice of an Annual General Meeting, and of extraordinary general meetings, at which questionsregarding changes to the corporate bylaws will bedealt with, must be given six weeks (at the earliest)or four weeks (at the latest) before the meeting.Notice of an extraordinary general meeting will begiven six weeks (at the earliest) or two weeks (at thelatest) before the meeting.
Notice shall be given via an advertisement in theSwedish Official Gazette, and in Svenska Dagbladet,or other national newspaper.
Shareholders who wish to participate at the AnnualGeneral Meeting, should be both registered in theprint-out of the Shareholder’s register, 10 days in
Articles of Association
45
advance of the meeting, as well as giving the Company notice of their intention to participate atthe meeting by at least (16.00)on the day stated inthe notice of the Annual General Meeting. The last-mentioned day shall not be a Sunday, a day before apublic holiday, a Saturday, Midsummer’s day, Christ-mas day, New Year’s day, and should not fall earlierthan five working days before the meeting.
A shareholder may appoint one or two representa-tives. Representatives can only attend the meeting ifthe shareholder gives notification of their intentionto attend (maximum two representatives).
§ 11At the Annual General Meeting the following matters shall be on the agenda:
1. The election of a Chairman of the Meeting;2. The drawing up and approval of the list of voters;3. The approval of the Meeting’s agenda;4. The election of one or two persons to check the
Minutes;5. The determination of whether the Meeting has
been duly convened;6. The presentation of the Annual Report and the
Auditors’ Report7. Resolutions:
a)the adoption of the Income Statement and theBalance Sheet;b) the allocation of the company’s profit or lossin accordance with the adopted Balance Sheet;c) discharge from liability for the Members ofthe Board of Directors and the CEO;
8. Determination of the number of Members of the Board and Deputy Members and where appropriate, Auditors;
9. Determination of fees for the Board of Directorsand where appropriate, Auditors.
10. Election of Members of the Board, Deputy Members of the Board, and where appropriate,Auditors.
11. Other business incumbent upon the Meeting,pursuant to the Swedish Companies Act(1975:1385)or the Articles of Association.
§ 12The Annual general Meeting shall be held in Lund or Stockholm.
§ 13Every person entitled to vote at the Annual GeneralMeeting may vote for the full amount of shares represented by him/her.
§ 14The Chairman of the Board or a Member of theBoard so chosen may open the Annual GeneralMeeting and shall direct proceedings until a Chairman of the Meeting is chosen.
§ 15The company’s financial year shall be the calendaryear
§ 16Whoever is entered on the record day in the share-holders’ register or is a subscriber in accordance withSweden’s Corporation Law (1975:1385) Chap. 3 §12, is to be regarded as also authorized to receivedividends and, in the case of a bonus issue, newshares that are due to the shareholder, and to exer-cise the shareholder’s preferential right to participatein new stock issue.
These Articles of Association were adopted at theAnnual General meeting held on 6 May 1999.
Nils Bernhard, born 1947.Member of the BoardFounderOther Board positions: Chairman of Pajeb Kvarts AB.Board member of Array AB, Imsys AB, Pacta Copy-right S.A. and Schweden Splitt AB.Board member since 1998.No. of shares held in Precise Biometrics: 344,000*.No. of options held in Precise Biometrics: 20,000.No. of outstanding call options: 30,950.* On the basis of an endowment insurance 326,500 (Andante Investment Ltd).
Nils Sandstedt, born 1964.Member of the BoardOther Board positions: Board member of Netmage AB.Board member since 2000.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 10,000.
Lars Grönberg, born 1949.Member of the BoardOther Board positions: Chairman of Cambio Health-care Systems AB, New Media Distribution AB, LimtAB, Remako AB, Matkompaniet AB, Actit AB,Bindomatic AB and Mobilsys AB. Board member ofSmarteq AB, Wireless Maingate AB, Right positionAB, e-Drive Holding AB, Tele1 Europe Holding AB,Graphium Nordstedts Tryckeri AB, XL Print Syd AB,Sonox AB and Core Ventures AB.Board member since 2000.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 10,000.
Board of Directors, Executive Management anBoard of DirectorsChrister Lindberg, born 1948.Chairman of the BoardManaging Director of ALMI Företagspartner Stockholm AB.Other Board positions: Chairman of Östergrens Elmotor AB. Board member of Teknikhöjden AB.Chairman since 1998.No. of shares held in Precise Biometrics: 10,000.No. of options held in Precise Biometrics: 30,000.
Nils Ljung, born 1948.Member of the BoardOther Board positions: Chairman of A Brand NewWorld in Sweden AB, Jensen Elektronik AB, C Tech-nologies AB and ComMet AB. Board member ofCentrecourt AB and RS Sandell Elektronik AB.Board member since 1998.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 40,000.
Christer Fåhraeus, born 1965.Member of the BoardManaging Director of Anoto ABDeputy CEO of C Technologies AB.FounderOther Board positions: Board member of CellavisionAB, C Technologies AB and Netmage AB.Board member since 1998.No. of shares held in Precise Biometrics: 407,667.No. of options held in Precise Biometrics: 20,000.No. of outstanding call options: 44,500.
The Board of PreciseBiometrics:Standing from left:Nils Sandstedt, NilsLjung,(MårtenÖbrink – not aBoard member)Nils Bernhard,Christer Lindberg.Sitting from leftChrister Fåhraeus,Lars Grönberg.
Executive managementPeter Höjerback, born 1966.CEOEmployed since 1999.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 21,000.
Jonas Källmén, born 1965.CFOEmployed since 1999.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 17,500.
Johan Oltegen, born 1964.Business Development ManagerEmployed since 1999.No. of shares held in Precise Biometrics: 4,000.No. of options held in Precise Biometrics: 1,500.
Mårten Öbrink, born 1968.Deputy CEO, Technical Director.Employed since 1997.No. of shares held in Precise Biometrics: 82,000No. of options held in Precise Biometrics: 35,000.
Ola Svedin, born 1965.R&D Manager.Employed since 1998.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 12,000.
d AuditorsSusanne Dahlman, born 1964.Marketing and Communications Manager.Employed since 1999.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 2,500.
Erling Faxoe Nielsen, born 1943.Business Area Manager, Physical Access.Employed since 2000.No. of shares held in Precise Biometrics: 0.No. of options held in Precise Biometrics: 5,000.
Ola Andersson, born 1959.Business Area Manager, Embedded SolutionsEmployed since 2000.No. of shares held in Precise Biometrics: 2,950.No. of options held in Precise Biometrics: 10,000.
AuditorsÖhrlings Pricewaterhouse Coopers AB
Per Wardhammar, born 1951.Authorized Public Accountant.Precise Biometrics’ Auditor since the 1997/1998 financial year.
Dan Andersson, born 1956.Authorized Public Accountant.Precise Biometrics’ Auditor since the 1999 financial year.
Precise Biometrics’executive manage-ment: From left JonasKällmén, Johan Oltegen, Ola Svedin,Peter Höjerback,Mårten Öbrink,Susanne Dahlman.(Not in picture ErlingFaxoe Nielsen andOla Andersson).
48
The following presentation provides general informationon current tax legislation applicable to the dispositionand ownership of Precise Biometrics’ shares. Special tax consequences may arise for certain categories of taxpayers.
The presentation does not cover cases in which, for pur-poses of taxation, shares held constitute a current assetin a business or are held by a trading company. Themanner in which a capital gain or loss on a sale ofshares is calculated is described below, and then thetaxation of the physical persons and legal entities.
Capital gain/lossA capital gain or capital loss consists of the differ-ence between the selling price (less cost of sales) and the acquisition value.
The acquisition value is calculated in accordancewith the so-called average method. In this method,the acquisition value per share is considered to bethe average acquisition value for all shares of thesame type and class, calculated based on actual acquisition costs and taking into account changesthat have occurred in the holding.
Alternatively, the acquisition value of publicly listedshares can be set at 20 per cent of the selling priceafter deduction of selling costs (the standard rule).
IndividualsIn the case of physical persons domiciled in Sweden,(and the estates of deceased Swedes), capital gainsand dividends are taxed as income from capital atthe national rate of 30 per cent.
Capital losses are deductible against the income oncapital. Capital losses on publicly listed shares andother publicly listed securities taxed as shares arefully deductible against capital gains in the same yearon other such securities. Losses on other listed par-ticipatory rights (for example shares) are from thisyear fully deductible against capital gains in the sameyear on unlisted shares. In the case of capital lossthat is not deductible through such netting, 70 percent of the loss may be deducted.
If a deficit arises in income from capital, a reductionof the tax on income from service and business oper-ations, as well as the tax on property is allowed. Thetax reduction allowed amounts to 30 per cent of adeficit that does not exceed SEK 100,000 and 21 percent of a deficit in excess of SEK 100,000. Deficitsmay not be carried forward to a later tax year.
Property taxThe company plans to list Precise Biometrics’ shareson the O-list of the OM Stockholm Exchange. Suchshares are exempt from property tax.
Inheritance and gift taxShares on the O-list are valued at 30 per cent ofmarket for purposes of taxation.
Legal entitiesLegal entities (except for estates of deceased per-sons) are taxed for capital gains on business opera-tions at a rate of 28 per cent. Deductions for capitallosses on the sale of shares and other securities taxedas shares that are held as capital investments are allowed only against capital gains on the sale ofshares and other securities taxed as shares. A deduc-tion may be carried forward to a later tax year.
Dividends are taxed at a rate of 28 per cent. If theshares are considered to be business-related, they arenormally exempt from tax.
Separate tax rules apply for certain special categoriesof taxpayers, including investment companies andmanagement companies.
Coupon taxIn the case of foreign shareholders who receive divi-dends from Sweden, a coupon tax is normally with-held. The tax rate is 30 per cent, but this is generallyreduced through provisions in applicable agreementsdesigned to avoid double taxation.
In Sweden, VPC (the Swedish Securities RegisterCentre) is responsible for withholding the coupontax. If the shares are registered in the name of atrustee, the trustee is responsible for deducting the tax.
Tax considerations in Sweden
49
The AccountsIncome statement
4 Sep.1997–Amounts in SEK 000 Note 1999 31 Dec.1998
OPERATING INCOME, ETC. 1
Net sales 527 0
Other operating income 0 200
Capitalised development work 4 8,554 3,639
Total income, etc. 9,081 3,839
OPERATING EXPENSES
Goods for resale –947 0
Other external expenses 2 –6,456 –1,658
Personnel costs 3 –11,109 –4,043
Depreciation according to plan 4, 5 –1,725 –340
Other operating expenses 6 –1,200 0
Total operating expenses –21,437 –6,041
Operating loss –12,356 –2,202
PROFIT/LOSS FROM FINANCIAL INVESTMENTS
Interest income 7 248 42
Interest expenses –134 –4
Expenses for new share issue –2,500 0
Total profit/loss from financial investments –2,386 38
Net loss for the year –14,742 –2,164
Balance sheetAmounts in SEK 000 Note 31 Dec. 1999 31 Dec. 1998
ASSETS
Fixed assets
Intangible fixed assets 4 18,934 5,906
Tangible fixed assets 5 1,711 854
Total fixed assets 20,645 6,760
Current assets
Inventories
Goods for resale 1,231 0
Current receivables
Accounts receivable – trade 454 0
Other receivables 8 1,105 396
Current investments 6,000 0
Cash and bank balances 1,913 5,559
Total current assets 10,703 5,955
Total assets 31,348 12,715
SHAREHOLDERS’ EQUITY AND LIABILITIES
Shareholders’ equity
Restricted equity 9
Share capital 937 140
Share premium reserve 37,460 6,224
Current new share issue 0 6,711
38,397 13,075
Accrued losses
Unconditional shareholders contribution received 400 400
Loss brought forward –2,164 0
Net loss for the year –14,742 –2,164
–16,506 –1,764
Total equity 21,891 11,311
Liabilities
Loan from Industrifonden 10 6,000 0
Total long-term liabilities 6,000 0
Current liabilities
Accounts payable – trade 1,320 753
Other current liabilities 11 775 380
Accrued expenses 12 1,362 271
Total current liabilities 3,457 1,404
Total equity and liabilities 31,348 12,715
Pledged assets
Floating charges 1,000 0
Contingent liabilities Inga Inga
50
Cash flow statement4 Sep.1997 –
Amounts in SEK 000 1999 31 Dec.1998
Current activities
Loss after financial items –14,742 –2,164
Adjustments for items not included in cash flow –12,300 –5,566
–27,042 –7,730
Paid taxes 0 0
Cash flow from current activities before changes in working capital –27,042 –7,730
Cash flow from changes in working capital
Increase in inventories –1,231 0
Increase in receivables –1,163 –396
Increase in current liabilities 2,053 1,404
Cash flow from current activities –27,383 –6,722
Investment activities
Acquisitions of tangible fixed assets –1,585 –1,194
Cash flow from investing activities –1,585 –1,194
Operation’s cash flow after investments –28,968 –7,916
Financing activities
New share issue 25,322 13,075
Loans raised 6,000 0
Unconditional shareholders contribution 0 400
Cash flow from financing activities 31,322 13,475
Cash flow for the year 2,354 5,559
Liquid funds at the beginning of the year 5,559 0
Liquid funds at the end of the year 7,913 5,559
Liquid funds mean cash balances and bank balances as well as current investments.
Interest paid during the year amounted to SEK 134,000.
51
52
(Amounts in SEK 000 unless otherwise stated)
Note 1 Accounting and valuation principlesThe accounting and valuation principals applied are consis-tent with the provisions of the Annual Accounts Act andgenerally accepted accounting principles. Unless otherwisestated the principles are unchanged in comparison withthe previous year.
Depreciation according to planDepreciation according to plan is charged against incomefor capitalized development work, computers and equip-ment. The depreciation according to plan is based on theacquisition value of the assets and is calculated on their ex-pected economic lifetime.
The following assumptions regarding economic lifetimeshave been applied:Capitalized development work: 5 yearsComputers: 3 yearsEquipment: 5 years
Capitalization of development workDuring 1999 extensive development work has taken place.The capitalized expenses consist of costs for the continueddevelopment of equipment for biometric fingerprint iden-tification. The company has directly and indirectly capital-ized salary expenses as fixed expenses relating to the development department. These development projects arefocused on producing new products, new processes, newsystems or important improvements to existing productswith the aim of generating end products to be introducedon to and sold in the market. Expenses for developmentwork are charged as they occur, but are later directly capitalized in accordance with the conditions in BFN R1.
The capitalized development work is depreciated accord-ing to plan over five years, which is equivalent to the estimated utilisation period, with reference to the ageingof the technology and estimated product life cycle.
During the later part of 1999 the company ’s first productgroup for finger print identification was introduced ontothe market and, consequently, depreciation of developmentwork began to be reported during the last quarter of 1999.
InventoriesGoods for resale are valued at the lowest of acquisitionvalue and realisable value as at closing day date.
ReceivablesReceivables have been reported at the amount at whichthey are expected to be received, on the basis of individualassessment.
Receivables and liabilities in foreign currencyReceivables and liabilities in foreign currency are translat-ed at the closing day rate in the balance sheet. Translationdifferences are reported in the income statement duringthe period of their occurrence.
Note 2 Remuneration to auditorsDuring the year the following compensation has been paidto the auditors chosen by the AGM.
Consulting Audit services
Öhrlings PricewaterhouseCoopers 65 39
NotesNote 3 Salaries, other remuneration and
payroll overheadsSalaries, emoluments and social security contributionsamount to:
1999 1997/1998
Salaries and emoluments 7,604 2,768
CEO 642 486
Other employees 6,962 2,282
Social security contributions 2,957 996
(of which pension costs) 419 122
Pension premiums equivalent to those of the ITP plan havebeen paid to the CEO. Compensation to the members ofthe Board of Directors who are not employed in the company amount to SEK 20,000 per person.
The average number of employees during 1999 amountedto 22.
1999 1997/1998
Total number of employees 22 9
(of which male) 21 8
For the executive management, including the CEO , thefollowing rules apply as regards severance pay. The CEOreceives 6, alternatively 9 months’ salary if the terminationof employment is on behalf of the CEO or if it is on behalfof the company. The other members of the executive man-agement receive 2 to 6 months’ salaries upon terminationof employment, regardless if the employee or the companyinstigates such termination.
Note 4 Intangible fixed assetsIntangible fixed assets consist only of capitalized develop-ment work.
Depreciation reported during the last quarter of 1999.
Capitalized development work 1999 1997/1998
Opening acquisition value 5,906 0
The year ’s acquisitions –Own work 8,554 3,639
The year ’s acquisitions –External expenses 5,471 2,267
Closing acquisition value 19,931 5,906
Opening depreciation 0 0
The year ’s depreciation –997 0
Closing depreciation according to plan –997 0
Closing residual value according to plan 18,934 5,906
Note 5 Tangible fixed assets
1999 1997/1998
Opening acquisition value 1,194 0
The year ’s acquisitions 1,580 1,194
Closing acquisition value 2,774 1,194Not 5 fortsätter på nästa sida
53
Not 9 EquityShare- Share prem- Current new Shareholder Profit/loss bro- Net losscapital ium reserve share issue contribution ught forward for the year
4 Sep. 1997 100
Unconditional shareholders’ contribution received 400
New share issue 40 6,224
Current new share issue 6,711
Loss for the year –2,164
31 Dec. 1998 140 6,224 6,711 400 –2,164
1 Jan. 1999 140 6,224 6,711 400 –2,164
New share issue reg. Feb. 22 6,202
Disposition of loss as approved at Annual General Meeting –2,164 2,164
Bonus issue reg. May 487 –6,711
New share issue reg. Sep. 288 24,912
Warrant premiums 122
Net loss for the year –14,742
31 Dec. 1999 937 37 460 0 400 –2,164 –14,742
During the year 943,700 new shares have been issued at a premium of SEK 31,114,000. The share capital at year -end comprised 2,343,700 class A shares à SEK 0.40 per share (previous year 1,400,000 shares à SEK 0.10 per share).
Note 10 Loan from IndustrifondenThe entire amount matures within five years.
Note 11 Loan with attached warrants for the purchase of new shares
A loan, with attached warrants for the purchase of newshares, totalling SEK 5,700,was subscribed by a number ofthe members of the Board of Directors in 1998.The loan be-came due for payment in September of 1998.The promissorynote included the right, according to the attached warrants, topurchase a total of 190,000 shares in the company at a shareprice of SEK 39. Holders of the warrants own the right topurchase new shares in the company until 31 Dec. 2000. Thedifference between the nominal value of the shares and the issue price of the promissory note, a total of SEK 190,000, hasbeen included in the share premium reserve.
A further four loans with warrants totalling SEK 640, SEK1,050, SEK 630, and SEK 33,000 respectively, in nominalvalue, have been subscribed by key individuals and employees in the company. The subscription period termi-nates on 31 Dec. 2000 for the first three loans and on 1Oct. 2001 for the fourth loan. The promissory notes men-tioned here include the right, on the basis of the attached
warrant, to purchase a total of 153,000 shares in the com-pany at a share price of SEK 50, SEK 39, SEK 43 per sharefor the first three loans and SEK 55 for the fourth loan.The difference between the nominal value of the sharesand the issue prices of the promissory notes subscribed foron 31 Dec. 1999 of SEK 18,560, SEK 35,000, SEK 30,870and SEK 122,100, a total of SEK 206,530, has been reported in the share premium reserve.
A further loan with attached warrants totalling SEK100,000 was subscribed by Industrifonden in conjunctionwith a substantial financing commitment from Industri-fonden. (See Note 10).
Of other liabilities, SEK 8,020 comprises a loan with attached warrants for the purchase of new shares.
Note 12 Accrued expensesIncluded in this item are personnel-related expenses totalling SEK 631,000 (previous year SEK 271,000).
Note 13 LeasingThe company has no financial leasing contract and only afew smaller operational leasing contracts.
Opening depreciation –340 0
The year ’s acquisitions –723 –340
Closing acquisitions –1,063 –340
Closing residual value according to plan 1,711 854
Note 6 Other operating expensesRefers to royalty charges for the co-operation agreementwith C Technologies AB.
Note 7 Interest incomeInterest income from short -term investments.
Note 8 Other receivables
1999 1997/1998
Prepaid expenses andaccrued revenue 240 65
Other receivables 865 331
Total other receivables 1,105 396
Included in receivables is a VAT receivable of SEK 825,000(previous year SEK 291,000).
54
In our capacity as Auditors of precise Biometrics AB(publ), we have reviewed this prospectus.
The review has been carried out in accordance withthe recommendations issued by the Swedish Insti-tute of Authorized Public Accountants (FAR).Accordingly the forecasts and projections have onlybeen reviewed to a limited extent. Information corresponding to the six-month period 1 January to30 June 2000, has been subject to a review by us.
We have audited the annual reports for 1997/1998and 1999. The accounts for 1997/1998 have beenaudited by authorized public accountant Per Ward-hammar without qualification and for 1999 the accounts have been audited by Per Wardhammar andDan Andersson without qualification. The informa-tion corresponding to the annual reports in thisprospectus has been subject to a review.
Nothing has come to our attention in this prospectusthat does not meet the requirements of the SwedishCompanies Act and the Act on Stock Exchange andClearing Operations.
25 September 2000Lund, Sweden
Öhrlings Pricewaterhouse Coopers AB
Per Wardhammar Dan AnderssonAuthorized Public Authorized Public Accountant Accountant(Senior Auditor)
Auditors’ Review
55
AlgorithmMathematical calculation model.
API (Application Programming Interface)A specification defining an interface for a function.
ASIC (Application Specific Integrated Circuit)An integrated microchip specially designed for a specific application.
BiometricsThe technical analysis of biometric data, e.g. a finger-print or voice pattern, used to confirm a person’sidentity.
BluetoothA system for high-speed wireless communicationacross short distances.
DigitalA method for handling, storing and transmitting in-formation based on the use of distinct electronic oroptical pulses that represent the binary code, 0 and 1.
Digital certificateA data file that acts as a certificate for a connectionbetween a physical person’s identity and their identi-ty on the Internet.
EncryptionCoding to protect information.
FPGA (Field Programmable Gate Array)Programmable board that handles calculations andflows.
GPRS (General Packet Radio Services)European packet distribution standard that managesInternet, email, traffic information and other servic-es. Taken originally from GSM network.
i-modeA transmission protocol for mobile data communica-tion, used in Japan.
IP (Internet protocol)The standard that defines the information unitspassed between the host computer and the packetdistribution network that the Internet consists of.The Internet Protocol forms the basis for packet distribution via the Internet.
OEM (Original Equipment Manufacturing)Manufacturing a product that is then sold under another name. An OEM company may sell otherproducts under its name.
OS (Operating System)The system in the background that controls otherprograms and takes care of the computer’s internaloperation.
PIN-code (Personal Identity Number)Personal, numerical code. Usually four numbers.
PKI (Public Key Infrastructure)Security solution based on a public and a private key,where identification of a user is performed locally.The private key is protected either with a PIN codeor a fingerprint.
PlatformA number of free-standing components that are connected to form the base for a company’s productdevelopment.
ProcessorThe component in a computer that performs all calculations.
ProtocolA list of rules and conventions for how messages areto be formatted prior to transmission between twocommunication points within a computer system ora data communication network.
SHD (Smart Handheld device)Collective term for small computers.
Smart cardA card the size of a credit card containing microelec-tronics and memory. Can store data and, with thehelp of a built -in microprocessor, communicate andexecute transactions.
SmartphonesThe next generation of mobile phones with largerscreens and extended functions.
UMTS (Universal Mobile Telecommunications-System)The third generation mobile phone system.
WAP (Wireless Application Protocol)Transmission protocol for mobile data communication.
Glossary
Precise Biometrics ABDag Hammarskjölds väg 2224 64 LundSwedenTel. +46 (0)46 31 11 00Fax. +46 (0)46 31 11 01www.precisebiometrics.com
Production Graphium InforMera Design Maria Westman/Appelberg Publishing Agency Photos Olof Hedtjärn, Kenneth Rouna, Andreas Kindler, Tony Stone, Digital Vision Printing Graphium Västra Aros, Västerås 2000 Translation John Cannon Språkkonsult AB
Precise Biometrics Inc.8300 Boone BoulevardSuite 500Vienna, VA 22182USATel: + 1 (703) 848-9266Fax: + 1 (703) 832-0577
www.precisebiometrics.com
