AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1999
REGISTRATION NO. 333-59219
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------------------
WHO? VISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 65-0768968
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
100 NORTH POINTE DRIVE
LAKE FOREST, CA 92630
(949) 837-5353
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
ALEXANDER G. DICKINSON, PH.D.
CHIEF EXECUTIVE OFFICER
WHO? VISION SYSTEMS, INC.
100 NORTH POINTE DRIVE
LAKE FOREST, CA 92630
(949) 837-5353
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies of all communications to:
<TABLE>
<S> <C> <C>
JAMES A. OUNSWORTH, ESQ. N. JEFFREY KLAUDER, ESQ. WALTER J. MOSTEK, JR., ESQ.
SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP DRINKER BIDDLE & REATH LLP
800 THE SAFEGUARD BUILDING 2000 ONE LOGAN SQUARE 1000 WESTLAKES DRIVE
435 DEVON PARK DRIVE PHILADELPHIA, PENNSYLVANIA SUITE 300
WAYNE, PENNSYLVANIA 19087 19103-6993 BERWYN, PENNSYLVANIA 19312-2409
(610) 293-0600 (215) 963-5694 (610) 993-2200
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ X ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 22, 1999
P R O S P E C T U S
6,825,000 SHARES
WHO? VISION SYSTEMS, INC.
COMMON STOCK
(AND RIGHTS TO ACQUIRE UP TO 6,500,000 OF SUCH SHARES)
------------------------
Who? Vision Systems, Inc. is granting at no cost to the holders of common
shares of Safeguard Scientifics, Inc. transferable rights to purchase shares of
our Common Stock. Safeguard stockholders will receive one right for every five
Safeguard common shares that they own as of , 1999. Each right
will entitle the holder to purchase one share of our Common Stock at an exercise
price of $5.00 per share. We will offer up to 6,500,000 shares of our Common
Stock in the rights offering. If any shares remain unsubscribed for after the
rights offering, the underwriters will purchase all such shares pursuant to a
standby underwriting agreement.
Certain of our existing stockholders will be selling an additional 325,000
shares of our Common Stock to certain persons selected by us. These persons may
have a relationship with us, Safeguard or one of Safeguard's other partnership
companies.
The exercise period for the rights will expire at 5:00 p.m., New York City
time, on , 1999. You may only exercise your rights if you
purchase at least 20 shares of our Common Stock through such exercise.
(Continued on next page)
------------------------
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION REGARDING THE RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK AND RIGHTS THAT ARE DISCUSSED
UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
==========================================================================================================
<S> <C> <C> <C> <C> <C>
| ASSUMED | UNDERWRITING | UNDERWRITING | |
| EXERCISE | DISCOUNT | DISCOUNT PAID BY| PROCEEDS | PROCEEDS TO
| AND | PAID BY THE | SELLING | TO THE | THE SELLING
| OFFER PRICE| COMPANY | STOCKHOLDERS | COMPANY | STOCKHOLDERS
- ----------------------------------------------------------------------------------------------------------
| | Min. $0.15 | Min. $0.15 | Max. $4.85 | Max. $4.85
Per Share............ | $5.00 | Max. $0.35 | Max. $0.35 | Min. $4.65 | Min. $4.65
- ----------------------------------------------------------------------------------------------------------
| | Min. $ 975,000 | Min. $ 48,750 | Max. $31,525,000| Max. $1,576,250
Total................ | $34,125,000| Max. $2,275,000 | Max. $ 48,750 | Min. $30,225,000| Min. $1,576,250
- ----------------------------------------------------------------------------------------------------------
Total with Over- | | Min. $ 975,000 | Min. $276,250 | Max. $31,525,000| Max. $4,598,750
Allotment.......... | $37,375,000| Max. $2,275,000 | Max. $276,250 | Min. $30,225,000| Min. $4,598,750
==========================================================================================================
</TABLE>
The minimum underwriting discount assumes that all rights granted in the
rights offering are exercised and reflects the payment of a financial advisory
fee to the underwriters equal to 3% of the exercise price on the 6,825,000
shares sold in this offering. In such a case, the minimum underwriting discount
would yield the maximum proceeds to us. The maximum underwriting discount
assumes that none of the rights granted in the rights offering are exercised and
reflects the payment of an underwriting discount of 4% of the exercise price on
the 6,500,000 shares which would then be purchased by the underwriters plus an
additional 3% financial advisory fee on all of the 6,825,000 shares offered
hereby. In such a case, the maximum underwriting discount would yield the
minimum proceeds to us.
The last row of the table assumes that the underwriters have exercised
their option granted by the selling stockholders to purchase an additional
650,000 shares of our Common Stock. The exercise of the over-allotment option
would yield additional proceeds to the selling stockholders and would require
the payment by the selling stockholders of both a 4% underwriting discount and a
3% financial advisory fee on such shares.
ROBERT W. BAIRD & CO. JANNEY MONTGOMERY SCOTT INC.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OR AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
(Continued from cover page)
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. The shares of our Common Stock that are sold in the rights
offering will come from the shares being issued by us. If shares remain
unsubscribed for after the end of the rights exercise period, the first 300,000
of such shares will be offered by us to certain other persons. These persons may
have a relationship with us, Safeguard or one of Safeguard's other partnership
companies. All shares not purchased by such persons after this offer and all
unsubscribed shares in excess of 300,000 will be purchased by the underwriters
pursuant to a standby underwriting agreement.
There is no minimum number of shares that must be subscribed for in the
rights offering for it to be completed. The number of rights that will be
granted to the holders of Safeguard common shares is based upon the number of
Safeguard common shares that are outstanding on , 1999. If there
are fewer than 32,500,000 Safeguard common shares outstanding on
, 1999, we will grant fewer than 6,500,000 rights in the rights
offering. If fewer than 6,500,000 rights are granted, we will offer the shares
subject to the rights which were not granted to Safeguard stockholders to
certain persons selected by us at a purchase price of $5.00 per share. In any
event, all of the 6,500,000 shares of our Common Stock offered in the rights
offering will be sold. However, this offering may be canceled by the
underwriters if certain conditions are not satisfied. In that event, if you have
made any payments to the rights agent, ChaseMellon Shareholder Services, L.L.C.,
the full amount of your payments will be promptly returned to you.
We will not receive any proceeds from the sale of shares by the selling
stockholders. After the completion of this offering, the selling stockholders
together will own approximately 28.8% of our Common Stock.
We have filed a Registration Statement with the SEC covering the rights and
the shares of Common Stock. Before this offering, our Common Stock has not been
listed on any stock exchange or The Nasdaq Stock Market. We have filed an
application to have the rights and our Common Stock approved for quotation on
the Nasdaq National Market under the symbols "WHOVR" and "WHOV," respectively,
and our Common Stock approved for quotation on the Nasdaq National Market on a
when-issued basis during the rights exercise period under the symbol "WHOVV."
The underwriters may engage in transactions involving the rights and the
Common Stock during and after the rights exercise period. As a result, the
underwriters may realize profit in addition to the underwriting compensation
received for their participation in this offering. If there are shares of Common
Stock that are not purchased pursuant to the exercise of rights before the
rights expiration date, the underwriters will be obligated to purchase all of
the remaining shares from us. We expect that we will deliver any remaining
shares on or about , 1999 at the offices of Robert W. Baird & Co.
Incorporated in Milwaukee, Wisconsin.
After this offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon with an opinion expressed by the Company's independent auditors.
We have filed an application to register TactileSense(Trademark) as a
trademark with the U.S. Patent and Trademark Office. All other product names
referred to herein are the property of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus (i) assumes no exercise of the underwriters'
over-allotment option, (ii) assumes an exercise price of $5.00 per share and
(iii) assumes conversion of all outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock (the "Preferred Stock")
into shares of Common Stock. Unless the context otherwise indicates, Who? Vision
Systems, Inc. is referred to herein as "Who? Vision" or the "Company."
THE COMPANY
Who? Vision develops fingerprint identification technologies that enable
individuals to electronically authenticate their identities to access digital
networks and consumer products. The burgeoning use of the Internet, e-commerce
and computer networks is placing increasing importance upon network security. In
particular, the ability to authenticate identity is critical to safeguard
against unauthorized transactions and data access. The Company has designed and
developed TactileSense(Trademark), a proprietary fingerprint identification
technology, which enables it to create highly reliable, compact and
cost-effective authentication products. The Company believes that TactileSense
will enable the widespread integration of fingerprint identification devices
into numerous commercial mass market products.
The Company is primarily focusing its initial commercialization efforts for
its TactileSense products on the computer network security market. According to
an April 1998 report by Dataquest, a technology market research firm, the
worldwide installed base of personal computers and office workstations ("PCs")
totaled more than 270 million in 1997, with new computer purchases exceeding 80
million in 1997 and projected to increase at a compound annual growth rate of
approximately 15% from 1997 to 2002. Today, the most common means for
identifying individuals in computer network applications are personal
identification numbers ("PINs") and passwords. However, these methods are
inherently insecure, as they are easy to guess or difficult to remember and
consequently are often written down, subjecting them to theft. In addition to
providing only limited security, PINs and passwords are also costly to
administer. A February 1998 study by Forrester Research, Inc. indicated that
more than 40% of all help desk calls involve resetting passwords for employees
and estimated that elimination of these calls can save several hundred dollars
per user annually. The Company believes that its TactileSense based fingerprint
identification system is both simpler and less costly to support than PIN and
password-based systems. TactileSense products will be sold (i) as separate
attachments to existing PCs, (ii) as value-added product features embedded into
newly manufactured PC keyboards, mice and other peripherals or (iii) directly to
PC manufacturers for inclusion as a base or optional product feature. The
Company believes that initial demand within the computer network security market
will come from the healthcare and financial services industries in
identity-sensitive applications such as securing access to patient medical
records and on-line banking transactions.
The Company intends to pursue additional market opportunities for its
TactileSense products beyond the computer network security market, including
applications such as noncomputer consumer electronic security, credential
verification and access control. Potential noncomputer consumer electronic
security applications include integrating the Company's fingerprint
identification devices into cellular phones, television remote controls, point
of sale devices and other high-value personal or commercial electronic devices.
Potential credential verification applications include integration of the
Company's products into devices that verify a person's identity, such as driver
licenses, voter registration cards and passports. Potential access control
applications range from simple applications, such as replacing standard door
locks, to more advanced applications, such as automotive and building security
systems. The Company believes that these application markets will be significant
and intends to devote time and resources to develop these markets, with an
initial focus on those that it considers to possess high-value and involve early
technology adopters.
3
<PAGE>
Who? Vision has formed, and intends to form, strategic alliances with
companies possessing leading technology, manufacturing and distribution
capabilities in order to maintain its focus on advancing its fingerprint
identification technology and expedite its entry into selected markets. The
Company has entered into a strategic alliance with Koninklijke Philips
Electronics N.V., a leading worldwide manufacturer of a broad range of consumer
electronic products, and certain of its affiliates (collectively, "Philips")
under which the Company has received the exclusive right to complete the
development of certain Philips patented and unpatented proprietary technology
and to incorporate the technology into Who? Vision's fingerprint identification
sensors. Who? Vision and Philips have also entered into an exclusive
relationship to combine their respective technologies and jointly develop and
manufacture fingerprint identification sensors for sale by Who? Vision to
product markets worldwide. One of the benefits of this alliance is the expected
development and manufacture of an extremely thin (less than 1/8 inch) and
cost-effective fingerprint sensor that can be incorporated into a variety of
computer and consumer product devices, such as laptops and cellular phones. In
connection with this alliance, Philips received 3.7 million shares of Who?
Vision Series C Preferred Stock.
In addition, Who? Vision has entered into a strategic alliance with Silitek
Corporation ("Silitek") for the high-volume manufacture of certain of its
TactileSense fingerprint sensors. Based in Taiwan, Silitek is a manufacturer and
distributor of computer peripherals and one of the top three keyboard
manufacturers in the world, whose customers include Dell Computers, Inc.,
Hewlett-Packard Company and Compaq Computer Corporation.
Who? Vision believes that its fingerprint identification technology
possesses attributes that collectively give it a competitive advantage over
alternative technologies and will allow it to be incorporated into numerous
commercial applications. These attributes include:
o LOW COST. The TactileSense technology's low material cost and relatively
simple manufacturing process enable it to be produced and sold at a price
point that will promote widespread commercial adoption.
o SMALL SIZE. The TactileSense device's small size will enable it to be
incorporated into numerous commercial applications, including computer
peripherals such as keyboards and mice, and directly into laptop computers
and cellular phones.
o HIGH RELIABILITY MATCHING. The TactileSense technology effectively overcomes
fingerprint image problems caused by dry skin and extraneous ambient light
sources.
o ANTI-FRAUD CAPABILITY. The TactileSense technology is capable of
consistently distinguishing real fingers from artificial replicas that can
fool existing optical fingerprint sensors.
o DURABILITY. The TactileSense technology utilizes a protective polymer
material to ensure its durability. Additionally, TactileSense's sensor
components do not come into contact with the finger surface, thereby avoiding
exposure to electrostatic discharge which can cause damage to direct-contact
silicon-based sensors.
o LOW POWER CONSUMPTION. The ability to operate without an external light
source and to enter into a low power "idle" mode allows TactileSense products
to be energy efficient and therefore makes it advantageous for power
sensitive applications such as laptop computers and cellular phones.
The Company was incorporated in the State of Delaware on June 30, 1997.
From May 1, 1997 through June 29, 1997, the Company operated as a division of XL
Vision, Inc. ("XL Vision"). The Company's principal executive offices are
located at 100 North Pointe Drive, Lake Forest, California 92630 and its
telephone number is (949) 837-5353.
4
<PAGE>
THE OFFERING
Description of the Rights Offering. If you hold Safeguard common shares on
, 1999, you will receive one right
to purchase our Common Stock for every five
Safeguard common shares you own. Fractional
rights will be rounded up to the next whole
number in determining the number of rights
to be issued to Safeguard stockholders. Each
right entitles you to purchase one share of
our Common Stock at a purchase price of
$5.00. You must own at least 20 rights to be
eligible to exercise your rights. In other
words, if you own fewer than 96 Safeguard
common shares, you will receive fewer than
20 rights and you will not be eligible to
exercise your rights unless you purchase
additional rights in the market. We are
offering up to 6,500,000 shares of our
Common Stock for purchase through the
exercise of rights.
The Exercise Price of the Rights... If you wish to exercise your rights to
purchase our Common Stock, the purchase
price will be $5.00 per share of Common
Stock.
When You Can Exercise Your
Rights........................... The rights will only be exercisable from the
period beginning on , 1999 and
ending on , 1999 at 5:00 p.m., New
York City time.
How Your Rights Will be
Evidenced........................ You will receive certificates that represent
your transferable rights.
Offer of Unsubscribed Shares to
Other Purchasers................. We will offer the first 300,000 unsubscribed
shares in the event that not all of the
rights are exercised and any shares of
Common Stock subject to rights that were not
distributed to certain persons selected by
us. These persons may have a relationship
with us, Safeguard or one of Safeguard's
other partnership companies.
Obligations of the Underwriters.... The underwriters will purchase any shares
offered in the rights offering that have not
been purchased through the exercise of
rights and have not otherwise been sold by
us by , 1999 at the exercise price,
less a 4% underwriters' discount and a 3%
financial advisory fee. The underwriters
will then offer these shares to the public.
Number of Shares of Common Stock
Offered in the Rights Offering... We will be selling the 6,500,000 shares
offered in the rights offering.
5
<PAGE>
Offer of Direct Shares to Direct
Purchasers....................... The selling stockholders are offering up to
325,000 shares of our Common Stock to
certain persons selected by us. These
persons may have a relationship with us,
Safeguard or one of Safeguard's other
partnership companies.
Common Stock to be Outstanding
After the Offering............... After this offering, 25,082,704 shares of
Common Stock will be outstanding and
1,030,156 shares will be issuable upon the
exercise of stock options outstanding as of
January 15, 1999 (at a weighted average
exercise price of $2.43 per share).
How We Intend to Use the Proceeds.. We will use approximately $6.5 million of
the money received from the sale of our
shares to repay in full our outstanding debt
to XL Vision, approximately $6.0 million for
continued product development prior to
commercialization, approximately $2.3
million to complete the development of
certain components and the transfer of
technology related to the Philips alliance
and the remainder for working capital,
including ongoing product development and
sales and marketing, general corporate
purposes and capital expenditures. We will
not receive any proceeds from the sale of
shares by the selling stockholders.
Nasdaq National Market Symbols..... During the period in which you can exercise
your rights, the rights will trade on the
Nasdaq National Market under the symbol
"WHOVR" and the Common Stock will trade
under the symbol "WHOVV" on a when-issued
basis. After the expiration of the rights
period, the Common Stock will trade under
the symbol "WHOV."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 1, 1997 JUNE 30, 1997
(INCEPTION) (INCORPORATION) NINE MONTHS
THROUGH THROUGH ENDED
JUNE 29, 1997 DECEMBER 31, 1997 SEPTEMBER 30, 1998(1)
------------- ----------------- ---------------------
(DIVISIONAL
OPE(2))ONS
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $ -- $ -- $ --
Cost of revenue......................... -- -- --
Operating expenses:
Selling, general and
administrative.................... 123,940 1,440,406 2,849,740
Research and development............. 58,804 1,540,950 3,224,658
In-process research and
development(3).................... -- -- 29,000,000
Total operating expenses.......... 182,744 2,981,356 35,074,398
Interest expense........................ 1,216 74,499 366,041
--------- ----------- ------------
Net profit (loss)....................... $(183,960) $(3,055,855) $(35,440,439)
========= =========== ============
Net profit (loss) subsequent to
incorporation(2)..................... $(3,055,855) $(35,378,836)
=========== ============
Net profit (loss) per common share
subsequent to incorporation:(2)(4)
Basic............................. $ (2.46) $ (6.98)
=========== ============
Diluted........................... $ (2.46) $ (6.98)
=========== ============
Weighted average number of common shares
outstanding.......................... 1,241,467 5,076,980
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------------
ACTUAL AS ADJUSTED(5)
----------------- ---------------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 9,405 $ 22,558,022
Capitalized offering costs.............................. 248,356 --
Total assets............................................ 1,104,442 23,425,909
Total indebtedness(6)................................... 6,526,383 --
Equity purchase option(7)............................... 3,000,000 --
Total stockholders' equity (deficit).................... (9,844,924) 22,230,076
</TABLE>
- ------------------
(1) On December 8, 1998, the Company changed its fiscal year end to
September 30.
(2) Prior to June 30, 1997, the Company operated as a division of XL Vision. See
Note 1 of the Notes to Financial Statements.
(3) Includes a one-time $10.0 million fee payable for the transfer of technology
from XL Vision and $19.0 million in costs associated with the technology
purchased from Philips during the nine months ended September 30, 1998. See
Notes 7 and 11 of the Notes to Financial Statements.
(4) See Note 2 of the Notes to Financial Statements for information concerning
the calculation of net profit (loss) per common share.
(5) Adjusted to give effect to the sale by the Company of 6.5 million shares of
Common Stock, the receipt of approximately $29.1 million representing the
minimum net proceeds from this offering, after deducting the maximum total
underwriting discount with respect to such shares of approximately $2.3
million and estimated offering expenses of approximately $1.2 million
(including $200,000 representing the maximum applicable non-accountable
expense allowance to the underwriters), and the application of the proceeds
as set forth in "Use of Proceeds."
(6) Represents approximately $6.5 million owed to XL Vision as of September 30,
1998. As of December 31, 1998, approximately $9.2 million was due to XL
Vision.
(7) Represents a provision to repurchase 600,000 shares of Series C Preferred
Stock. This repurchase provision expires upon the earlier of the completion
of this offering or March 31, 1999. See Note 11 of the Notes to Financial
Statements.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock and the rights offered hereby
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors, as well as the other information in this Prospectus,
before investing in the shares of Common Stock and rights offered hereby. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. Future events and the Company's actual results could differ
materially from the results reflected in these forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the following risk factors.
DEVELOPMENT STAGE COMPANY WITH LIMITED OPERATING HISTORY; UNCERTAINTY OF
OPERATING RESULTS
The Company is a development stage enterprise, has no commercialized
products or revenues and has a limited operating history. Since the inception of
the Company's operations in May 1997 as a division of XL Vision through
September 30, 1998, the Company has incurred losses totaling approximately $38.7
million, including a one-time $10.0 million fee related to the purchase of the
TactileSense technology from XL Vision and $19.0 million for technology
purchased from Philips. To date, the Company has not made any commercial sales
of its products and has never successfully marketed a product. The Company does
not anticipate that it will realize any material commercial revenues before the
third calendar quarter of 1999 and, therefore, will continue to incur losses for
the foreseeable future. The Company's prospects must be considered in light of
the risks and uncertainties encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets. The
Company's success will depend on many factors, including, but not limited to,
the timing and rate of adoption of fingerprint identification technologies in
markets targeted by the Company, the demand for the Company's products, the
degree of competition faced by the Company and the Company's ability to enter
into and maintain additional strategic relationships. To address these risks,
the Company must, among other things, successfully introduce products and
enhancements to products, respond to competitive developments and attract and
retain qualified personnel. There can be no assurance that the Company will
succeed in addressing any or all of these risks, or that the Company will
achieve profitable operations at any time in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
If the Company is successful in achieving revenues, the Company's operating
results may vary substantially and may continue to fluctuate due to a number of
factors, including the timing, size and nature of the orders for the product;
the market acceptance of new products and product enhancements by the Company or
its competitors; product and price competition; the relative proportions of
revenues derived from different channels of distribution; changes in the
Company's operating expenses; foreign currency exchange rates; and general
fluctuations in economic conditions. Once revenues begin, the timing, size and
nature of individual orders are important factors in the Company's quarterly
results of operations. Because orders for the Company's products may involve
review, validation and adoption of new technologies, the sales cycles for
certain transactions may be lengthy and unpredictable. Due to these and other
factors related to the transition of a development stage company to commercial
operations, the Company believes that period-to-period comparisons of its
results of operations will not necessarily be meaningful and that results in any
particular quarter will not necessarily be indicative of future performance.
Future revenues, if any, and results of operations may vary substantially from
quarter to quarter. In future quarters, the Company's results may be below
expectations of public market analysts and investors. In either case, the price
of the Company's Common Stock could be materially adversely affected.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE
All of the Company's revenues for the foreseeable future are anticipated to
be derived from fingerprint identification products. These products represent
new technologies, which have not gained widespread commercial acceptance. To
date, fingerprint identification products have only been used in limited
applications. The expansion of the markets for the Company's products depends on
a number
8
<PAGE>
of factors, including the cost and reliability of the Company's and its
competitors' products, the degree to which a percentage of the population will
not be able to use these products, the public perception of the benefits of
these products relative to their intrusiveness and customer satisfaction. Public
objections have been raised to the use of biometric identification products for
some applications on civil liberties grounds. The Company's future success is
dependent upon the development and expansion of markets for biometric
fingerprint identification products both domestically and internationally. There
can be no assurance that markets will develop for the Company's products. Even
if markets develop for biometric fingerprint identification products, there can
be no assurance that the Company's products will gain wide market acceptance. A
number of factors may affect the market acceptance of the Company's products,
including the performance and price of the Company's products compared to
competitive products or technologies, the adoption of an industry standard for
fingerprint identification applications related to computer network security,
the ability of the Company to develop technological innovations and the success
of marketing efforts by the Company's partners. If the markets for the Company's
products fail to develop or develop more slowly than anticipated or if the
Company's products fail to gain wide market acceptance, the Company's business,
financial condition and results of operations will be materially adversely
affected. See "Business -- Markets."
DEPENDENCE ON PRODUCT INTRODUCTIONS AND TECHNOLOGICAL INNOVATIONS
The Company's future success will depend upon its ability to develop,
introduce and achieve market acceptance of its products on a timely basis that
keeps pace with technological developments, emerging industry standards and
evolving customer requirements. The development of new, technologically-advanced
products and product enhancements is a complex, costly and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. Any failure by the Company to anticipate or
adequately respond to technological developments or end-user requirements, or
any significant delays in product development or introduction, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The development cycle for the Company's new products may
be significantly longer than the Company's historical product development cycle
or than that anticipated by the Company, resulting in higher development costs
or a loss in market share. If the Company is unable, for technological or other
reasons, to develop, introduce and sell its products in a timely manner, the
Company's business, financial condition and results of operations will be
materially adversely affected. For instance, the failure to develop Philips'
technology in accordance with certain milestones and specifications set forth in
the agreements with Philips could result in the termination of the exclusive
license to use such technology, resulting in the Company holding only a
non-exclusive license to use Philips' technology. In addition, because a number
of the Company's fingerprint identification products will be incorporated into
systems marketed by other companies, or will be co-marketed together with other
products sold by other companies, the failure to introduce products in a timely
manner may cause such companies to seek alternative suppliers or marketing
partners. From time to time, the Company or its present or future competitors
may announce new products, capabilities or technologies that have the potential
to replace the Company's products. There can be no assurance that announcements
of currently planned or other new products will not cause customers to delay or
alter their purchasing decisions in anticipation of such products, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, new product introductions may contribute
to fluctuations in quarterly operating results or result in the early
obsolescence of the Company's products. If the Company's products have
reliability or quality problems, the Company may experience reduced orders,
higher manufacturing costs, delays in collecting accounts receivable and
additional service and warranty expense. There can be no assurance that the
Company will be successful in developing and marketing products or product
enhancements on a timely basis, if at all, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of these products, or that any of its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance.
9
<PAGE>
NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS
The Company does not intend to establish its own manufacturing capabilities
and will depend initially on third parties for distribution capabilities. A
significant business strategy of the Company is to enter into strategic or other
similar collaborative relationships for the manufacture, marketing and
distribution of its products. The Company has also established strategic
relationships in connection with the acquisition of technology it believes will
lead to the development of new and better products. There can be no assurance
that the Company will be able to enter into or maintain strategic relationships
on commercially reasonable terms, if at all. If the Company is unable to enter
into strategic relationships or maintain its strategic relationships, it will be
required to devote substantially greater resources than anticipated to the
manufacture, distribution, sale and marketing of its products. Furthermore, as a
result of the Company's emphasis on these relationships, the Company's success
will depend on the ultimate success of the other parties to such relationships,
and there can be no assurance that such parties will be able to perform their
obligations to the Company's expectations. In addition, there can be no
assurance that the other parties to the Company's manufacturing and distribution
relationships will not reduce their commitments to the Company at any time in
the future. Failure of one or more of the Company's strategic relationships
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Strategic Alliances."
In addition, the Company or its distribution partners will be required to
enter into and maintain strategic relationships with software companies for
software to be integrated with the Company's products or to develop software
packages on their own. There can be no assurance that the Company or its
distribution partners will be able to enter into or maintain strategic
relationships with companies for such software. The failure to enter into such
relationships could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Strategic
Alliances."
DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's commercial success will depend in part on its ability to
protect and maintain its proprietary technology and to obtain and enforce
patents on the Company's technology. In addition, the Company has acquired the
right to use certain intellectual property from Philips which it believes it
will be able to employ in the development of future products. The Company relies
primarily on a combination of copyright, patent and trademark laws, trade
secrets, confidentiality procedures, exclusive licensing and contractual
provisions to protect its proprietary rights. No assurance can be given that the
Company's efforts will provide meaningful protection for its proprietary
technology against others who independently develop or otherwise acquire
substantially equivalent techniques or gain access to, misappropriate or
disclose the Company's proprietary technology. The Company applied for three
patents with the U.S. Patent and Trademark Office, one on July 30, 1998 and two
on September 5, 1998, regarding certain aspects of the Company's fingerprint
imaging technology and its integration into PCs. The Company believes that
approval of such patents, if granted, will be received not later than December
31, 2000. The Company has also filed foreign patent applications that correspond
to the U.S. patent applications. There can be no assurance that any patent
applications filed by the Company will result in the issuance of patents or that
any patents issued to the Company will afford protection against competitors
that develop similar technology. The failure to obtain meaningful protection for
its proprietary technology would cause the Company to reconsider its business
plan and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The computer manufacturing and software industry has experienced a
significant amount of litigation regarding patents and other proprietary rights.
Any claims of infringement by third parties, with or without merit, relating to
intellectual property owned or licensed by the Company, could be time-consuming,
resulting in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, if at all. A determination that the Company is infringing the
proprietary rights of others could have a material adverse effect on the
Company's
10
<PAGE>
business, financial condition and results of operations. See "Business --
Patents and Proprietary Technology."
COMPETITION
Although the biometric identification product industry has yet to fully
develop, the Company anticipates that it will be characterized by intense
competition. The Company will generally compete with producers of both
non-biometric and biometric methods of restricting access. Non-biometric methods
of restricting access, such as keys, tokens, PINs and passwords, will initially
compete with the Company's devices. The Company will compete more directly with
other biometric methods of restricting access, such as signature verification,
voice recognition, iris recognition, facial recognition, hand geometry
recognition and retinal scanning, all of which are currently being marketed.
Companies that develop and distribute fingerprint identification devices, such
as American Biometric Company, Digital Persona, Inc., Harris Corporation,
Identicator, Inc., Identix Incorporated, Siemens AG, ST Microelectronics N.V.,
Thomson-CSF and Veridicom, Inc., will compete directly with the Company. The
Company will face additional competition from other established and emerging
companies in each market in which the Company intends to compete. Many of the
Company's present and potential competitors have longer operating histories and
significantly greater financial, marketing and research resources than those of
the Company. The Company expects competition to increase as other companies
introduce additional and more competitive products. In order to compete
effectively in this environment, the Company must continually be able to develop
and market new and enhanced products and market those products at competitive
prices. There can be no assurance that the Company will be able to compete
effectively in the markets in which it intends to enter. See "Business --
Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
An integral part of the Company's business strategy is to form strategic
alliances for the manufacture and distribution of its products with third
parties, including foreign corporations. Currently, one of the Company's
strategic partners is located in the Pacific Rim. See "Business -- Strategic
Alliances." Several countries in this region have recently experienced currency
devaluation and/or reduced access to credit. In January 1999, the Company
terminated its relationship with a strategic partner located in this region as a
result of such partner's financial condition. There can be no assurance that the
effect of this economic condition on the Company's strategic partners, or the
exposure to variations in the respective value of the currency of all of the
Company's international partners with that of the U.S. dollar, will not have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company intends to market and sell its products
internationally and, therefore, the sale of its products may be regulated by
foreign governmental agencies. The Company does not know the impact of such
regulation, if any, on the Company, and there can be no assurance that foreign
regulation will not have a material adverse effect on the Company's ability to
sell its products in such countries. Additionally, the Company's products are
subject to restrictions on export to foreign countries. These restrictions
require the Company to obtain a validated export license prior to the export of
its technology or sale of its products to purchasers in such countries, thereby
making many of the Company's sales to foreign countries subject to the approval
of the U.S. Department of Commerce. There can be no assurance that the U.S.
Department of Commerce will not mandate more restrictions in the future towards
the Company's products or, due to the political or diplomatic climate or for
human rights reasons, impose additional restrictions on exports to one or more
countries where the Company desires to sell its products. Such a change could
adversely affect the Company's ability to sell its products in such countries,
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulation."
RISKS ASSOCIATED WITH IMPLEMENTATION OF LARGE SCALE MANUFACTURING CAPABILITIES
The Company plans to market its products for potentially large volume
commercial applications, such as computer network security. The Company is
relying on strategic partners for the manufacture and assembly of its products.
As a result, the Company's current or future manufacturing partners may
11
<PAGE>
be required to fulfill large orders in a short period of time and to implement
measures in their manufacturing processes to decrease product costs. No
manufacturer has demonstrated the ability to manufacture the Company's products
on a large scale. There can be no assurance that the Company will be able to
establish large scale manufacturing and assembling capacity sufficient to
fulfill large orders and to decrease manufacturing costs or that the quality of
such high volume products will meet customer requirements. Any failure by the
Company's manufacturing partners to do so could have a material adverse effect
on the Company's business, financial condition and results of operations. Even
if the Company is able to enter into an agreement with a partner having the
ability to manufacture the Company's products on a large scale, the loss of such
manufacturer would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Manufacturing"
and "Business -- Strategic Alliances."
DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY
The TactileSense material, the silicon image sensor, the glass image
sensors and certain custom silicon chips used in the Company's products are
obtained by the Company or the Company's manufacturing partners from a single
source or a limited group of suppliers. Specifically, the glass image sensors
used in the Company's products are manufactured exclusively by Philips. The
partial or complete loss of certain of these sources or the delay in receiving
supplies from these sources could result in delays in manufacturing and shipping
of products to customers and require the incurrence of development, re-tooling
and other costs to establish alternative sources of supply. If the Company is
required to seek alternative suppliers, there can be no assurance that the
Company will be able to obtain such components within the time frames and cost
parameters required by the Company, if at all.
Any delays resulting from the failure of suppliers to deliver components on
a timely basis in sufficient quantities and of sufficient quality or any
significant increase in the price of components from existing or alternative
suppliers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Technology" and
"Business -- Manufacturing."
RISKS OF PRODUCT DEFECTS AND FAILURE TO MEET PERFORMANCE CRITERIA; PRODUCT
LIABILITY RISK
Complex products such as those to be offered by the Company may contain
undetected or unresolved defects or may fail initially to meet customers'
performance criteria when first introduced or as new versions are released.
There can be no assurance that defects or performance flaws will not be found in
products or versions of products following commercial release or that
performance failures will not result, causing loss of market share, delay in or
loss of market acceptance, additional warranty expense or product recall. In
addition, the failure of products to meet performance criteria could result in
delays in recognition of revenue and higher operating expenses during the period
required to correct any such defects. There is a risk that, for unforeseen
reasons, the Company may be required to repair or replace a substantial number
of products in use or to reimburse persons for products that fail to work or
meet strict performance criteria. Any such occurrence could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company does not carry, nor is it intending to
procure in the foreseeable future, product liability insurance. The assertion of
product liability claims against the Company could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS RELATED TO THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions or engage in similar normal business
activities. The Company's business operations are dependent upon its software
vendors, suppliers and strategic partners. The Company is in the process of
working with its software vendors to ensure that the software that the Company
has licensed will operate properly in the year 2000 and beyond. Additionally,
the Company is working with its strategic partners and suppliers and expects to
determine by June 1999 the extent to which such
12
<PAGE>
third parties' systems (insofar as they relate to the Company's business) are
subject to the Year 2000 issue. Significant uncertainty exists concerning the
potential costs and effects associated with Year 2000 compliance. Any Year 2000
compliance problems experienced by the Company or the Company's software
vendors, suppliers or strategic partners could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends on the continued service of key management,
sales, operations and technical personnel, including Alexander G. Dickinson, the
Company's Chief Executive Officer, and on its continued ability to attract,
retain and motivate such personnel. The Company has not entered into employment
contracts with any of its personnel. The competition for qualified management,
sales, operations, and technical personnel is intense, and there can be no
assurance that the Company can retain its key personnel or attract other highly
qualified personnel in the future. The failure to attract or retain such persons
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
LIMITED HISTORY OF MANAGEMENT TEAM
Of the senior executives of the Company, only the Chief Executive Officer
has been employed by the Company since its incorporation in June 1997. Other
members of the Company's senior management have a more limited history with the
Company. As a result, the Company's senior management has only worked together
as a team for a short period of time. There can be no assurance, therefore, that
the Company's senior management will establish an effective working relationship
that will facilitate the successful implementation of the Company's business
plan. See "Management."
RISKS ASSOCIATED WITH RAPID GROWTH
If the Company is successful in implementing its business strategy, it may
experience a period of rapid growth and expansion which could place significant
additional demands on the Company's corporate infrastructure. The failure by the
Company's management team to manage this potential growth effectively could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATED TO GOVERNMENT REGULATION
Third-party software bundled with the Company's fingerprint identification
technologies could contain cryptographic technology which is subject to export
controls under U.S. law and applicable foreign government restrictions. All
cryptographic products require export licenses from either the U.S. State
Department, acting under the authority of the International Traffic in Arms
Regulation, or the U.S. Department of Commerce, acting under the authority of
the Export Administration Regulations. The U.S. government generally limits the
export of software with encryption capabilities to mass marketed software with
limited key sizes, which could affect the Company's international competitive
position or results of operations.
The Director of the U.S. Federal Bureau of Investigation has asked Congress
to enact legislation that would require manufacturers of encryption products to
incorporate key escrow and recovery capabilities into their products for both
domestic and international use, thereby allowing law enforcement officials to
gain access to decryption keys for the purposes of decoding messages relating to
illegal activities, subject to constitutional due process safeguards. There can
be no assurance that this or other similar measures will not in the future
become law in the United States or other countries, and the Company cannot
predict what effect any such law would have on its domestic or international
competitive position or on its business, financial condition and results of
operations.
In addition, states may enact legislation which restricts the use and
dissemination of data derived from biometric products, which could have a
material adverse effect on the Company's ability to commercialize its products
in such markets. See "Business -- Governmental Regulation."
13
<PAGE>
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
Notwithstanding the receipt of the net proceeds from this offering, the
Company may require additional capital to finance its growth and its marketing
and research and development projects beyond the next 16 months. The Company's
capital requirements will depend on many factors including, but not limited to,
the demand for the Company's products and the timing of and extent to which such
products achieve market acceptance, the timing of and extent to which the
Company invests in new technology, the Company's general and administrative and
new product development expenses, the extent to which competitors are successful
in developing their own products and increasing their own market share and brand
awareness, the success of the Company's strategic relationships, the costs
involved in maintaining and enforcing intellectual property rights, the level
and timing of revenues, the available borrowings under line of credit
arrangements and other factors. To the extent that resources are insufficient to
fund the Company's activities, the Company may need to raise additional funds
through public or private financing (including the issuance of equity
securities), strategic relationships or other arrangements. The Company
currently does not have any such arrangements in place. There can be no
assurance that such additional funding, if needed, will be available on terms
acceptable to the Company, if at all. Strategic relationships that provide
funding to the Company may require the Company to relinquish rights to certain
of its technologies or products. The inability to obtain sufficient funds may
require the Company to delay, scale back or eliminate some or all of its
development activities or license to third parties the right to commercialize
products or technologies that the Company would otherwise seek to commercialize
itself. After this offering, the Company will not have arrangements with any
financial institution for funding. The failure of the Company to raise capital
when needed could have a material adverse effect on the Company's business,
financial condition and results of operations. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
Company by its then-current stockholders would be reduced. Furthermore, such
equity securities might have rights, preferences or privileges senior to those
of the Company's Common Stock. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
CONTROL BY PRINCIPAL STOCKHOLDERS
After the completion of this offering, Safeguard, Philips, XL Vision,
Technology Leaders II and Technology Leaders I (collectively, the "Principal
Stockholders") will beneficially own approximately 20.8%, 14.8%, 6.3%, 4.8% and
4.5%, respectively, of the Company's outstanding Common Stock. Each of XL
Vision, Technology Leaders II and Technology Leaders I has a relationship with
Safeguard. See "Management -- Certain Relationships". In addition, officers of
the Principal Stockholders will own an additional 5.8% of the outstanding Common
Stock (before the exercise of any rights they may receive in this offering). As
a result, the Principal Stockholders will collectively have the voting power to
substantially control the election of the Company's entire Board of Directors
and all matters requiring stockholder approval. See "Management -- Executive
Officers and Directors," "Principal and Selling Stockholders," "Certain
Transactions" and "Shares Eligible for Future Sale."
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS
The Company intends to use the net proceeds from this offering to repay
certain indebtedness and for working capital, including product development and
sales and marketing, general corporate purposes and capital expenditures. Other
than the repayment of debt and continuing product development payments related
to the Philips technology transfer, the Company has not specifically allocated
the remaining net proceeds of approximately $14.3 million for any particular
uses. Accordingly, the specific uses for a substantial portion of the net
proceeds will be at the complete discretion of the Board of Directors of the
Company and may be allocated from time to time based upon a variety of
circumstances. There can be no assurance that the Company will deploy such funds
in a manner that will enhance the financial condition of the Company. See "Use
of Proceeds."
14
<PAGE>
BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS
This offering will provide significant benefits to the current stockholders
of the Company, including the creation of a public market for the Common Stock
and the receipt of proceeds from the sale of Common Stock in this offering by
the selling stockholders. As a result, the Company's current stockholders will
generally have greater liquidity with respect to their investment in the Common
Stock and their holding of Common Stock will potentially have a greater value.
Furthermore, the Company intends to use approximately $6.5 million of the
estimated net proceeds to the Company to repay loans from XL Vision, a selling
stockholder in this offering, and approximately $1.4 million to pay ongoing
product development costs to Philips, a stockholder of the Company, related to
the Company's joint development efforts. The Principal Stockholders and the
Company's other executive officers and directors will beneficially own
approximately 14.0 million shares of Common Stock after completion of this
offering. Based on the exercise price of $5.00, such shares owned will have an
aggregate market value of approximately $70.1 million. See "Use of Proceeds,"
"Principal and Selling Stockholders" and "Certain Relationships and Related
Transactions."
RISKS ASSOCIATED WITH RELATED PARTY TRANSACTIONS
The Company began operations in May 1997 as a division of XL Vision.
Historically, the Company has been managed to a great extent by members of XL
Vision's management and receives services from XL Vision pursuant to an
administrative services agreement. After this offering, XL Vision will own
approximately 6.3% of the Company's outstanding capital stock. In addition, a
member of the Company's Board of Directors is also an officer and director of XL
Vision. XL Vision will therefore have the ability to influence the management of
the Company. In July 1998, the Company entered into a value-added reseller
agreement with Integrated Visions, Inc., a subsidiary of XL Vision ("Integrated
Visions"). In addition, the Company is a party to agreements with Philips, a
stockholder of the Company, with certain terms to be negotiated by the parties
in the future. There can be no assurance that such terms are at least as
favorable as terms that the Company may have been able to negotiate for a
similar agreement with an unrelated third party. In the future, the Company may
enter into additional agreements with Integrated Visions or other affiliates of
XL Vision and Philips. There can be no assurance that such agreements will be
negotiated at arms-length or on terms at least as favorable as if they had been
negotiated with unrelated third parties. See "Business -- Strategic Alliances"
and "Certain Transactions."
DILUTION
The average price per share paid upon the original issuance by the Company
of Common Stock as of September 30, 1998 was $1.71. Purchasers of the Common
Stock of the Company offered hereby will suffer an immediate and substantial
dilution of $4.11 as of September 30, 1998 in the net tangible book value per
share of the Common Stock from the exercise price of the rights and the offering
price for the shares of Common Stock offered hereby. See "Dilution."
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ NATIONAL MARKET; APPLICATION
OF THE PENNY STOCK RULES
The Company has filed an application for listing of the Common Stock and
rights (the "Listed Securities") on the Nasdaq National Market. If the Company
is unable to maintain the standards for continued listing, the Listed Securities
could be subject to delisting from the Nasdaq National Market. Trading, if any,
in the Listed Securities would thereafter be conducted on the Nasdaq Small Cap
Market. If, however, the Company did not meet the requirements of the Nasdaq
Small Cap Market, trading of the Listed Securities would be conducted on an
electronic bulletin board established for securities that do not meet the Nasdaq
listing requirements or on what is commonly referred to as the "pink sheets." As
a result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an
15
<PAGE>
investor with a net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with a spouse). For transactions covered by this
rule, the broker-dealer must make a special suitability determination for the
purchaser and must have received the purchaser's written consent to the
transaction prior to sale. Consequently, delisting, if it occurred, may affect
the ability of broker-dealers to sell the Company's securities and the ability
of purchasers in this offering to sell their securities in the secondary market.
The Securities and Exchange Commission (the "SEC" or the "Commission") has
adopted regulations that define a "penny stock" to be any equity security that
has a market price (as defined in the regulations) of less than $5.00 per share
or an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. As a result, if the Common
Stock is determined to be "penny stock," an investor may find it more difficult
to dispose of the Company's Common Stock.
NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICES
Prior to this offering, there has been no public market for the Common
Stock or the rights, and there can be no assurance that an active public market
will develop or be sustained. The exercise price of the rights and purchase
price of the Common Stock has been determined solely by negotiations among the
Company, the selling stockholders and the underwriters and does not necessarily
reflect the price at which shares of Common Stock may be sold in the public
market during or after this offering. See "The Offering -- Why We are Selling
Shares Through a Rights Offering" for a discussion of the factors considered in
determining the exercise price. The public markets, in general, have from time
to time experienced extreme price and volume fluctuations, which have in some
cases been unrelated to the operating performance of particular companies, and
the market for biometric identification and computer network security stocks,
such as the Common Stock, can be subject to greater price volatility than the
stock market in general. In addition, factors such as announcements of
technological innovations, new products by the Company's competitors or other
third parties, potential litigation, strategic alliances of the Company's
competitors, the status of the Company's patent applications, regulatory action
and market conditions in the biometric identification and computer network
security industries may have a significant impact on the market price of the
Common Stock.
CANCELLATION OF RIGHTS OFFERING
If the conditions precedent to the sale of shares of Common Stock to the
underwriters, set forth in the standby underwriting agreement entered into by
the Company, the selling stockholders and the underwriters (the "Standby
Underwriting Agreement"), are not satisfied, the underwriters may elect, on or
before the sixth business day after the Expiration Date (the "Closing Date"), to
cancel the rights offering and the Company and the selling stockholders will not
have any obligations with respect to the rights except to return, without
interest, any payment received in respect of the exercise price. See
"Underwriting." The Company has been advised by the NASD that trades in the
rights and the when-issued shares of Common Stock in the market would be
canceled if the rights offering is not consummated.
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding stock options will become
eligible for future sale in the public market at various times. In addition to
the factors affecting the stock market in general and the market for the Common
Stock discussed above, sales of substantial amounts of Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of this offering,
the Company will have 25,082,704 shares of
16
<PAGE>
Common Stock outstanding, excluding 1,030,156 shares of Common Stock subject to
stock options outstanding as of January 15, 1999 and any stock options granted
by the Company after January 15, 1999. Of these shares, the Common Stock sold by
the Company and the selling stockholders in this offering, except for certain
shares described below, will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Act"). The
remaining 18,256,704 shares of Common Stock (the "Restricted Shares") were sold
by the Company in reliance on exemptions from the registration requirements of
the Act and are "restricted securities" as defined in Rule 144 under the Act
("Rule 144") and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701 ("Rule 701") under the Act. Without considering the contractual
restrictions described below, (i) 1,250 Restricted Shares will be eligible for
sale ninety days after the date of this Prospectus, subject to volume and other
resale conditions imposed by Rule 144, and (ii) 18,255,454 Restricted Shares
will be eligible for future sale subject to the holding period and other
conditions imposed by Rule 144. Certain restrictions on shares of Common Stock
are applicable to (i) any shares of Common Stock purchased in this offering by
affiliates of the Company, which may generally only be sold in compliance with
the limitations of Rule 144, except for the holding period requirements
thereunder, and (ii) the shares of Common Stock beneficially owned by the
Principal Stockholders all of which, together with the shares of Common Stock
beneficially owned by the directors, executive officers and certain other
stockholders of the Company are subject to lock-up agreements (the "Lock-Up
Agreements") and pursuant to such agreements will not be eligible for sale or
other disposition until 180 days after the Expiration Date (the "Lock-Up Expiry
Date") without the prior written consent of Robert W. Baird & Co. Incorporated.
In addition, the Company has granted certain registration rights to its
shareholders whereby they may cause the Company to register shares of Common
Stock. See "Shares Eligible for Future Sale."
It is anticipated that a registration statement (the "Form S-8 Registration
Statement") covering the Common Stock that may be issued pursuant to the
exercise of options awarded by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
Subject to the provisions of any Lock-Up Agreement, shares of Common Stock may
be resold in the public market beginning 90 days after the date of this
Prospectus pursuant to Rule 701(i) by persons who are not affiliates of the
Company without compliance with the public information, holding period, volume
limitation or notice provisions of Rule 144 and (ii) by affiliates of the
Company without compliance with the holding period requirements of Rule 144. See
"Management -- Equity Compensation Plan," "Shares Eligible for Future Sale --
Stock Options" and "Underwriting."
POSSIBLE ISSUANCES OF PREFERRED STOCK
Shares of preferred stock may be issued by the Company in the future
without stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. The Company
has no present plans to issue any shares of preferred stock and all shares of
the Company's preferred stock which are currently outstanding will be converted
to Common Stock prior to the consummation of this offering. See "Description of
Capital Stock -- Preferred Stock."
NO DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently intends to retain future earnings for use in its business
and, therefore, does not expect to declare or pay any cash dividends in the
foreseeable future. See "Dividend Policy."
17
<PAGE>
THE OFFERING
WHY WE ARE SELLING SHARES THROUGH A RIGHTS OFFERING
We have agreed with Safeguard and the selling stockholders to make a rights
offering to holders of Safeguard common shares. This rights offering represents
the Company's initial public offering of its securities, although it is
different than a traditional public offering in that securities are directed
first to Safeguard shareholders and then to the general public. We believe that
this rights offering will provide several advantages over a traditional initial
public offering. This type of offering gives us the opportunity to offer our
Common Stock to investors who, as Safeguard shareholders, already have some
knowledge of our business. Our securities will also be distributed to a broader,
more stable shareholder base and underwriting discounts and commissions will be
less than if we pursued a traditional initial public offering. In addition,
Safeguard supports this type of rights offering because it affords its
shareholders the opportunity to purchase shares before the shares are offered to
the general public.
We determined the exercise price through negotiations with the selling
stockholders and the underwriters. In making this determination, we considered
such factors as our future prospects and historical financial data, our industry
in general and our position in the industry; market valuations of the securities
of companies engaged in activities similar to ours; the quality of our
management team; and the advice of our underwriters.
YOU CAN EXERCISE OR SELL YOUR RIGHTS
Until , 1999, you may purchase one share of our Common Stock
for each right you receive, or you may sell your rights in the market. However,
you may not exercise rights for fewer than 20 shares of Common Stock in a single
account, unless you have previously exercised rights for at least 20 shares in
the same account and you provide a letter to ChaseMellon stating that you have
already exercised at least 20 rights. If you hold Safeguard common shares in
multiple accounts, you must meet the minimum purchase requirement for each
account. You may, however, consolidate your rights into one account. If you
receive fewer than 20 rights, you should consider purchasing enough additional
rights to be eligible to exercise your rights or selling your rights in the
market. You should consult with your regular investment advisor and carefully
consider your alternatives.
IF THE NUMBER OF SAFEGUARD COMMON SHARES YOU OWN IS NOT DIVISIBLE BY FIVE
If the number of Safeguard common shares you own is not evenly divisible by
five, we will round up to the next highest whole number in calculating the
number of rights that you are entitled to receive. For example, if you hold 96
Safeguard common shares, you will receive 20 rights. If you are a nominee for
beneficial holders of Safeguard common shares, we will round the number of
rights that you will receive based upon the amount held by each beneficial
holder individually.
WHEN YOU CAN EXERCISE YOUR RIGHTS
You can exercise your rights at any time during the period beginning on
, 1999 and ending at 5:00 p.m., New York City time, on ,
1999. After that date, you will not be able to exercise or transfer your rights
and they will be worthless. We do not intend to honor any rights received for
exercise by ChaseMellon after , 1999, regardless of when you sent
your rights to ChaseMellon for exercise.
HOW YOU CAN TRANSFER YOUR RIGHTS
You may transfer all or a portion of your rights by endorsing and
delivering to ChaseMellon (at the addresses set forth below) your rights
certificate. You must properly endorse the certificate for transfer, your
signature must be guaranteed by a bank or securities broker and your certificate
must be accompanied by instructions to reissue the rights you want to transfer
in the name of the person purchasing the rights. ChaseMellon will reissue
certificates for the transferred rights to the purchaser,
18
<PAGE>
and will reissue a certificate for the balance, if any, to you if it is able to
do so before , 1999. You will be responsible for the payment of any
commissions, fees and other expenses (including brokerage commissions and any
transfer taxes) incurred in connection with the purchase or sale of your rights.
We believe that a market for the rights may develop during the period in which
the rights may be exercised. To facilitate the market, we have applied with the
Nasdaq National Market to have the rights approved for quotation for the period
, 1999 through , 1999. We have reserved "WHOVR" as the
Nasdaq symbol under which the rights will trade. If you have any questions
regarding the transfer of rights, you should contact ChaseMellon at P.O. Box
3301, South Hackensack, New Jersey 07606, Attention: Reorganization Department,
telephone number (800) 223-6554.
HOW YOU CAN EXERCISE YOUR RIGHTS
On , 1999, ChaseMellon transferred a significant majority of
the rights to The Depository Trust Company, which, in turn, will credit the
rights, in its normal course of handling this type of transaction, to the
accounts of the participants (including brokers and dealers, banks, trust
companies and clearing corporations) for whom it holds Safeguard common shares.
The remainder will be transferred as soon as possible thereafter. You may
exercise your rights by completing and signing the election to purchase form
that appears on the back of each rights certificate. You must send the completed
and signed form, along with payment in full of the exercise price for all shares
that you wish to purchase to ChaseMellon. ChaseMellon must receive these
documents and the payment by 5:00 p.m., New York City time, on ,
1999. We do not intend to honor any exercise of rights received by ChaseMellon
after that date.
We will, however, accept your exercise if ChaseMellon has received full
payment of the exercise price for shares to be purchased through the exercise of
rights and has received a letter or telegraphic notice from a bank, trust
company or member firm of the New York Stock Exchange or the American Stock
Exchange setting forth your name, address and taxpayer identification number,
the number of shares you wish to purchase and guaranteeing that a properly
completed and signed election to purchase form will be delivered to ChaseMellon
by 5:00 p.m., New York City time, on , 1999. If the properly
executed documents are not received by 5:00 p.m. on , 1999, we do
not intend to accept your subscription.
We suggest, for your protection, that you deliver your rights to
ChaseMellon by overnight or express mail courier. If you mail your rights, we
suggest that you use registered mail. If you wish to exercise your rights, you
should mail or deliver your rights and payment for the exercise price to
ChaseMellon as follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand: By Overnight:
ChaseMellon Shareholder ChaseMellon Shareholder ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C. Services, L.L.C.
Reorganization Department Reorganization Department Reorganization Department
P.O. Box 3301 120 Broadway -- 13th 85 Challenger Road,
South Hackensack, NJ 07606 Floor Mail Drop Reorg.
New York, NY 10271 Ridgefield Park, NJ 07660
</TABLE>
You must pay the exercise price in U.S. dollars by cash, check or money
order payable to the "Safeguard Escrow Account." Until this offering is closed,
your payment will be held in escrow by ChaseMellon, who will serve as the escrow
agent of the Safeguard Escrow Account.
ChaseMellon will deliver certificates to you representing the Common Stock
purchased through the exercise of rights by , 1999. Until that date,
ChaseMellon will hold all funds received in payment of the exercise price in
escrow and will not deliver any funds to us or to the selling stockholders until
the shares of Common Stock have been issued.
If you are a broker or depository who holds Safeguard common shares for the
account of others and you receive rights certificates for the account of more
than one beneficial owner, you should
19
<PAGE>
provide copies of this Prospectus to the beneficial owners. You should also
carry out their intentions as to the exercise or transfer of their rights.
Safeguard will decide all questions as to the validity, form and
eligibility (including times of receipt, beneficial ownership and compliance
with minimum exercise provisions). The acceptance of subscription forms and the
exercise price also will be determined by Safeguard. Alternative, conditional or
contingent subscriptions will not be accepted. Safeguard reserves the absolute
right to reject any subscriptions not properly submitted. In addition, Safeguard
may reject any subscription if the acceptance of the subscription would be
unlawful. Safeguard also may waive any irregularities (or conditions) in the
subscription of shares of Common Stock, and its interpretation of the terms (and
conditions) of the rights offering shall be final and binding.
If you are given notice of a defect in your subscription, you will have
five business days after the giving of notice to correct it. You will not,
however, be allowed to cure any defect later than , 1999. We are not
obligated to give you notification of defects in your subscription. We will not
consider an exercise to be made until all defects have been cured or waived. If
your exercise is rejected, your payment of the exercise price will be promptly
returned by ChaseMellon.
HOW YOU CAN OBTAIN ADDITIONAL INFORMATION
If you wish to receive additional copies of this Prospectus or additional
information concerning this offering, you should contact Catherine Laboe at
Robert W. Baird & Co. Incorporated, telephone number (414) 298-7647 or Antony
Joffe at Janney Montgomery Scott Inc., telephone number (215) 665-6191.
EXPECTED EXERCISE OF RIGHTS BY SAFEGUARD CEO
Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard, or
his assignees, is expected to exercise all rights distributed to him. As a
result, he (or his assignees) is expected to acquire approximately 560,000
shares of our Common Stock through the rights offering.
WHAT HAPPENS TO THE UNSUBSCRIBED SHARES
The first 300,000 shares of Common Stock that are not subscribed for at the
end of the rights exercise period will be offered at a price of $5.00 per share
to persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies. We expect to enter
into agreements with these persons to purchase the unsubscribed shares before
the end of the rights exercise period. If there are less than 300,000
unsubscribed shares at the end of the rights exercise period, the number of
unsubscribed shares offered to each of these persons will be adjusted
accordingly.
To the extent that any unsubscribed shares remain unsold after the offer to
these persons, the underwriters will purchase these shares pursuant to the
standby underwriting agreement. The underwriters must purchase these shares no
later than , 1999.
In connection with this offering, the underwriters will receive a financial
advisory fee of 3% of the exercise price for each share of Common Stock being
offered in this offering, regardless of whether they purchase any shares in this
offering. In addition, if the underwriters purchase any shares in this offering
or through the exercise of certain rights that are purchased in the open market
under certain circumstances, they may purchase the shares at the exercise price
less an underwriting discount of 4% of the exercise price, subject to certain
limitations. The underwriters will offer shares of Common Stock purchased by
them to the public at prices which may vary from the exercise price. The selling
stockholders have granted to the underwriters an option to purchase an
additional 650,000 shares of Common Stock to cover over-allotments, if any,
during the 20-day period beginning on , 1999. The underwriters will
be entitled to purchase these over-allotment shares at the exercise price less
the 3% financial advisory fee and the 4% underwriting discount. See
"Underwriting." We will not receive any proceeds from the sale of any shares of
Common Stock by the selling stockholders.
20
<PAGE>
We intend to supplement this Prospectus after the rights exercise period is
over to set forth the results of the rights offering, the transactions by the
underwriters during the exercise period, the number of unsubscribed shares
purchased, if any, and any resale transactions.
WHAT HAPPENS IF THE RIGHTS OFFERING IS CANCELED
The underwriters have the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of this offering. If you exercise rights and the rights offering is
canceled, ChaseMellon will promptly return to you, without interest, any payment
received in respect of the exercise price and you will not receive any shares of
our Common Stock. Along with the selling stockholders, we have established an
escrow account with ChaseMellon to hold funds received prior to the closing date
of this offering. The NASD has advised us that trades in the rights and the
when-issued shares of Common Stock in the market would be canceled if this
offering is not consummated.
21
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
affecting holders of Safeguard common shares receiving rights in this offering.
In the opinion of Morgan, Lewis & Bockius LLP, the distribution of the rights by
the Company to holders of Safeguard common shares more likely than not will
constitute a taxable transaction under the Internal Revenue Code of 1986, as
amended (the "Code"), and may also be subject to state or local income taxes.
Because of the complexity of the provisions of the Code referred to below and
because tax consequences may vary depending upon the particular facts relating
to each holder of Safeguard common shares, such holders should consult their own
tax advisors concerning their individual tax situations and the tax consequences
of this offering under the Code and under any applicable state, local or foreign
tax laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard common shares receiving rights in this offering generally are as
follows:
DISTRIBUTION OF RIGHTS TO HOLDERS OF SAFEGUARD SHARES
The rights, representing the right to acquire shares of Common Stock from
the Company, can be considered as constituting "property" within the meaning of
Section 317(a) of the Code. The federal income tax consequences of a
distribution of the rights by the Company to holders of Safeguard common shares,
as determined under the Code and the regulations thereunder, are as follows: (i)
each noncorporate holder of Safeguard common shares will be deemed to have
received a distribution from Safeguard, generally taxable as ordinary dividend
income, in an amount equal to the fair market value (if any) of the rights, as
of the date of distribution, (ii) each corporate holder of Safeguard common
shares (other than foreign corporations and S corporations) will be deemed to
have received a distribution from Safeguard (generally taxable as a dividend
subject to the dividends received deduction for corporations (generally 70%, but
80% under certain circumstances) in an amount equal to the fair market value (if
any) of the rights, as of the date of distribution; and (iii) the tax basis of
the rights in the hands of each holder (whether corporate or noncorporate) of
Safeguard common shares will be equal to the fair market value (if any) of the
rights as of the date of distribution. Because of the predominantly factual
nature of determining the fair market value, if any, of the rights, Morgan,
Lewis & Bockius LLP has expressed no opinion with respect to the fair market
value of the rights.
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Safeguard common shares, the
determination of the fair market value of each right as of the date of
distribution is critical. The exercise price was determined through arms-length
negotiations among the Company, the selling stockholders and the underwriters.
Based on these negotiations, Safeguard's Board of Directors believes that the
per share value of Common Stock represented by the rights at the date of the
commencement of this offering approximates the exercise price and that the
rights should have no value for federal income tax purposes. However, the
Internal Revenue Service is not bound by this determination. See "The Offering
- -- Why We Are Selling Shares Through a Rights Offering."
EXERCISE OF RIGHTS
Holders of rights, whether corporate or noncorporate, will recognize
neither gain nor loss upon the exercise of the rights. A holder of rights who
receives shares of Common Stock upon the exercise of the rights will acquire a
tax basis in such shares equal to the sum of the exercise price paid under this
offering and the tax basis (if any) of the holder of rights in the rights.
TRANSFER OF RIGHTS
The transferable nature of the rights will permit a holder of rights to
sell rights prior to exercise. Pursuant to Section 1234 of the Code, a rights
holder who sells rights prior to exercise will be entitled to treat the
difference between the amount received for the rights and the adjusted tax basis
(if any) of
22
<PAGE>
the holder of rights in the rights as a short-term capital gain or capital loss,
provided that Common Stock subject to the rights would have been a capital asset
in the hands of the holder had it been acquired by him. The gain or loss so
recognized will be short-term since the rights will have been held for less than
12 months.
NON-EXERCISE OF RIGHTS
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the expiration date also is set forth
in Section 1234 of the Code. Holders of rights who allow their rights to lapse
are deemed under the Code to have sold their rights on the date on which the
rights expire. Since upon such lapse no consideration will be received by a
holder of rights, and since the rights will have been held for less than 12
months, a short-term capital loss equal to the tax basis (if any) in the rights
will be sustained by the holder on such lapse, provided that Common Stock
subject to the rights would have been a capital asset in the hands of the holder
had it been acquired by him.
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 6,500,000
shares of Common Stock offered by the Company are estimated to be approximately
$29.1 million after deducting estimated offering expenses allocable to and
payable by the Company, assuming that none of the rights granted in the rights
offering are exercised and that, as a result, 6,500,000 shares of Common Stock
are purchased by the underwriters pursuant to the standby underwriting
agreement. Estimated offering expenses include the maximum applicable
non-accountable expense allowance to the underwriters, a financial advisory fee
of 3% of the exercise price and an underwriting discount of 4% of the exercise
price. In the event any shares of Common Stock offered hereby are sold pursuant
to the exercise of rights, the Company will not be obligated to pay the
underwriting discount with respect to such shares and will, therefore, realize
an amount of net proceeds greater than approximately $29.1 million. See "The
Offering -- What Happens to the Unsubscribed Shares" and "Underwriting."
The Company intends to use a portion of the net proceeds from this offering
to repay in full amounts due to XL Vision. As of September 30, 1998,
approximately $6.5 million was due to XL Vision. The amounts due to XL Vision
under a note and a loan agreement bear interest at 7.0% and 9.5%, respectively,
as of September 30, 1998 and are due in full upon the earlier of the closing of
the Company's initial public offering and March 31, 2000. As of December 31,
1998, approximately $9.2 million was due to XL Vision. Of the remainder of the
net proceeds, approximately $6.0 million will be used for continued product
development prior to commercialization, approximately $2.3 million will be used
to complete the development of certain components and the transfer of technology
related to the Philips alliance and the balance will be used for working
capital, including ongoing product development and sales and marketing, general
corporate expenses and capital expenditures. The amounts and the timing of any
such use may vary significantly depending upon a number of factors, including
the Company's revenue growth, asset growth, cash flow and acquisition
activities. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, interest-bearing securities. The
Company currently anticipates that the net proceeds received by the Company from
this offering and existing cash balances will be sufficient to satisfy its
operating cash needs for at least 18 months from receipt of the proceeds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
To date, the Company has not paid or declared any cash dividends on its
Common Stock. The Company currently intends to retain future earnings for use in
its business and, therefore, does not anticipate paying or declaring any cash
dividends in the foreseeable future. The payment of future dividends, if any,
will depend among other things, on the Company's results of operations, cash
flows and financial condition and on such other factors as the Company's Board
of Directors may, in its discretion, consider relevant.
23
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual total capitalization of the
Company as of September 30, 1998, (ii) the pro forma capitalization after giving
effect to the conversion of all shares of Preferred Stock and (iii) the pro
forma as adjusted capitalization to reflect the conversion of shares of
Preferred Stock, the sale of 6,500,000 shares of Common Stock by the Company
pursuant to this offering and the application of the estimated minimum net
proceeds of approximately $29.1 million therefrom. This table should be read in
conjunction with the financial statements and related notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
----------- ------------ --------------
<S> <C> <C> <C>
Total indebtedness(3)................................... $ 6,526,383 $ 6,526,383 $ --
Equity purchase option(4)............................... 3,000,000 -- --
Stockholders' equity (deficit)(5):
Preferred Stock, par value $0.01 per share; 15,000,000
shares authorized:
Series A Preferred Stock, 8,300,000 shares
designated; 8,258,881 shares issued and
outstanding actual, and no shares issued and
outstanding pro forma and pro forma as
adjusted........................................ 82,589 -- --
Series B Preferred Stock, 1,400,000 shares
designated; 1,400,000 shares issued and
outstanding actual, and no shares issued and
outstanding pro forma and pro forma as
adjusted........................................ 14,000 -- --
Series C Preferred Stock, 3,800,000 shares
designated; 3,775,000 shares issued and
outstanding, and no shares issued and
outstanding pro forma and pro forma
as adjusted..................................... 37,750 -- --
Common Stock, par value $0.01 per share; 60,000,000
shares authorized, and 5,147,823 shares issued and
outstanding actual, 18,581,704 shares issued and
outstanding pro forma and 25,081,704 shares issued
and outstanding pro forma as adjusted(5)........... 51,478 185,817 250,817
Additional paid-in capital(5)......................... 28,649,513 31,649,513 60,659,513
Accumulated deficit................................... (38,680,254) (38,680,254) (38,680,254)
----------- ----------- -----------
Total stockholders' equity (deficit)............... (9,844,924) (6,844,924) 22,230,076
----------- ----------- -----------
Total capitalization............................ $ (318,541) $ (318,541) $22,230,076
=========== =========== ===========
</TABLE>
- ------------------
(1) Adjusted to give pro forma effect to the automatic conversion of all shares
of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock and the expiration of the Company's equity purchase option
upon consummation of this offering.
(2) Adjusted to give effect to the sale by the Company of 6,500,000 shares of
Common Stock and the receipt and application of approximately $29.1 million,
representing the minimum net proceeds from this offering, after deducting
the maximum total underwriting discount with respect to such shares of
approximately $2.3 million and estimated offering expenses of $1.2 million
(including $200,000 representing the maximum applicable non-accountable
expense allowance to the underwriters). The maximum net proceeds from this
offering is approximately $30.4 million, after deducting the minimum total
underwriting discount with respect to such shares of approximately $975,000
and estimated offering expenses of $1.2 million.
(3) Represents $6.5 million due to XL Vision as of September 30, 1998. As of
December 31, 1998, approximately $9.2 million was due to XL Vision.
(4) Represents the buyback provision included in the Philips agreements. See
Note 11 of the Notes to Financial Statements.
(5) Excludes as of September 30, 1998, 901,425 shares of Common Stock issuable
upon the exercise of options at a weighted average exercise price of $1.85
per share (34,333 of which were exercisable as of September 30, 1998 at a
weighted average exercise price of $1.99). As of January 15, 1999, 1,030,156
shares of Common Stock were issuable upon the exercise of options at a
weighted average exercise price of $2.43 per share (85,270 of which were
exercisable at a weighted average exercise price of $1.60 as of January 15,
1999). See "Management -- Equity Compensation Plan."
24
<PAGE>
DILUTION
As of September 30, 1998, the Company had a negative net tangible book
value of approximately $6.8 million or $(0.37) per share of Common Stock, after
giving effect to the conversion of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into Common Stock. Net tangible
book value per share of Common Stock represents the amount of the Company's
tangible assets less its total liabilities divided by the total number of shares
of Common Stock outstanding. Without taking into account any changes in net
tangible book value after September 30, 1998, other than to give effect to the
items described in Note (2) appearing immediately below the following table, the
pro forma net tangible book value of the Company as of September 30, 1998 would
have been approximately $22.2 million or $0.89 per share. This represents an
immediate increase in such pro forma net tangible book value of $1.26 per share
to existing stockholders and an immediate dilution of $4.11 per share to
investors purchasing Common Stock at the exercise price in this offering. New
stockholders that acquire Common Stock from the underwriters at a price greater
than the exercise price will experience greater dilution. The following table
illustrates this per share dilution in net tangible book value:
<TABLE>
<S> <C> <C>
Exercise price.............................................. $5.00
Net tangible book value per share as of September 30,
1998(1)................................................ $(0.37)
Increase per share attributable to new stockholders(2).... 1.26
------
Pro forma net tangible book value per share as of September
30, 1998.................................................. 0.89
-----
Dilution per share to new stockholders...................... $4.11
=====
</TABLE>
- ------------------
(1) Assumes the termination of the buyback provision included in the Philips
Agreements. See Note 11 of the Notes to Financial Statements.
(2) Reflects the automatic conversion of all outstanding shares of Preferred
Stock, the sale by the Company of 6,500,000 shares of Common Stock and the
receipt of approximately $29.1 million in net proceeds from this offering
after deducting the maximum total underwriting discount with respect to such
shares of approximately $2.1 million and estimated offering expenses of $1.2
million (including $200,000 representing the maximum applicable
non-accountable expense allowance to the underwriters).
The following table sets forth, on an adjusted basis as of September 30,
1998, the number of shares of Common Stock issued by the Company, the total
consideration paid and the average price per share paid upon original issuance
to stockholders prior to this offering and by new investors before deducting the
underwriters' compensation and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE(1)
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 18,581,704 74.1% $31,835,330 49.5% $1.71
New stockholders............... 6,500,000 25.9 32,500,000 50.5 5.00
---------- ----- ----------- -----
Total........................ 25,081,704 100.0% $64,335,330 100.0% 2.57
========== ===== =========== =====
</TABLE>
- ------------------
(1) Reflects gross consideration from the issuance of stock, and therefore does
not reflect deductions for stock issuance costs, underwriting discounts and
offering expenses.
The foregoing tables assume no exercise of outstanding options. As of
September 30, 1998, there were outstanding options to purchase an aggregate of
901,425 shares of Common Stock at a weighted average exercise price of $1.85 per
share (of which 34,333 were exercisable at September 30, 1998 at a weighted
average exercise price of $1.99), and the Company had an additional 667,325
shares of Common Stock available for future grants and other issuances under its
Equity Compensation Plan. See "Management" and Note 6 of the Notes to Financial
Statements. As of January 15, 1999, there were outstanding options to purchase
an aggregate of 1,030,156 shares of Common Stock at a weighted average exercise
price of $2.08 per share (of which 85,270 were exercisable at January 15, 1999
at a weighted average exercise price of $1.60 per share), and the Company had an
additional 51,094 shares of Common Stock available for future grants and other
issuances under its Equity Compensation Plan.
25
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the period from May 1, 1997
(inception) through June 29, 1997 and the period from June 30, 1997
(incorporation) through December 31, 1997, the period from May 1, 1997
(inception) through December 31, 1997, the nine months ended September 30, 1998
and the period from May 1, 1997 (inception) through September 30, 1998 are
derived from the financial statements of the Company, which financial statements
have been audited by KPMG LLP, independent certified public accountants. The
audited balance sheets as of September 30, 1998 and December 31, 1997 and the
related statements of operations, stockholders' equity (deficit) and cash flows
and the KPMG LLP report thereon are included elsewhere in this Prospectus. The
following information should be read in conjunction with the Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
PERIOD FROM JUNE 30, 1997 MAY 1, 1997 MAY 1, 1997
MAY 1, 1997 (INCORPORATION) (INCEPTION) NINE MONTHS (INCEPTION)
(INCEPTION) THROUGH THROUGH ENDED THROUGH
THROUGH DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
JUNE 29, 1997 1997 1997 1998(1) 1998
-------------- --------------- --------------- ------------- -------------
(DIVISIONAL
OPERATIONS(2))
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $ -- $ -- $ -- $ -- $ --
Cost of revenue............................. -- -- -- -- --
--------- ----------- ----------- ------------ ------------
Gross profit (loss)......................... -- -- -- -- --
Operating expenses:
Selling, general and administrative....... 123,940 1,440,406 1,564,346 2,849,740 4,414,086
Research and development.................. 58,804 1,540,950 1,599,754 3,224,658 4,824,412
In-process research and development(3).... -- -- -- 29,000,000 29,000,000
--------- ----------- ----------- ------------ ------------
Total operating expenses................ 182,744 2,981,356 3,164,100 35,074,398 38,238,498
Interest expense............................ 1,216 74,499 75,715 366,041 441,756
--------- ----------- ----------- ------------ ------------
Net profit (loss)......................... $(183,960) $(3,055,855) $(3,239,815) $(35,440,439) $(38,680,254)
========= =========== =========== ============ ============
Net profit (loss) subsequent to
incorporation(2)........................ $(3,055,855) $(35,440,439)
=========== ============
Net profit (loss) per common share
subsequent to incorporation(2)(4):
Basic................................... $ (2.46) $ (6.98)
=========== ============
Diluted................................. $ (2.46) $ (6.98)
=========== ============
Weighted average number of common shares
outstanding............................... 1,241,467 5,076,980
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 500 $ 9,405
Capitalized offering costs................................ -- 248,356
Total assets.............................................. 187,706 1,104,442
Total indebtedness(5)..................................... 2,728,448 6,526,383
Equity purchase option(6)................................. -- 3,000,000
Total stockholders' equity (deficit)...................... (2,937,658) (9,844,924)
</TABLE>
- ------------------
(1) On December 8, 1998, the Company changed its fiscal year end to September
30.
(2) Prior to June 30, 1997 the Company operated as a division of XL Vision. See
Note 1 of the Notes to Financial Statements.
(3) Includes a one-time $10.0 million fee payable for the transfer of technology
from XL Vision and $19.0 million in costs associated with the technology
purchased from Philips during the nine months ended September 30, 1998. See
Notes 7 and 11 of the Notes to Financial Statements.
(4) See Note 2 of the Notes to Financial Statements for information concerning
the calculation of net profit (loss) per common share.
(5) Represents approximately $6.5 million owed to XL Vision as of September 30
1998. As of of December 31, 1998, approximately $9.2 million was due to XL
Vision.
(6) Represents a provision to repurchase 600,000 shares of Series C Preferred
Stock. This repurchase provision expires upon the earlier of the completion
of this offering or March 31, 1999. See Note 11 of the Notes to Financial
Statements.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information contained herein may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts included in this
Prospectus, are forward-looking statements. Such statements are subject to
certain risks and uncertainties, which include but are not limited to those
discussed in the section entitled "Risk Factors." Should one or more of these
risks or uncertainties, among others as set forth in this Prospectus,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although the Company believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the Company, no assurance can be given that such
expectations will prove to be correct. Cautionary statements identifying
important factors that could cause actual results to differ materially from the
Company's expectations are set forth in this Prospectus. All forward-looking
statements included in this Prospectus and all subsequent oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
OVERVIEW
From inception on May 1, 1997 through June 29, 1997, the Company operated
as a division of XL Vision (the "Division"). On June 30, 1997, the Company was
incorporated as a wholly-owned subsidiary of XL Vision, and XL Vision
contributed the assets and liabilities of the Division to the Company. Prior to
January 1998, all administrative personnel and services of the Company were
provided by XL Vision and the related costs were allocated to the Company.
Effective January 1, 1998, the Company entered into an administrative services
agreement with XL Vision that provides for cost-based administrative charges by
XL Vision based upon actual hours of work provided to the Company.
Since inception, the Company has devoted substantially all of its resources
to the development of its TactileSense and related fingerprint identification
technologies. From inception to September 30, 1998, the Company accumulated
losses totaling approximately $38.6 million, including one-time expenses of
$29.0 million related to in-process research and development. The Financial
Statements included in this Prospectus reflect the Company's operations since
inception as if it had been a separate entity. Until the Company begins to
realize significant revenue from operations, the Company will be considered in
the development stage.
On January 14, 1998, XL Vision transferred the TactileSense technology to
the Company in exchange for a one-time technology fee of $10.0 million, which
has been reflected in the Company's statements of operations as an in-process
research and development expense. Since inception, the Company has expended
approximately $12.0 million to develop and commercialize this technology and
expects to expend between $800,000 and $2.0 million in additional development
costs prior to production of the first commercial units. Since acquiring the
technology from XL Vision the research and development activities required for
product commercialization relate to the basic functional components that
comprise the fingerprint module. These include (i) the TactileSense polymeric
material necessary to capture an image, (ii) a low-cost lens and complementary
metal oxide semiconductor ("CMOS") chip and (iii) electronics circuitry and
software to process the image and to control the operation of the device.
Additional research and development is required to integrate software to process
the fingerprint image and perform matching functionality, to finalize the
interface between the device and a computer interface, through either a parallel
or universal serial bus port, and to resolve issues related to large-volume
production. Production of the first commercial units incorporating this
technology is expected to begin during 1999; however, no significant commercial
revenues related to these units are anticipated until the second half of 1999.
On September 30, 1998, the Company entered into an agreement with Philips
pursuant to which the Company issued 3.7 million shares of Series C Preferred
Stock to Philips in exchange for access to a broad range of patents and other
intellectual property. In addition, 75,000 shares of Series C Preferred Stock
were issued and $125,000 cash will be paid to a third party for services related
to the
27
<PAGE>
transfer of the Philips technology to the Company. Combined, the total
consideration paid in connection with the Philips transaction was $19.0 million,
which has been reflected in the Company's statements of operations as an
in-process research and development expense. Currently, the additional expenses
required to develop the product incorporating the licensed Philips amorphous
silicon glass technology are believed to be between $5.0 million and $9.0
million over the next 12 months. Additional product variations from this
technology may be developed over an extended period of time. At this time, the
Company is unable to estimate all of the costs that will be required to develop
and commercialize technologies licensed or otherwise made available by Philips.
The initial research and development activities related to commercialization of
the Philips technology are expected to include (i) payment of $1.4 million to
Philips for technical services to be performed by Philips employees, (ii)
payment of approximately $900,000 to complete development of an
application-specific integrated circuit ("ASIC") by a third party, (iii)
research and development to integrate the TactileSense material, ASIC and
Philips glass technology, (iv) design of interfaces of the fingerprint module
with computers and other products and (v) development related to adapting
designs to high-volume manufacturing. Production of the first commercial units
incorporating Philips technology is expected to begin during late 1999 or during
early 2000.
Although the Company believes that it will be successful in its efforts to
commercialize products based on the TactileSense technology, if the Company is
not successful in completing the development of this technology, the Company
would consider developing products based upon other available technologies.
The Company has developed a fingerprint identification technology which is
designed to be a component for integration into computer peripherals, laptops
and stand alone systems. The Company will recognize revenue as products are
shipped to its customers. The Company anticipates increasing its level of
expenditures for marketing, research and development and administrative
expenses. The Company expects to incur significant negative cash flows from
operations and additional losses for at least the next 16 months.
RESULTS OF OPERATIONS
FISCAL PERIOD ENDED SEPTEMBER 30, 1998 (NINE-MONTH PERIOD)
Overview. The Company began operations on May 1, 1997 and, accordingly,
there was no comparable period in 1997. On December 8, 1998, the Company
changed its fiscal year end to September 30.
Revenue. The Company is a development stage company and had no revenue for
the nine-month period ended September 30, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.8 million for the nine-month period ended
September 30, 1998. These expenses consisted primarily of salary, travel,
consulting and administrative fees associated with conducting the business of
the Company. These costs are expected to increase in the future as the Company
builds the necessary infrastructure to support its anticipated growth.
Research and development expenses. Research and development expenses were
$3.2 million for the nine-month period ended September 30, 1998. These expenses
consisted of product development costs for the Company's TactileSense
technology. The Company anticipates that product development costs will increase
in the future due to costs related to product commercialization and the
continuation of advances in its TactileSense technology.
In-process research and development expenses. In-process research and
development expenses consisted of a one-time $10.0 million technology fee
payable to XL Vision and a one-time $19.0 million technology fee for the
transfer and license from Philips of certain technology.
Interest expense. Interest expense was $366,041 for the nine-month period
ended September 30, 1998. This expense was attributable to amounts accrued on
advances made by XL Vision to the Company to fund its operations.
28
<PAGE>
PERIOD FROM MAY 1, 1997 THROUGH DECEMBER 31, 1997
Overview. The Company began operations on May 1, 1997 and, accordingly,
there was no comparable period in 1996. While the financial statements segregate
the results of operations between periods prior to and after the Company's
incorporation, for convenience, management's discussion and analysis of the
Company's results for the periods in 1997 have been combined.
Revenue. The Company is a development stage company and had no revenue for
the period ended December 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.6 million for the period ended December 31,
1997. These expenses consisted primarily of salary, travel, consulting and
administrative fees associated with conducting the business of the Company.
These costs are expected to increase in the future as the Company builds the
necessary infrastructure to support its anticipated growth.
Research and development expenses. Research and development expenses were
$1.6 million for the period ended December 31, 1997. These expenses consisted of
product development costs for the development of the Company's TactileSense
technology.
Interest expense. Interest expense was $75,715 for the period ended
December 31, 1997. This expense was attributable to amounts accrued on advances
made by XL Vision to the Company to fund its operations.
LIQUIDITY AND CAPITAL RESOURCES
Prior to June 30, 1997, the Company operated as a division of, and was
funded by, XL Vision. XL Vision has continued to make advances to the Company to
fund its operations. In February 1998, the Company raised approximately $8.3
million in a private placement. All proceeds from this private placement were
paid to XL Vision as partial repayment of its advances. Pursuant to an agreement
between XL Vision and the Company, XL Vision has agreed to fund the Company's
operations, with no maximum specified, until the earlier of March 30, 2000 and
the successful completion of the Company's initial public offering. As of
September 30, 1998, the Company had approximately $9,400 of cash and
indebtedness of approximately $6.5 million to XL Vision. As of December 31,
1998, approximately $9.2 million was due XL Vision. The amounts due to XL Vision
will be repaid in full from the net proceeds of this offering.
Capital expenditures for the period from inception through December 31,
1997 and for the nine-month period ended September 30, 1998 were $189,218 and
$708,780, respectively. This increase in capital expenditures is attributable to
leasehold improvements and office furnishings and equipment related to the
Company's move into its new facility in Lake Forest, California in May 1998.
Excluding future cash from operations, the Company anticipates that the net
proceeds from this offering, together with existing cash balances, will be
sufficient to satisfy its operating cash needs for at least 10 months following
this offering. The Company intends to use the net proceeds from this offering to
repay the net cumulative advances due to XL Vision, which were approximately
$6.5 million as of September 30, 1998, for continued product development prior
to commercialization of approximately $6.0 million, and for the Company's
ongoing working capital requirements. As of December 31, 1998, approximately
$9.2 million was due XL Vision. Management expects that losses from operations
and increases in working capital requirements will produce significant negative
cash flows for at least the next 14 months. To support the Company's future cash
needs, it may consider additional debt or equity financing. However, there can
be no assurance that any such financing will be available to the Company or that
adequate funds for the Company's operations will be available when needed or on
terms acceptable to the Company. If the Company is unable to obtain sufficient
additional funds, the Company may have to delay, scale back or eliminate some or
all of its marketing and development activities.
29
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has been engaged in an evaluation of its Year 2000 readiness in
connection with various aspects of its business. Specifically, the Company has
focused on its information technology and non-information technology systems. In
addition, the Company has analyzed its production processes and products. The
Company's business operations are dependent upon its strategic partners,
suppliers and software vendors. The Company has attempted to analyze Year 2000
issues relating to such third parties. Any Year 2000 issues affecting such third
parties could have a material adverse effect on the Company's business,
financial condition and results of operations. The current status of the
Company's efforts is as follows:
Internal Systems, Processes and Products
Information Technology Systems. The Company's accounting software provider
and operating system provider have advised the Company that such software is
Year 2000 compliant
Non-Information Technology Systems. The Company's heating, cooling,
ventilation, telephone and alarm systems include microprocessor-based
components. The Company has not determined whether such systems are Year 2000
compliant. The Company does not believe that such systems are material to its
business; however, the Company has begun reviewing and testing such systems. The
Company does not believe that it will incur any material costs in connection
with the review and testing of such systems.
Products. The Company's products are not date sensitive. Therefore, the
Company does not believe it has any material exposure with regard to its
products as a result of the Year 2000 issue.
Year 2000 Issues Relating to Third Parties
Strategic Partners. The Company intends to manufacture and distribute its
products through strategic partners. The Company has surveyed its existing
strategic partners regarding their Year 2000 system and expects to determine by
June 1999 the extent to which such partners are subject to Year 2000 issues.
Suppliers. Certain of the components included in the Company's products,
including the TactileSense material, are obtained by the Company or the
Company's manufacturing partners from a single source or a limited group of
suppliers. The Company intends to survey such suppliers and expects to determine
by June 1999 the extent to which such suppliers are subject to Year 2000 issues.
Absent widespread difficulties affecting several major vendors, the Company does
not anticipate that vendors' Year 2000 issues would have a material adverse
effect on the Company, because the Company believes alternative sources of
supply are available for all required components.
The Company is not currently aware of the Year 2000 readiness of certain
outside services companies. The failure of these providers to be Year 2000
compliant could have a material adverse effect on the Company, which is not
currently susceptible to quantification. In the worst case, the Company's
operations could be seriously disrupted.
Customers. Because the Company intends to distribute its products through
its strategic partners and because the customer base is expected to change from
year to year, the Company is unable to predict the identity of most of its major
customers in the Year 2000 and thereafter. Accordingly, the Company is unable to
make an inquiry as to whether the customers' computer driven payment or
purchasing processes are Year 2000 compliant. A customer's Year 2000 issues
could cause a delay in receipt of purchase orders or in payment. If Year 2000
issues are widespread among the Company's customers, the Company's sales and
cash flow could be materially affected.
30
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to display, with the same prominence as
other financial statements, the components of other comprehensive income. SFAS
No. 130 requires that an enterprise classify items of other comprehensive income
by their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Through September
30, 1998, the Company did not have any components of other comprehensive income
as defined by SFAS No. 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of An Enterprise and Related Information." SFAS No.
131 requires that an enterprise disclose certain information about its operating
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. SFAS No. 131 did not have an impact on the
Company as it operated within a single segment during 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures About Pensions and Postretirement Benefits." SFAS
No. 132 revises employers' disclosures about pensions and other postretirement
benefits. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. SFAS No. 132 did not have an impact on the Company's disclosures
during 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 is effective for periods beginning after June
15, 1999. The Company believes that it does not currently have any transactions
that will be affected by SFAS No. 133.
31
<PAGE>
BUSINESS
OVERVIEW
Who? Vision develops fingerprint identification technologies that enable
individuals to electronically authenticate their identities to access digital
networks and consumer products. The burgeoning use of the Internet, e-commerce
and computer networks is placing increasing importance upon network security. In
particular, the ability to authenticate identity is critical to safeguard
against unauthorized transactions and data access. The Company has designed and
developed TactileSense(Trademark), a proprietary fingerprint identification
technology, which enables it to create highly reliable, compact and
cost-effective authentication products. The Company believes that TactileSense
will enable the widespread integration of fingerprint identification devices
into numerous commercial mass market products.
The Company is primarily focusing its initial commercialization efforts for
its TactileSense products on the computer network security market. According to
an April 1998 report by Dataquest, a technology market research firm, the
worldwide installed base of PCs totaled more than 270 million in 1997, with new
computer purchases exceeding 80 million in 1997 and projected to increase at a
compound annual growth rate of approximately 15% from 1997 to 2002. Today, the
most common means for identifying individuals in computer network applications
are PINs and passwords. However, these methods are inherently insecure, as they
are easy to guess or difficult to remember and consequently are often written
down, subjecting them to theft. In addition to providing only limited security,
PINs and passwords are also costly to administer. A February 1998 study by
Forrester Research, Inc. indicated that more than 40% of all help desk calls
involve resetting lost or forgotten passwords for employees and estimated that
the elimination of these help desk calls can save several hundred dollars per
user annually. The Company believes that its TactileSense fingerprint
identification system is both simpler and less costly to support than PIN and
password based systems. TactileSense products will be sold (i) as separate
attachments to existing PCs, (ii) as value-added product features embedded into
newly manufactured PC keyboards, mice and other peripherals or (iii) directly to
PC manufacturers for inclusion as a base or optional product feature. The
Company believes that initial demand within the computer network security market
will come from the healthcare and financial services industries in
identity-sensitive applications such as securing access to patient medical
records and on-line banking transactions.
The Company intends to pursue additional market opportunities for its
TactileSense products beyond the computer network security market, including
applications such as noncomputer consumer electronic security, credential
verification and access control. Potential noncomputer consumer electronic
security applications include integrating the Company's fingerprint
identification devices into cellular phones, television remote controls, point
of sale devices and other high-value personal or commercial electronic devices.
Potential credential verification applications include integration of the
Company's products into devices that verify a person's identity, such as driver
licenses, voter registration cards and passports. Potential access control
applications range from simple applications, such as replacing standard door
locks, to more advanced applications, such as automotive and building security
systems. The Company believes that these application markets will be significant
and intends to devote time and resources to develop these markets, with an
initial focus on those that it considers to possess high-value and involve early
technology adopters.
Who? Vision has formed, and intends to form, strategic alliances with
companies possessing leading technology, manufacturing and distribution
capabilities in order to maintain its focus on advancing its fingerprint
identification technology and expedite its entry into selected markets. The
Company has entered into a strategic alliance with Philips, a leading world-wide
manufacturer of a broad range of consumer electronic products, under which the
Company has received the exclusive right to complete the development of certain
Philips patented and unpatented proprietary technology and to incorporate the
technology into Who? Vision's fingerprint identification sensors. Who? Vision
and Philips have also entered into an exclusive relationship to combine their
respective technologies and jointly develop and manufacture fingerprint
identification sensors for sale by Who? Vision to product markets worldwide. One
of the benefits of this alliance is the expected development and manufacture of
an extremely thin (less than 1/8 inch) and cost-effective fingerprint sensor
that can be incorporated into a variety of computer consumer product devices,
such as laptops and cellular phones. In connection with this alliance, Philips
received 3.7 million shares of Who? Vision Series C Preferred Stock.
In addition, Who? Vision has entered into a strategic alliance with Silitek
for the high-volume manufacture and distribution of certain of its TactileSense
fingerprint sensors. Based in Taiwan, Silitek is a manufacturer and distributor
of computer peripherals and one of the top three keyboard manufacturers in the
world, whose customers include Dell Computers, Inc., Hewlett-Packard Company and
Compaq Computer Corporation.
32
<PAGE>
COMPUTER NETWORK SECURITY INDUSTRY
The continuing shift to an information-driven and communication-intensive
society, as evidenced by the proliferation of PCs, dramatic growth of the
Internet and burgeoning use of electronic commerce, is placing increasing
importance upon computer network security and, specifically, the ability to
positively confirm a person's identity. In both commercial and personal
settings, the ability to identify a specific individual is critical in order to
adequately safeguard against unauthorized persons gaining access to confidential
or inappropriate data and against various kinds of fraudulent activity. A 1998
survey by the Computer Security Institute ("CSI"), an association of information
security professionals, with the participation of the Federal Bureau of
Investigation ("FBI") found that 64% of the 520 respondents surveyed reported
computer security breaches within the last 12 months representing a 16% increase
from the CSI/FBI survey conducted in 1997. Of the reporting respondents, 44%
reported unauthorized access by employees and 24% reported system penetration
from the outside. While the survey indicated that the most serious financial
losses occurred through unauthorized access by insiders, increasingly
organizations are finding that their Internet connection is a point of attack.
While 72% of respondents that reported a breach acknowledged suffering financial
losses from unauthorized intrusions, only 46%, or 241, of the respondents were
able to quantify
their losses. For the 241 respondents that could quantify their losses, an
aggregate of $136.8 million in losses were incurred, representing an average
annual loss per respondent of approximately $568,000. The need for greater
computer network security is further heightened by the increasing availability
of remote access to corporate networks and direct electronic links to outside
strategic suppliers, customers and business partners, all of which place a
business' intellectual property and proprietary data at risk.
THE THREE COMPUTER NETWORK SECURITY FACTORS
As the following diagram depicts, the Company believes that there are three
independent factors that should be analyzed when evaluating the efficacy of a
computer network security solution: confidentiality, portability and identity. A
security solution can be implemented using any combination of these independent
factors, depending upon the specific application or level of flexibility and
security desired.
In the printed version of the document, artwork appears which contains the
following information:
Identity
Confidentiality
Portability
Biometrics
Smart Cards
Encryption
33
<PAGE>
Confidentiality. "Confidentiality" refers to the protection of data while
it is stored or being transmitted within local and wide area networks or across
the Internet. Confidentiality has been widely addressed by the commercial
marketplace through sophisticated encryption and decryption technologies. With
commercially-available encryption and decryption algorithms, confidential
communication between two or more computer systems can be achieved, without
interception by an unauthorized user or "hacker."
Portability. "Portability" refers to the ability to access data from a
variety of physical locations without compromising security. Information may be
delivered to various locations through such means as a network or the Internet.
The ability to secure access to information from remote locations has been
commercially addressed through data encoded cards or smart cards and
identification tokens.
Identity. "Identity" refers to the ability to unambiguously confirm the
specific user on either end of a digital transaction. The Company believes that,
to date, identity has not been adequately addressed in the commercial computer
network security industry. Today, it is possible to communicate securely from
one machine to another and assure the identity of the user indirectly, by using
a combination of commercially available products. However, these products
require that individuals exercise certain procedures or possess a device or
piece of information to establish and communicate their identity.
The Company does not believe that existing commercially available products
provide both a reliable and cost-effective identification solution. Such
positive identification of an individual requires the use of some measurable
physical characteristics or personal traits, referred to as biometrics. The most
widely used biometric today is a handwritten signature. However, because
signatures are difficult to utilize in computer network security systems, PINs
and passwords are commonly used as a substitute for verifying identity. People
generally have multiple PINs and passwords, many of which are changed
periodically in an attempt to improve security. PINs and passwords are either
easy to remember and are therefore inherently insecure because they are easy to
guess, or difficult to remember, and consequently are often written down,
subjecting them to theft. Furthermore, in addition to providing only limited
security, PINs and passwords are also costly to administer. A February 1998
study by Forrester Research, Inc. indicated that more than 40% of all help desk
calls involve resetting passwords for employees and estimated that elimination
of these calls can save several hundred dollars per user annually. While the
costs associated with maintaining passwords vary by organization, depending upon
specific conditions such as company size, intensity of computer related work and
other factors, the Company believes that results provided in the Forrester
Research study are representative of the costs to maintain password-based
computer security systems within a wide variety of organizations. The Forrester
Research study was derived from information gathered from interviews conducted
with information technology officers from 30 Fortune 1,000 companies. The
results of the Forrester Research study reflect estimates and conclusions that
are based upon numerous assumptions, conditions and limitations. Consequently,
these results may not be predictive of future results or consistent with other
studies based on different assumptions. Because of the inherent shortcomings of
PINs and passwords, the Company believes that an effective computer network
security solution can be achieved by integrating the biometric information with
existing technologies such as a Smart Card, or an independent biometric
identification device. For a biometric solution to gain widespread commercial
acceptance, however, it must not only be technologically viable but also
commercially available at a price point that is competitive with the total cost
of ownership of PINs and passwords.
OVERVIEW OF BIOMETRICS
Biometrics are unique biological characteristics or personal traits that
can be used to identify an individual. A wide variety of biometrics are
available, including fingerprints, voice, hand geometry, facial structure, iris
and retinal patterns and handwritten signatures. Although biometric systems can
provide a more accurate means of identification than traditional non-biometric
methods, until recently, their integration into commercial applications has been
limited by the cost and technological complexity of the equipment needed to
read, record and distinguish unique biological data. In order to
34
<PAGE>
compete with non-biometric systems, biometric identification systems must be
accurate, cost-effective and applicable to a broad user base.
The Company believes that fingerprint identification systems possess
several important advantages over alternative biometric systems, including low
cost, small size, convenience, reliability, fraud resistance and social
acceptance, which will promote their commercial adoption. Fingerprints have a
long history of being used as a means of verifying the identity of individuals
both in the U.S. and internationally. Legal systems throughout the world accept
the validity of positive identification through fingerprints. In addition,
fingerprints are already in widespread use on documents such as drivers'
licenses, voter registration cards, bank checks and national identification
cards. In the U.S., 11 states have started programs to scan fingerprints of
welfare applicants, and five states require thumbprints on drivers' license
applications.
Fingerprints are well-suited for positive identification because each
individual's fingerprints contain unique patterns that are distinguishable from
the fingerprint patterns of the rest of the population. The process of
capturing, storing, retrieving and comparing fingerprints has become
increasingly automated as a result of advances in optics, electronics and
computing. The Company believes that these advances will enable fingerprint
identification technology to be used to confirm an individual's identity for a
large number of commercial applications. Although the Company believes that a
small percentage of the population may be unable to utilize fingerprint
technology due to the absence of readable fingerprints and although certain
other biometrics might be more appropriate for specialized applications, the
Company believes that fingerprints are the most effective biometric for
widespread commercial use. Relative to other biometric alternatives,
fingerprint-based systems are believed to have significant technological
advantages, including speed, accuracy and the relatively small size of the
reading device. Although the costs of fingerprint identification technology have
been declining in recent years, the Company believes that costs have not yet
reached a level competitive with PINs and passwords. The Company believes that
its technology will reduce costs of fingerprint identification products to
facilitate their widespread commercial adoption.
CURRENT FINGERPRINT IDENTIFICATION TECHNOLOGIES
To date, in addition to the Company's technology, two primary fingerprint
identification technologies have been developed: optical sensor technology and
direct-contact silicon-based sensor technology. The majority of fingerprint
sensors currently in use and available for purchase are optical sensors. In such
devices, light enters a conventional or holographic prism and illuminates the
image of a fingerprint created by the oil and moisture of a finger that has been
placed on the prism surface. The fingerprint image is then captured by imaging
sensor electronics.
Recently, several companies have demonstrated fingerprint sensor prototypes
that utilize direct-contact silicon-based technology. These sensors measure the
electric field around a fingertip placed on the silicon device surface to
generate a digital representation of the ridges and valleys of the finger. This
technology has several reported advantages over optical sensor technology, the
most important of which are its relatively small size and its applicability to a
broader segment of the population.
Neither of these technologies, however, has achieved widespread commercial
acceptance. To date, each of these technologies possesses one or more of the
following inherent limitations: high unit cost, large size, lack of reliability,
high power requirements and susceptibility to damage.
THE WHO? VISION ADVANTAGE
The Company has developed a proprietary approach to fingerprint
identification that addresses many of the limitations of existing optical and
direct-contact silicon-based sensor technologies. The Company's proprietary
TactileSense technology uses a polymeric sensor to measure the electric current
modulated by the ridges and valleys that comprise a fingerprint. The finger is
placed on one side of the polymer and a high resolution image of the finger
appears on the opposite surface. This image is then directed onto an optical
sensor where it is captured and digitized. Additionally, the Company and Philips
are jointly developing fingerprint identification sensors that combine Who?
35
<PAGE>
Vision's proprietary TactileSense technology with Philips' proprietary
photosensitive flat panel glass technology. Significant portions of the Philips
technology are protected by patents or are the subject of pending patents, which
the Company believes gives it a significant advantage over its competitors.
Who? Vision believes that its fingerprint identification technology
possesses attributes that collectively give it a competitive advantage over
alternative technologies and will allow its technology to be incorporated into
numerous commercial applications. These attributes include:
Low Cost. The Company believes that its proprietary TactileSense
technology will enable the Company to price its products at a level that will
make widespread commercial adoption viable. The primary factors that determine
the production cost of a fingerprint identification device are the cost of the
materials utilized and the complexity of its assembly process. Silicon
represents a significant component of the production cost of direct-contact
silicon-based sensors. Because the Company's technologies require much smaller
quantities of costly silicon, it is expected to have inherent cost advantages
over direct-contact silicon-based technologies. In addition, TactileSense
devices have fewer optical components and require a lesser degree of precision
in their assembly than existing optical fingerprint sensors, thereby making
assembly less costly.
Small Size. Size reduction is critical for the continued expansion of
commercial applications for fingerprint identification products. The Company has
developed a fingerprint identification device that can be incorporated into
computer peripherals, such as keyboards and mice. Furthermore the Company's
strategic relationship with Philips will enable it to produce extremely thin
(less than 1/8 inch) sensors for use in portable devices such as laptop
computers and cellular phones.
High Reliability Matching. Certain conditions relating to an individual's
finger and the environment can significantly impact fingerprint image quality.
For example, optical technologies rely on the presence of oil and moisture on
the skin and will often generate low quality fingerprint images for individuals
with dry skin. In addition, optical technologies are susceptible to false
readings caused by ambient light from sources such as bright desk lamps. The
electric-field sensing technology of TactileSense significantly reduces dry skin
and ambient light problems.
Anti-Fraud Capability. To ensure positive identification, it is essential
for fingerprint identification devices to verify that a fingerprint image has
been generated by a live finger and not by an artificial replica. Optical
technologies are often unable to differentiate such fingerprints, thereby
potentially exposing systems utilizing these technologies to fraudulent
activity. Devices utilizing the TactileSense electric-field sensing technology
are significantly more capable of discerning real fingers from artificial
replicas.
Durability. The potential for highly repetitive utilization of fingerprint
identification devices in widespread commercial applications and their potential
use in harsh environments require them to be both durable and sturdy. Optical
technologies face the challenge of protecting a transparent optical surface from
long-term damage, and these surfaces typically must undergo regular replacement.
Direct-contact silicon-based technologies, although coated with a thin layer of
hard material, may be sensitive to common environmental conditions, such as
electrostatic discharge, which could damage the device. The TactileSense
material is coated with protective polymer materials to ensure its long-term
durability. Additionally, TactileSense's image sensor does not come into contact
with the finger surface, thereby avoiding certain harmful environmental hazards
such as electrostatic discharge.
Low Power Consumption. Due to the increasing miniaturization and
portability of computers and other electronic devices, it is essential that
commercial security devices be energy efficient. The ability to operate without
an external light source and to enter into a low power "idle" mode will allow
TactileSense products to be energy efficient and therefore makes them
advantageous for power sensitive applications such as a laptop computers.
36
<PAGE>
BUSINESS STRATEGY
The Company seeks to leverage the inherent advantages of its TactileSense
technology and the increasing need for positive identification to introduce
highly reliable, small and durable fingerprint identification devices at price
points that will facilitate the widespread adoption of its device into numerous
markets. The Company plans to pursue this objective through the following
strategic initiatives:
Provide High Quality, Cost-Effective Products. The Company believes that
its TactileSense technology enables the commercialization of a high quality
fingerprint identification sensor that can be marketed at a price point that
will facilitate the rapid adoption of the technology into a wide variety of
markets. While competitive fingerprint identification technologies exist, the
Company believes that the characteristics of its TactileSense technology
position it to overcome the price, size, reliability and durability constraints
of such competing technologies.
Focus Efforts on the Computer Network Security Market. According to
Dataquest, there were over 270 million existing PCs worldwide in 1997, with
worldwide PC purchases expected to exceed 80 million in 1997 and projected to
increase at a compound annual growth rate of approximately 15% from 1997 to
2002. The rapid growth in and increased dependence on information technology has
created a favorable environment for the commercial adoption of the Company's
high quality, cost-effective TactileSense fingerprint identification device.
Within this market, the Company expects that initial demand will come from the
healthcare and financial services industries in applications such as securing
access to patient medical records and on-line banking transactions. The Company
believes the corporate network security market will evolve from early individual
and small business adopters to high volume larger commercial entities.
Pursue Additional Application Markets. The Company intends to pursue
additional market opportunities for its TactileSense products beyond the
computer network security market, such as consumer electronic security,
credential verification and access control applications. Examples of these
applications include integrating fingerprint sensors into: cellular phones,
television remote controls and credit card or smart card readers; devices to
verify driver licenses, voter registration cards and passports; and automotive
and building security systems. As a result of the small size and low power
consumption of the TactileSense device and the Company's strategic partnership
with Philips, Who? Vision believes that it is particularly well-positioned to
pursue cellular phone applications and that such applications will present a
significant market opportunity.
Utilize Strategic Alliances. The Company is forming strategic alliances
with companies possessing leading technology, manufacturing and distribution
capabilities in order to enable the Company to develop leading fingerprint
identification products and expedite the introduction of its products into its
targeted markets. The Company believes that entering into strategic alliances
will (i) broaden its technological capabilities, (ii) allow for rapid
penetration of targeted markets, (iii) provide significant cost benefits due to
the manufacturing and volume purchasing scale advantages possessed by its
strategic partners and (iv) mitigate the potential risks associated with
manufacturing and distribution by working with strategic partners that have
proven capabilities in these areas.
Focus on Continued Product Development. The Company has devoted a
significant amount of its resources to the development of its TactileSense
technology. The Company intends to continue to devote significant time and
resources to enhance its current core technology to effect reductions in the
cost and size of its products and to enhance reliability and durability of its
products. In addition, the Company seeks to identify and develop the next
generation fingerprint identification technology by pursuing targeted research
and development initiatives, such as the September 1998 acquisition of
technology from Philips.
Pursue Software Alliances and Conform to Emerging Software
Standards. Initially, the Company through its strategic partners intends to
enter into alliances with software companies which have products that will be
integrated into the Company's products to provide customers with turnkey
security solutions. The Company believes that it is necessary to enter into
these alliances in the absence
37
<PAGE>
of a standard software protocol or application program interface ("API") for
biometrics. The Company seeks to enter into strategic alliances with leading
software providers to achieve this goal. Currently, several APIs for biometrics
are being developed. The Company believes that the adoption of a single standard
API would accelerate the acceptance of its products and has participated in
software industry standard setting committees. The Company believes that its
products will be easily conformed to the standards that may be established in
the future.
MARKETS
The Company believes that its TactileSense fingerprint identification
technology is well-positioned to achieve widespread adoption in numerous
commercial mass markets because of its unique characteristics and effectiveness.
The Company is focusing its initial commercialization efforts on areas in which
it believes it can gain rapid penetration and achieve significant market share,
such as the computer network security market. Furthermore, the Company is
targeting specific industries within the computer network security market that
have an awareness of and immediate need for the technology to control access to
records and/or identify individuals entering into electronic transactions. The
healthcare and financial services industries are examples in which such needs
currently exist. Additionally, the Company believes that its TactileSense
products can be integrated into a wide variety of other, non-computer security
applications. The Company anticipates that production of the first commercially
available TactileSense products will begin during the first calendar quarter of
1999.
COMPUTER NETWORK SECURITY MARKET
The shift from mainframes to distributed computer networks has led to a
dramatic increase in the number of users now sharing computer resources and
communicating with each other over local networks, wide-area networks and the
Internet. As open electronic communications become more prevalent, personal and
corporate information becomes increasingly vulnerable to unauthorized or
inappropriate access. Whether restricting a child's access to private files or
inappropriate Internet usage at home or safeguarding against attempts to access,
alter or steal proprietary information at the corporate level, the cost of
ineffective computer network security can be significant.
The Company believes the addressable market for its TactileSense technology
is the number of existing and new PCs. According to an April 1998 Dataquest
report, the worldwide installed base of PCs totaled more than 270 million in
1997. Additionally, the report estimated that over 80 million new PCs were
purchased worldwide in 1997, with approximately 75% and 25% of these used in
professional and private environments, respectively. Furthermore, compound
annual growth for new PC purchases was projected by Dataquest to be
approximately 15% through the year 2002. Within the PC market, the Company's
device is expected to be sold (i) as a separate attachment to existing PCs, (ii)
as a value-added product feature embedded into newly manufactured PC keyboards,
mice and other peripherals and (iii) directly to PC manufacturers for inclusion
as a base or optional product feature. The results of the Dataquest study
reflect estimates and conclusions that are based upon numerous assumptions,
conditions and limitations. Consequently, these results may not be predictive of
future results or consistent with other studies based upon different
assumptions.
The Company's initial commercialization effort is to introduce its
TactileSense technology for use with PCs as a highly reliable and cost-effective
means of data and network security. The Company views this market opportunity as
evolving from the early individual and small business adopters ("Consumer/Small
Business" segment) to the high-volume larger commercial entities ("Enterprise"
segment).
Consumer/Small Business Segment
The Company believes that the Consumer/Small Business segment can be
divided into three categories:
Home User Desktop Security. Applications for the Company's TactileSense
products within the Home User Desktop Security Market include data privacy for
shared home computer systems,
38
<PAGE>
password elimination and child Internet control. According to a January 1998
survey by Dataquest, 40.1% of the U.S. households surveyed in 1997 had a PC. The
Company believes that this retail category presents a significant potential
market opportunity.
Small Business Desktop Security. Applications for the Company's
TactileSense products within the Small Business Desktop Security Market include
data security for confidential accounting and human resources data and password
elimination. According to a U.S. Small Business Administration study, there were
23.3 million businesses of 500 employees or less within the U.S. in 1996. The
Company believes that this retail category presents a significant potential
market opportunity.
On-line Service Security. Use of fingerprint security for accessing
Internet accounts represents a large potential market as e-commerce such as home
banking, stock trading and general Internet-based purchasing increases.
According to a fall 1997 CommerceNet/Nielsen Demographic study, approximately 52
million users (over the age of 16) in the U.S. had used the Internet in the
prior three-month period. Furthermore, estimates based on various
CommerceNet/Nielsen Demographic studies show worldwide usage at approximately
99.5 million users. A March 1998 International Data Corporation report estimates
that global Internet commerce revenues will grow from approximately $12.4
billion in 1997 to approximately $425.7 billion in 2002.
Enterprise Segment
The Enterprise segment, which is comprised of large corporations and other
organizations, can be divided into multiple vertical markets, including
healthcare, financial services, government, manufacturing, technology and
utilities. Applications common to each include password elimination and data
security. While the Company believes that its TactileSense technology will have
broad application to a wide variety of corporate users, two vertical markets
that have exhibited particular near-term demand for TactileSense devices are the
healthcare and financial services industries.
Healthcare Industry. Within the healthcare industry, there is a high
degree of concern over the confidential treatment of patient and related medical
records. Due to the large volumes of patient data and the need to access this
information quickly and at multiple locations, electronic storage and retrieval
databases are being widely adopted as a means to enhance productivity. However,
because of the confidential nature of medical information, and recent Federal
legislation that mandates the protection of this data, hospitals and other
healthcare providers are increasingly seeking to improve the security of patient
records while providing an audit trail of the review or modification of such
records. One of the Company's distribution partners has engaged in discussions
with several leading healthcare institutions and has experienced significant
demand for the Company's product from these institutions.
Financial Services Industry. The financial services industry is
increasingly exploring ways to improve customer service, such as providing
remote access to individual accounts and allowing clients to conduct various
transactions electronically. However, the Company believes that widespread
acceptance of many of these services has been slow due to security concerns
regarding the inability to positively identify the user attempting to gain
access to an account or make a financial transaction. The Company and its
distribution partners are engaged in discussions with several leading financial
institutions in order to develop this market opportunity.
OTHER MARKET OPPORTUNITIES
The need for a reliable method of positive identification exists in a wide
variety of commercial and noncommercial applications. Consquently, the Company
intends to pursue additional market opportunities for its TactileSense products
beyond the computer network security, credential verification applications
market, such as consumer electronic security and access control applications.
Potential noncomputer consumer electronic security applications include
integration into cellular phones, television remote controls, point of sale
devices and other high-value personal or commercial electronic systems. Of
particular interest to the Company is the rapidly growing cellular phone market.
As cellular phone manufacturers continue to integrate added functionality such
as Internet access into the handsets, the Company believes that these devices
will require biometric security to secure
39
<PAGE>
communications. Additionally, thefts of cellular phone numbers cost the
telephone industry over $2 billion annually, which could be substantially
mitigated through incorporation of a fingerprint sensor which validates the
identity of the user. Potential credential verification applications include
integration into driver licenses, voter registration cards and passports.
Potential access control applications may range from simple applications, such
as replacing standard door locks, to more advanced applications, such as
automotive and building security systems. The Company believes these markets are
significant and intends to devote time and resources to developing these
application markets, and in particular those that it considers to possess
high-value and involve early technology adopters.
SALES AND MARKETING
Critical to the successful implementation of the Company's business
strategy is a rapid penetration of each selected market. For this reason, the
Company is pursuing a two-pronged sales and marketing approach directed to
hardware manufacturers and end-users and applications developers.
Well-established PC peripheral device manufacturers are a target market for
incorporation of the TactileSense fingerprint device which will "push" the
technology into use. At the same time, by marketing to end-users, application
developers and operating system security infrastructure producers, the Company
believes that the resulting software will have attractive features that users
will desire, thereby creating a demand or "pull" for the fingerprint sensors.
The Company believes that this "push-pull" strategy will be the most effective
method for rapid market entry and market share capture.
The Company currently employs four sales and marketing professionals with
significant experience in the Company's targeted markets. To further enhance the
Company's sales and marketing capabilities, the Company expects to hire
additional sales and marketing personnel to manage and promote existing
relationships with its larger accounts and generate sales from potential new
customers. These sales representatives are expected to be deployed throughout
the world in order to penetrate each of the major geographic markets.
Furthermore, the Company has entered into sales and marketing relationships
with certain of its strategic partners, including Philips, Silitek and
Integrated Visions, and intends to enter into additional sales and marketing
relationships with other strategic partners. The Company's marketing efforts
will be directed towards manufacturers and suppliers of keyboards, laptop
computers, cell phones, point-of-sale devices and other products.
In order to establish broad customer awareness of its TactileSense
technology, the Company has adopted a strategy that uses a combination of direct
contact with potentially large end users of fingerprint identification
technology, advertising, trade journal articles and reviews by panels of
industry experts.
MANUFACTURING
The Company is planning to rapidly expand production capacity for its
products. In order to achieve this result and minimize the risks and expenditure
of its resources, the Company has entered into an agreement and intends to enter
into additional agreements with international manufacturing partners that have
the capacity to manufacture the volumes anticipated and directly integrate the
device into end products. This approach will significantly reduce the time to
market of the Company's products. See "-- Strategic Alliances."
SUPPLIERS
The principal raw materials and components used in the manufacturing of the
Company's products are the TactileSense material, silicon image sensors, glass
image sensors and certain custom silicon chips. While the TactileSense material,
silicon image sensors and custom silicon chips are obtained by the Company or
the Company's manufacturing partners from a single souce or a limited
40
<PAGE>
group of suppliers, the Company believes that there are numerous alternative
suppliers of each. However, the Company will obtain its glass image sensors
through its strategic alliance with Philips.
TECHNOLOGY
The Company's proprietary patent-pending TactileSense technology was
invented by XL Vision. The technology was transferred to the Company, whose
staff of scientists and engineers has worked to develop a reliable, low cost,
manufacturable device. The Company expects to make considerable ongoing
investments in TactileSense technology and product development, including
working with external technical partners, such as Philips, to combine
TactileSense with other advanced technologies to create leading edge fingerprint
identification products. In addition, the Company is focused on providing
constant reductions in product costs and size over time in order to both
maximize computer industry penetration and to address new markets for
fingerprint identification technologies.
Who? Vision's TactileSense polymer material is used to generate a
high-resolution image of an individual's fingerprint. When the light emitting
polymer comes into contact with the electric current present within the
fingertip, a precise illuminated image is generated, revealing the fingerprint
patterns of ridges and valleys specific to the individual.
An advantage of the TactileSense fingerprint device is that it is
relatively simple, comprised of only three principal components:
o The finger image generation surface which is less than one square inch of
TactileSense material.
o An electrical circuit that controls the supply of an appropriate current
to the TactileSense material.
o An image sensor that combines an image capture function with a digital
interface.
Traditionally, digital imaging sensing has been performed using
charge-coupled-devices ("CCD"), a highly specialized and expensive form of
silicon chip. In recent years, a new image capture technology has emerged that
utilizes CMOS to fabricate chips for digital image capture. Not only are such
chips far less expensive than comparable CCDs, they have an additional advantage
of enabling specialized digital processing and interface circuits to be created
on the same chip that captures the image.
The Company believes that the use of CMOS image sensors in conjunction with
its TactileSense technology will allow it to produce highly competitive
fingerprint sensors. However, such sensors do require a small space between the
TactileSense material and the image sensor. To even better address
space-sensitive applications such as laptop computers, the Company has entered
into an exclusive alliance with Philips that will allow it to build extremely
thin devices by combining its TactileSense technology with Philips' flat,
glass-based image technology. The Company believes that the combination of Who?
Vision's technology and Philips' technology will give it technical advantages in
markets such as the laptop computer and cellular phone markets. The Company
believes that the combination of these technologies may also be used to develop
next-generation "fingerprint-enabled" flat panel display products.
Once an image of the fingerprint has been captured using the Company's
hardware, it must be processed to precisely locate the fingerprint "minutiae"
that uniquely identify an individual. The Company has licensed computer software
that incorporates patented algorithms from The Phoenix Group, Inc. ("Phoenix")
for this processing which can be executed on either a standard general purpose
PC or a low-cost, purpose-specific "embedded" computer of the Company's own
design.
41
<PAGE>
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's commercial success will depend in part on its ability to
protect and maintain its proprietary technology and to obtain and enforce
patents on its technology. The Company has applied for three patents with the
U.S. Patent and Trademark Office regarding certain aspects of the Company's
fingerprint imaging technology. The Company has also filed foreign patent
applications that correspond to its U.S. patent applications. The Company is not
aware of any patents held by others that would prevent the Company from
manufacturing and commercializing its fingerprint imaging technology in the
United States and abroad. However, the Company has not performed an exhaustive
worldwide search. There can be no assurance that any patent applications filed
by the Company will result in the issuance of patents or that any patents issued
to the Company will afford protection against competitors that develop similar
technology, or that a competitor will not reverse engineer the Company's
technology. The Company has acquired a license to use certain Philips
technology, and the Company's future success may depend on the protection and
confidentiality of such technology.
The Company currently relies on a combination of trade secrets, proprietary
knowledge, licenses, technological advances and non-disclosure, confidentiality
and non-competition agreements entered into with its employees and certain
consultants, customers and suppliers to protect its proprietary rights. No
assurance can be given that the Company's efforts will provide meaningful
protection for its unpatented proprietary technology against others who
independently develop or otherwise acquire substantially equivalent technologies
or gain access to, misappropriate or disclose the Company's proprietary
technology.
There can be no assurance that other parties will not in the future make
claims or threaten to take legal action against the Company alleging
infringement of patents by the Company. The computer manufacturing and software
industry has experienced a significant amount of litigation regarding patents
and other rights. Patent litigation can be costly and time consuming. If the
Company were determined to be infringing any patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses and/or
cease certain activities. In addition, if patents are issued to others which
contain claims that cover subject matter made, used or sold by the Company, the
Company may be required to obtain licenses to these patents, to develop or
obtain alternative technology or to cease using such technology. If the Company
is required to obtain any licenses, there can be no assurance that the Company
will be able to do so on terms acceptable to the Company, if at all.
PRODUCT DEVELOPMENT
The Company intends to continue to devote significant time and resources to
enhance its current core technology to effect reductions in the cost and size of
its products and to enhance the reliability and durability of its products. The
Company also intends to continue to develop the licensed Philips technology and
to incorporate it into future products. As of September 30, 1998, the Company
had 28 employees dedicated to product development, including several scientists
who hold Ph.D. degrees in various disciplines, primarily in the areas of
electrical engineering, physics and mathematics. Over 49% of the Company's
expenses during the period ended December 31, 1997 and over 50% of the Company's
expenses, excluding in-process research and development, for the nine months
ended September 30, 1998 were direct research and development expenses. The
Company intends to continue to invest heavily in research and development and
focus on the recruitment of experienced scientists and engineers.
STRATEGIC ALLIANCES
Philips Alliance. On September 30, 1998, the Company entered into a
strategic alliance with Philips. Pursuant to various agreements (collectively,
the "Philips Agreements"), the Company agreed to use its commercially reasonable
efforts to develop its TactileSense products and other products based on Philips
technology to enable the development of photo and capacitive fingerprint sensor
systems. In return, Philips granted the Company a worldwide license to develop,
make and sell products in the field of photo and capacitive fingerprint sensors
based on Philips proprietary amorphous silicon technology. The Company's use of
this technology will be exclusive, so long as the
42
<PAGE>
Company achieves certain development milestones and purchases minimum
quantities of certain glass components for the fingerprint sensors from Philips.
The Company has agreed to purchase an aggregate minimum of approximately $3.5
million of Philips glass-based fingerprint sensor components in the second half
of 1999 and $8.5 million of such sensors during 2000. However, under the Philips
agreements, the Company's obligation to purchase such minimum quantities of
glass components from Philips is tied to the achievement of certain specific
technological milestones that are the responsibility of Philips to achieve. If
Philips fails to achieve its milestones, there is a day-for-day extension in the
schedule and the related minimum purchase quantities. Under the Philips
Agreements, the Company is required to supply photo and capacitive fingerprint
sensors to Philips at the Company's most favored customer prices and pay Philips
a royalty fee based upon the amounts received by the Company from sales of
products to Philips. The Philips agreements require the Company to pay certain
developmental costs associated with developing Philips technology, including
fees due to Cadence Design Systems Ltd.
As consideration for entering into the Philips Agreements, the Company
issued 3,700,000 shares of Series C Preferred Stock to Philips and will pay
$125,000 in cash and issued 75,000 shares of Series C Preferred Stock to A3
Ventures Incorporated ("A3 Ventures"), which will assist in the transfer of
Philips' technology to the Company. See "Principal and Selling Stockholders."
Philips and A3 Ventures were granted certain stockholder rights, including
registration rights, in connection with the issuance of their shares. See
"Shares Eligible for Future Sale -- Registration Rights." Under the Philips
Agreements, the sale of Series C Preferred Stock to Philips included a buyback
provision to repurchase 600,000 shares at $5.00 per share which is triggered if
the Company does not become public on or before March 31, 1999. The Company as
an alternative to this buyback provision may at its discretion choose to lose
its exclusivity with respect to the Philips patents. In consideration for
receiving its shares, Philips agreed, subject to certain exceptions, not to
acquire more than 30% of the outstanding voting power of the Company prior to
August 18, 2000.
Silitek Alliance. In order to fulfill its manufacturing and distribution
requirements, the Company has entered into an agreement with Silitek to
manufacture its fingerprint modules. Silitek is a Taiwanese manufacturer and
distributor of computer peripherals and one of the top three keyboard
manufacturers in the world, whose customers include Dell Computer Corporation,
Hewlett-Packard Company, and Compaq Computer Corporation. The Company granted to
Silitek a license to be the only major keyboard manufacturer permitted to
manufacture the Company's fingerprint identification devices. In accordance with
a manufacturing agreement, Silitek will manufacture fingerprint identification
devices pursuant to the Company's purchase orders and sell them to the Company
at cost plus a fixed mark-up. Pursuant to a distribution agreement, Silitek and
the Company's other distribution partners will then purchase such devices from
the Company and incorporate them into their keyboards and stand-alone peripheral
units for resale into established PC and other markets.
Integrated Visions Alliance. In July 1998, the Company entered into a
value-added reseller ("VAR") agreement with Integrated Visions, which is engaged
in the business of providing integrated security solutions incorporating
biometric identification to its clients in vertical markets such as healthcare
and financial services. Integrated Visions is a development stage company and a
subsidiary of XL Vision. See "Management -- Certain Relationships" and "Certain
Transactions." The Company granted Integrated Visions the right to market and
sell the TactileSense fingerprint identification device on a non-exclusive basis
as a component of and in conjunction with the sale of computer hardware,
software and/or systems integration services to non-retail end users and to
other third party resellers in vertical markets, including healthcare and
financial services. Integrated Visions and its third party resellers may only
resell the fingerprint device as part of a complete business solution for its
non-retail customers and are prohibited from selling into distribution channels
granted to Silitek.
Phoenix Alliance. The Company has also formed a strategic alliance with
Phoenix from which the Company licenses field-tested fingerprint matching
software. In consideration of the grant by Phoenix to the Company of this
non-exclusive, worldwide license, the Company paid an upfront payment of
$200,000 and issued 92,042 shares of its Common Stock to Phoenix and
additionally agreed to pay quarterly license fees. See Note 8 of the Notes to
Financial Statements. The License Agreement, which was originally entered into
by XL Vision on November 5, 1997 and subsequently assigned to the Company,
expires on December 31,
43
<PAGE>
2002, but will automatically renew for additional one year terms unless the
Company gives Phoenix 90 days notice before the end of each term.
The Company plans to enter into arrangements with other manufacturing and
distribution partners for other product applications and/or markets.
COMPETITION
Although the biometric identification industry has yet to fully develop,
the Company anticipates that it will be characterized by intense competition.
The Company will generally compete with producers of both non-biometric and
biometric methods of restricting access. Non-biometric methods of restricting
access, such as keys, tokens, PINs and passwords, will initially compete with
the Company's devices. The Company will compete more directly with other
biometric methods of restricting access, such as signature verification, voice
recognition, iris recognition, facial recognition, hand geometry recognition and
retinal scanning, all of which are currently being marketed. Companies which
develop and distribute fingerprint identification devices, such as American
Biometric Company, Digital Persona, Inc., Harris Corporation, Identicator, Inc.,
Identix Incorporated, Siemens AG, ST Microelectronics N.V., Thomson-CSF and
Veridicom, Inc., will compete directly with the Company. The Company will face
additional competition from other established and emerging companies in each
market in which the Company intends to compete. The Company believes that it has
developed technology that has cost and technological advantages over the
technologies employed by its competition and that these differences will allow
the Company to successfully differentiate its products in the market.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
GOVERNMENTAL REGULATION
The Company's products are subject to restrictions on their export to and
reexport from many foreign countries. These restrictions require the Company to
obtain a validated export license prior to the sale of its products to
purchasers in such countries, thereby making many of the Company's sales to
foreign countries subject to the approval of the U.S. Department of Commerce.
Such requirements are not expected to have a material adverse effect on the
Company. In addition, states may enact legislation which restrict the use and
dissemination of data derived from biometric products, which could have a
material adverse effect on the Company's ability to commercialize its products
in such markets.
EMPLOYEES
As of January 15, 1999, the Company employed a total of 48 persons,
including 32 persons in product development and engineering, four persons in
marketing and sales, and 12 persons in administration. The Company is not
subject to any collective bargaining agreements and the Company believes that
its relationship with its employees is good.
FACILITIES
The Company's corporate facilities located in Lake Forest, California
occupy approximately 21,000 square feet. The lease has a five year term with
monthly base rent of approximately $22,000 and additional provisions for
allocations of direct expense charges for building upkeep, maintenance and
property taxes. This lease expires on May 17, 2003 at which time the Company has
an option to renew the lease for an additional five-year term. The Company
believes that this space is adequate to support its needs for the foreseeable
future.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alexander G. Dickinson, Ph.D.(1)(3)............. 37 Chief Executive Officer and Director
Linda Starr(1).................................. 41 President and Chief Operating Officer
James W. Kerrigan(1)............................ 62 Chief Financial Officer
Brian D. Berger(2).............................. 37 Vice President, Operations
John S. Scott, Ph.D.(3)......................... 47 Chairman of the Board of Directors
Edward Anderson(4)(5)........................... 52 Director
Walter W. Buckley, III(3)(4).................... 38 Director
Alex W. Hart.................................... 58 Director
James Ionson, Ph.D.(5).......................... 47 Director
Christopher Moller, Ph.D........................ 45 Director
Charles A. Root(3)(4)........................... 65 Director
</TABLE>
- ------------------
(1) Executive officer
(2) Key employee
(3) Member of the Executive Committee
(4) Member of the Audit Committee
(5) Member of the Compensation Committee
Alexander G. Dickinson, Ph.D. has been Chief Executive Officer of the
Company since May 1997 and a Director of the Company since July 1997. From
February 1996 until joining the Company, Dr. Dickinson held the position of
Director of Strategy and Business Development at Lucent Technologies, Inc. where
he developed new ventures based on AT&T Bell Labs technologies, including
fingerprint sensing and single-chip cameras. From January 1988 until February
1996, Dr. Dickinson led a digital imaging research and development group within
Bell Labs. Before joining Bell Labs, Dr. Dickinson co-founded and managed two
Australian high technology start-up companies. Dr. Dickinson holds a Ph.D. in
Electrical Engineering from the University of Adelaide, Australia and an M.B.A.
from Columbia University. Dr. Dickinson holds 16 patents relating to various
aspects of chip design and imaging.
Linda Starr has been President and Chief Operating Officer of the Company
since December 1998. Ms. Starr joined the Company as Senior Vice President,
Sales and Marketing of the Company in July 1998. From June 1997 to November
1997, Ms. Starr was Vice President, Channel Sales, North America for Compaq
Computer Corporation. From October 1993 to June 1996, she was Vice President,
Worldwide Sales for Visioneer Communications, Inc. From October 1988 to October
1993, Ms. Starr held various sales positions with NEC Technologies, Inc.,
including Vice President, Sales, Western Operations.
James W. Kerrigan has been Chief Financial Officer of the Company since
March 1998. From March 1997 through March 1998, Mr. Kerrigan was a self-employed
securities trader. From April 1995 to March 1997, Mr. Kerrigan was Chief
Financial Officer of Artios Corporation, a company that develops enterprise and
computer-aided design software and manufactures peripheral devices for
prototyping in the packaging industry. From October 1994 to January 1995, Mr.
Kerrigan served as Chief Financial Officer of Pinnacle Micro Inc., a computer
peripheral manufacturer. From 1988 to 1994, Mr. Kerrigan was Chief Financial
Officer of PDA Engineering Inc., a computer-aided
45
<PAGE>
engineering software company. He holds a B.S. in engineering and an M.B.A. from
Northwestern University.
John S. Scott, Ph.D. has been Chairman of the Board of the Company since
July 1997. Since May 1993, he has also been Chairman of the Board and Chief
Executive Officer of XL Vision. From 1991 until July 1993, Dr. Scott was the
President of Lenzar Electro-Optics, Inc., a manufacturer of imaging devices. Dr.
Scott has a Ph.D. in both physics (turbulence and particle acceleration,
associated space-borne instrumentation, plasma physics and electro-optical
sensor system development) and astrophysics from the University of Arizona. He
has designed and developed scanners for a wide range of media types including
intelligence imagery, microfiche, microfilm, fingerprint cards, aerial photos,
voter registration cards and medical x-rays. Dr. Scott is also Chairman of the
Board of ChromaVision Medical Systems, Inc., an XL Vision and Safeguard
partnership company.
Edward Anderson has been a Director of the Company since November 1997. Mr.
Anderson has served since January 1994 as President and Chief Executive Officer
of CompuCom Systems, Inc., a Safeguard partnership company. CompuCom is a
leading provider of distributed desktop computer products and network
integration services with annual revenues in excess of $2 billion. Mr. Anderson
joined CompuCom in August 1993 as Chief Operating Officer and has been a
Director of CompuCom since 1993. Prior to joining CompuCom, Mr. Anderson was
President and Chief Operating Officer of ComputerLand Corp. from 1989 until
1993. Mr. Anderson is a director of Diamond Technology Partners, a Safeguard
partnership company, and M/A/R/C Inc.
Walter W. Buckley, III has been a Director of the Company since November
1997. Mr. Buckley has been the President and Chief Executive Officer of Internet
Capital Group, a Safeguard partnership company which invests primarily in
Internet companies, since March 1996. Prior to that, Mr. Buckley worked for
Safeguard since 1987, most recently as Vice President. Prior to joining
Safeguard, Mr. Buckley was President and co-founder of Centralized Management
Systems, Inc., a medical supply company, which he sold in 1987. Mr. Buckley is a
member of the Board of Directors of Internet Capital Group, Sky Alland Marketing
Inc., MultiGen, Inc., VerticalNet, Inc., and XL Vision.
Alex W. Hart has been a Director of the Company since April 1998. Mr. Hart
has served as the Chief Executive Officer of Advanta Corp. from 1996 to 1998,
and as an officer of Advanta Corp. since 1994. Prior to that time, he was
President and Chief Executive Officer of Mastercard International Inc., a
position he held since 1988. For a period of ten years prior to joining
Mastercard, Mr. Hart served as Executive Vice President of First Interstate
Bancorp, Los Angeles.
James Ionson, Ph.D. has been a Director of the Company since November 1997.
Dr. Ionson is President and Chief Executive Officer of JDC, Inc., a management
consultant firm. Previously, Dr. Ionson worked for Polaroid Corporation from
1991 to 1995 where he served as corporate vice president of ImageNow business
development from 1994 to 1995, and corporate vice president of research and
technology from 1991 to 1994. Dr. Ionson held the Harvard Smithsonian
Astrophysical Observatory Award from 1981 to 1984 and was the Maryland Academy
of Sciences Scientist of the Year in 1983.
Christopher Moller, Ph.D. has been a Director of the Company since February
1998. Dr. Moller has served as Managing Director of Technology Leaders III and
since 1994 Technology Leaders II Management L.P., and in various capacities
since 1990 with its predecessors. He holds a Ph.D. in immunology from the
University of Pennsylvania. He is a director of five biotechnology companies
including ViroPharma, Inc. Dr. Moller serves on the medical advisory board of
Lankenau Research Institute. Dr. Moller is a director of ChromaVision Medical
Systems, Inc., an XL Vision and Safeguard partnership company.
Charles A. Root has been a Director of the Company since November 1997.
From 1986 until his retirement in December 1998. Mr. Root has served as an
Executive Vice President of Safeguard. From 1988 until March 1994, Mr. Root
served as Chairman and Chief Executive Officer of Coherent Communications
Systems Corporation, a Safeguard partnership company which manufactures
telecommunications equipment, where he continues to serve as Chairman. Mr. Root
is Chairman of
46
<PAGE>
Tangram Enterprise Solutions, Inc. and a director of XL Vision and ChromaVision
Medical Systems Inc., an XL Vision and Safeguard partnership company.
Each director is elected to hold office until the next annual meeting of
stockholders and until his respective successor is elected and qualified. The
Board of Directors has a Compensation Committee, which makes recommendations
concerning salaries and incentive compensation for employees of and consultants
to the Company; an Audit Committee, which reviews the results and scope of the
audit and other services provided by the Company's independent auditors; and an
Executive Committee. All non-employee directors are reimbursed for travel and
other expenses related to their service on the Board of Directors.
KEY EMPLOYEES
Brian D. Berger has been Vice President, Operations of the Company since
April 1998. From May 1988 until joining the Company, Mr. Berger held various
marketing and sales positions with NMB Technologies Inc. ("NMB"), one the
world's largest computer keyboard manufacturers. Prior to joining the Company,
Mr. Berger was Product Sales Manager, Input Devices at NMB. Mr. Berger has
related technical experience in fingerprint technologies through his marketing
association with the product development process at NMB. Mr. Berger holds a B.A.
degree from California State University, Northridge.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to December 1997, the Company did not have a Compensation Committee
or any other committee of the Board of Directors performing similar functions.
Recommendations concerning all of the Company's employees were made to the Board
of Directors by the Company's Chief Executive Officer. There are currently no
compensation committee interlocks with other entities or insider participation
on the Compensation Committee.
CERTAIN RELATIONSHIPS
Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology Leaders
Offshore C.V. are venture capital funds that are required by their governing
documents to make all investment, voting and disposition actions in tandem.
Technology Leaders L.P. and Technology Leaders Offshore C.V. are referred to
collectively in this Prospectus as "Technology Leaders I." Technology Leaders
Management L.P. has sole responsibility for all investment, voting and
disposition decisions for Technology Leaders I. The general partners of
Technology Leaders Management L.P. are (i) Technology Leaders Management, Inc.,
a wholly-owned subsidiary of Safeguard, (ii) TL Partners I, a general
partnership among Technology Leaders Management, Inc. and the Managing Directors
of Technology Leaders Management, Inc., other than Mark J. DeNino, and (iii)
four other corporations (the "TLA Corporations") owned by individuals, one of
whom serves as a director of Safeguard, and three of whom are not currently
otherwise affiliated with Safeguard or the Company. Technology Leaders
Management L.P. is managed by an executive committee, by whose decisions the
general partners have agreed to be bound, that consists of seven voting members
including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J. Anderson, M.D.,
each of whom are designees of Technology Leaders Management, Inc., and (ii) one
designee of each of the TLA Corporations. Clayton S. Rose is a non-voting member
of that executive committee. Technology Leaders Management, Inc. is the
administrative manager of Technology Leaders, subject to the control and
direction of the executive committee of Technology Leaders Management L.P. Mr.
Musser is the chairman and Mr. Keith is president and chief executive officer of
Technology Leaders Management, Inc. and Mr. Keith, Dr. Anderson, Mr. DeNino and
Christopher Moller, Ph.D., a director of the Company, are the managing directors
of Technology Leaders Management, Inc. Mr. Keith and Dr. Anderson are former
officers of Safeguard and Mr. Keith is a director of Safeguard.
47
<PAGE>
Technology Leaders II Management L.P., a limited partnership, is the sole
general partner of Technology Leaders II L.P. and a co-general partner of
Technology Leaders II Offshore C.V. Technology Leaders II L.P. and Technology
Leaders II Offshore C.V. are venture capital funds that are required by their
governing documents to make all investment, voting and disposition actions in
tandem. Technology Leaders II L.P. and Technology Leaders II Offshore C.V. are
referred to in this Prospectus as "Technology Leaders II." Technology Leaders II
Management L.P. has sole authority and responsibility for all investment, voting
and disposition decisions for Technology Leaders II. The general partners of
Technology Leaders II Management, L.P. are (i) Technology Leaders Management,
Inc., a wholly-owned subsidiary of Safeguard, (ii) Robert E. Keith, Jr., Gary J.
Anderson, M.D., Mark J. DeNino and Christopher Moller, Ph.D., a director of the
Company, and (iii) four other corporations (the "TLA Corporations") owned by
natural persons, one of whom is a director of Safeguard. Technology Leaders II
Management L.P. is managed by an executive committee, by whose decisions the
general partners have agreed to be bound, which consists of nine voting members
including (i) Warren V. Musser, who is a designee of Technology Leaders
Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. DeNino, Dr. Moller,
individually, and (iii) one designee of each of the TLA Corporations and (as a
non-voting member) Clayton S. Rose. Technology Leaders Management, Inc. is the
administrative manager of Technology Leaders II, subject to the control and
direction of the executive committee of Technology Leaders II Management L.P.
Mr. Keith is a director of Safeguard.
Safeguard Scientifics (Delaware), Inc., a privately held subsidiary of
Safeguard, is a limited partner in Technology Leaders L.P. and Technology
Leaders II, holding 3.3% of the aggregate limited partnership interest in
Technology Leaders L.P. and 4.4% of the aggregate limited partnership interest
in Technology Leaders II L.P. Technology Leaders Management, Inc. holds directly
or indirectly 31% of the general partnership interests in Technology Leaders
Management L.P. and 39% of the general partnership interests in Technology
Leaders II Management L.P.
Internet Capital Group L.L.C. ("Internet Capital") is a limited liability
company organized to invest in and provide strategic management and financial
support to Internet companies. Walter Buckley, a Director of the Company, is the
chief executive officer and a director of Internet Capital Group, Inc., the
management company for Internet Capital. Mr. Buckley is a former officer of
Safeguard. Robert Keith and Warren Musser are also members of Internet Capital's
Board. Safeguard and Technology Leaders II collectively own approximately 37% of
Internet Capital's ownership interests.
Safeguard, Technology Leaders I and Technology Leaders II collectively
beneficially own approximately 41% of the voting common stock of XL Vision and
approximately 97% of the non-voting convertible preferred stock of XL Vision and
have the right to designate two of the nine members of XL Vision's Board of
Directors. In February 1998, the Company raised its initial equity capital
through a private offering of its Series A Preferred Stock primarily to XL
Vision's stockholders. In May 1998 and June 1998, the Company sold an aggregate
of 300,000 shares of its Series B Preferred Stock to Technology Leaders I,
Technology Leaders II and Internet Capital.
Integrated Visions is a privately held subsidiary of XL Vision. XL Vision
controls 100% of the voting rights of Integrated Visions and approximately 31%
of its issued and outstanding common stock. Integrated Visions is engaged in the
business of providing integrated security solutions incorporating biometric
technology to its clients in vertical markets such as healthcare and financial
services. In July 1998, the Company entered into a VAR agreement with Integrated
Visions pursuant to which Integrated Visions was granted the right to market and
sell the TactileSense fingerprint device on a non-exclusive basis as a component
of and in conjunction with the sale of computer hardware, software and/or
systems integration services to non-retail end users and to other third party
resellers in vertical markets. See -- "Strategic Alliances." Dr. Scott, a
director of the Company, owns approximately 12% of the issued and outstanding
common stock of Integrated Visions. Dr. Scott's shares of Integrated Visions are
restricted shares granted pursuant to XL Vision's Long Term Incentive Plan and
as such, the voting rights related to his shares are controlled by XL Vision.
Gregory Haskell, who is President and Chief Operating Officer of XL Vision, is
the Chairman of the Board of Integrated
48
<PAGE>
Visions. Dr. Dickinson received from XL Vision a grant of 50,000 shares of
restricted stock in Integrated Visions.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued from the inception of the Company through September 30, 1998
with respect to the Company's Chief Executive Officer, its other most highly
compensated executive officer as of September 30, 1998, and a former executive
officer who earned total salary and bonus in excess of $100,000 in fiscal 1998
(collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL ---------------------------
COMPENSATION(2) RESTRICTED SECURITIES
FISCAL ------------------ STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS AWARDS(3) OPTIONS/SARS COMPENSATION
- ------------------------------ ------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alexander G. Dickinson,
Ph.D.(4) 1998 $123,092 47,697 -- -- $17,395
Chief Executive Officer..... 1997 98,470 $40,000 $31,875 -- 43,532
James W. Kerrigan(5)
Chief Financial Officer..... 1998 $ 72,120 $37,262 $ -- $75,000 $ 865
Tzu-Chiang Hsieh, Ph.D.(6)
Former Vice President and 1998 $100,603 -- -- -- $ 3,011
Chief Operating Officer..... 1997 80,000 $31,000 $13,125 -- 23,350
</TABLE>
- ------------------
(1) On December 8, 1998, the Company changed its fiscal year end from December
31 to September 30. Therefore, the information in this table for fiscal 1997
relates to the period beginning on May 1, 1997 (inception) and ending on
December 31, 1997, and for fiscal 1998 relates to the period beginning on
January 1, 1998 and ending on September 30, 1998.
(2) Except as otherwise noted, the annual compensation described in this table
reflects actual salary paid to such executive officers during the periods
indicated. Dr. Dickinson, Mr. Kerrigan and Dr. Hsieh were paid based upon an
annual salary of $160,000, $125,000 and $130,000, respectively. All bonuses
are paid in the subsequent fiscal year. The compensation described in this
table does not include medical, group life insurance or other benefits
received by the Named Officers which are available generally to all salaried
employees of the Company and certain perquisites and other personal
benefits, securities or property received by the Named Officers which do not
exceed the lesser of $50,000 or 10% of the aggregate of any such Named
Officer's salary and bonus.
(3) In November 1997, Drs. Dickinson and Hsieh were granted restricted stock
grants in the Company of 531,250 and 218,750 shares, respectively, at a
deemed value of $0.06 per share. These amounts were reported as additional
paid compensation to these individuals.
(4) Dr. Dickinson joined the Company on May 22, 1997. Included in All Other
Compensation is reimbursement for the use of a Company vehicle of $2,889 in
fiscal year 1998, and the reimbursement by the Company of relocation
expenses of $10,998 and $42,609 and a Company contribution of $3,508 and
$923 to his 401(k) Plan account for fiscal 1997 and fiscal 1998,
respectively. For comparison, Dr. Dickinson's salary and bonus for the
twelve-month period ended September 30, 1998 was $166,173 and $64,840,
respectively.
(5) Mr. Kerrigan joined the Company in March 1998. Included in All Other
Compensation is a Company contribution to his 401(k) Plan account.
(6) Dr. Hsieh joined the Company on May 19, 1997. Dr. Hsieh ceased being an
employee of the Company as of August 24, 1998. Included in All Other
Compensation is a Company contribution of $1,050 to his 401(k) Plan account
and a $22,300 buyout of XL Vision stock for fiscal 1997 and a Company
contribution of $3,011 for fiscal 1998. For comparison, Dr. Hsieh's salary
and bonus for the twelve-month period ended September 30, 1998 was $135,603
and $13,286, respectively.
49
<PAGE>
The following table provides information on stock options granted by the
Company in fiscal 1998 to the Named Officers. All Company option grants
depicited below were made pursuant to the 1997 Equity Compensation Plan.
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
REALIZABLE POTENTIAL
VALUE AT
ASSUMED ANNUAL
PERCENT OF RATE OF
NUMBER OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5.0% 10.0%
---- ---------- ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alexander G. Dickinson, Ph.D.......... -- -- -- -- -- --
James W. Kerrigan(3).................. 50,000 6.3% $1.00 3/12/08 $31,445 $ 79,687
15,000 1.9 1.00 3/24/08 9,433 23,906
10,000 1.3 2.00 6/1/08 12,578 31,875
Tzu-Chiang Hsieh, Ph.D.(4)............ 62,500 7.9% $2.50 6/16/08 $92,708 $232,136
</TABLE>
- ------------------
(1) On December 8, 1998, the Company changed its fiscal year from December 31 to
September 30. Information in this table relates to the nine-month period
ended September 30, 1998.
(2) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of
grant of the options. This value is the approximate price per share at which
shares of the Common Stock would have been sold in private transactions on
or about the date on which the options were granted. The dollar amounts
under these columns assume a compounded annual market price increase for the
underlying shares of the Common Stock from the date of grant to the end of
the option term of 5% and 10%. This format is prescribed by the Commission
and is not intended to forecast future appreciation of shares of the Common
Stock. The actual value, if any, a Named Officer may realize, will depend on
the excess of the market price for shares of the Common Stock on the date
the option is exercised over the exercise price. Accordingly, there is no
assurance that the value realized by a Named Officer will be at or near the
value estimated above.
(3) Includes: (a) options to purchase 50,000 shares granted on March 12, 1998
that vest in four equal annual installments; (b) options to purchase 15,000
shares granted on March 24, 1998 that vest upon completion of an initial
public offering; and (c) options to purchase 10,000 shares granted on June
1, 1998 that vest in four equal annual installments. The Board of Directors
amended Mr. Kerrigan's options to accelerate the vesting date of options to
purchase 65,000 shares to May 8, 1998 and to accelerate the vesting date of
options to purchase 10,000 shares to June 3, 1998. Mr. Kerrigan exercised
all of such options on such dates.
(4) Represents options to purchase 62,500 shares granted on June 16, 1998 that
vest in four equal annual installments. Dr. Hsieh's options were cancelled
upon his ceasing to be an employee of the Company on August 24, 1998.
50
<PAGE>
The following table sets forth information concerning options exercised
during fiscal 1998 and the number and the hypothetical value of certain
unexercised options of the Company held by the Named Officers as of September
30, 1998. This table is presented solely for purposes of complying with the
Commission rules and does not necessarily reflect the amounts the optionees will
actually receive upon any sale of the shares acquired upon exercise of the
options.
AGGREGATE OPTION EXERCISES AND
LAST FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
SHARES --------------------------- ---------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexander G. Dickinson, Ph.D..... -- -- -- -- -- --
James W. Kerrigan................ 75,000 $70,000 -- -- -- --
Tzu-Chiang Hsieh, Ph.D........... -- -- -- -- -- --
</TABLE>
- ------------------
(1) On December 8, 1998, the Company changed its fiscal year end from December
31 to September 30. Information in this table relates to the nine-month
period ended September 30, 1998.
EQUITY COMPENSATION PLAN
The Company has adopted the Who? Vision Systems, Inc. 1997 Equity
Compensation Plan (the "Plan") pursuant to which it has awarded, and may in the
future award, stock options, restricted stock and equity compensation awards to
its employees, non-employee directors and independent contractors.
The Plan provides for the issuance to employees, non-employee directors and
eligible independent contractors of up to 2,400,000 shares of Common Stock
pursuant to the grant of incentive stock options ("ISOs"), non-qualified stock
options ("NQSOs"), Stock Appreciation Rights ("SARs") and restricted stock
awards. The maximum aggregate number of shares of stock that shall be subject to
grants under the Plan to any recipient shall not exceed 625,000. The Plan is
administered by a committee of two or more non-employee directors appointed by
the Board of Directors (the "Committee"). Subject to the provisions of the Plan,
the Committee has the authority to determine to whom stock options and equity
compensation awards will be granted and the terms of the awards granted,
including the number of shares subject to each award, vesting and exercise
provisions and the duration of an award, to amend the terms of any outstanding
award and to generally deal with any other matters arising under the Plan.
As of January 15, 1999, options to purchase a total of 1,030,156 shares of
Common Stock, at a weighted average exercise price per share of $2.43 were
outstanding. Options to purchase a total of 85,270 shares were vested and
exercisable as of January 15, 1999. As of January 15, 1999, the Company had an
additional 51,084 shares of Common Stock available for future grants and other
issuances under the Plan. The Company also granted 531,250 shares of restricted
stock under the Plan. Options for 181,250 shares have been exercised.
The option price per share of stock under the Plan shall be determined by
the Committee at the time of each grant, provided, however, that the option
price per share for any ISO shall not be less than 100% of the fair market value
of the stock at the time of the grant. If a 10% stockholder receives an ISO, the
exercise price shall not be less than 110% of the fair market value at the time
of grant. The term of each stock option shall be fixed by the Committee, but
shall not exceed ten years. In the case of a 10% stockholder, the term shall not
exceed five years. Stock options shall be exercisable at such time or times as
shall be determined by the Committee. Payment for the exercise of an option
shall be made by cash, check or other instrument as the Committee may accept,
including, in the discretion of the
51
<PAGE>
Committee, unrestricted stock of the Company. The Committee may also agree to
allow an optionholder to elect to cash out the excess of the fair market value
over the option price of all or a portion of a stock option. The Committee may
also grant, in its sole discretion, a "cashless exercise" feature for the
exercise of stock options.
The Board of Directors may amend or revise the terms of the Plan in any
respect whatsoever, provided, that certain amendments of the Plan are subject to
shareholder approval. Unless sooner terminated, the Plan will terminate in 2007.
Under Section 162(m) of the Code, the Company may be precluded from
claiming a federal income tax deduction for total remuneration in excess of
$1,000,000 paid to the Chief Executive Officer or to any of the other four most
highly compensated officers in any one year. Total remuneration would include
amounts received upon the exercise of stock options granted under the Plan. An
exception does exist, however, for "performance-based compensation," including
amounts received upon the exercise of stock options pursuant to a plan approved
by stockholders that meets certain requirements. The Plan is intended to meet
the requirements of Treasury Regulation section 1.162-27(f), and the options
granted under the Plan are intended to meet the requirements of
"performance-based compensation."
CERTAIN TRANSACTIONS
The Company's business commenced as an unincorporated business division of
XL Vision in May 1997 to develop fingerprint identification technologies. From
inception of the business through its incorporation as a separate entity on June
30, 1997, the Company incurred approximately $184,000 in operating costs. As of
May 1, 1997, the assets and liabilities of the Company's business were
transferred to the Company in exchange for the assumption of a liability to XL
Vision totaling approximately $126,000. Operations of the Company subsequent to
inception have been funded by loans from XL Vision. In November 1997, 4,223,281
shares of Common Stock were issued to XL Vision at a purchase price of $0.06 per
share. As of January 14, 1998, the Company issued a promissory note in the
principal amount of $10.0 million bearing interest at 7% in consideration for
the one-time transfer of the TactileSense technology to the Company. The $10.0
million technology fee paid to XL Vision was based on negotiations between XL
Vision and the Company and includes costs incurred by XL Vision over several
years as XL Vision developed the basic technical building blocks for the
TactileSense technology. XL Vision has agreed to provide funding to the Company
as reasonably required for its working capital needs until the first to occur of
(i) the initial public offering of the Company and (ii) March 31, 2000. In
connection with this commitment, the Company entered into a loan agreement with
XL Vision covering all amounts loaned by XL Vision for working capital. The loan
bears interest at the prime lending rate plus 1%. Both the note and the loan are
due in full upon the earlier of the closing of the Company's initial public
offering and March 31, 2000.
In February 1998, the Company closed a private placement of 8,258,881
shares of Series A Preferred Stock to certain stockholders of XL Vision,
including Safeguard, Technology Leaders I, Technology Leaders II, Charles A.
Root and Walter W. Buckley, III. All of the shares in the private placement were
sold at a purchase price of $1.00 per share. The Company used a portion of the
proceeds from the private placement to repay a portion of the debt to XL Vision.
In connection with the purchase of shares in the private placement, the
purchasers were granted certain registration rights. See "Shares Eligible for
Future Sale -- Registration Rights." In addition, the holders of Series A
Preferred Stock are entitled to elect two members of the Company's Board of
Directors for as long as the Series A Preferred Stock remains outstanding. The
holders entered into an agreement to vote their shares of Series A Preferred
Stock to elect one designee of Safeguard and one designee of Technology Leaders
I and Technology Leaders II, together, to the Company's Board of Directors.
Also, in connection with the private placement, the Company agreed with
Safeguard to make a rights offering of its Common Stock to holders of Safeguard
Common Shares under certain circumstances. Upon consummation of this offering,
all shares of Series A Preferred Stock will automatically convert into Common
Stock.
52
<PAGE>
In May and June 1998, the Company closed a private placement of 1,400,000
shares of Series B Preferred Stock, of which 300,000 shares were issued to
Safeguard affiliates, including Technology Leaders I, Technology Leaders II,
Technology Leaders I Offshore, Technology Leaders II Offshore, and Internet
Capital Group. All of the shares in the private placement were sold at a
purchase price of $3.00 per share. Upon consummation of this offering, all
shares of Series B Preferred Stock will automatically convert into Common Stock.
The Company has entered into an Administrative Services Agreement with
Safeguard and XL Vision. This agreement requires XL Vision and Safeguard to
provide certain administrative services for the Company including management
consultation, investor relations, financial management, human resources
management, legal services, insurance program administration, audit
administration, tax planning, income tax return preparation and other services.
The Administrative Services Agreement requires the Company to accrue an annual
fee payable quarterly to XL Vision and Safeguard based upon an aggregate of 1.5%
of gross revenues subject to an annual limit of $300,000 and a minimum amount of
$100,000. The fee is only payable upon achievement of positive cash flow from
operations. The Administrative Services Agreement extends through May 18, 2003
and continues thereafter unless terminated by any party.
On September 30, 1998, the Company entered into a strategic alliance with
Philips. In connection with this alliance, the Company issued 3.7 million shares
of Series C Preferred Stock to Philips. See "Business -- Strategic Alliances --
Philips Alliance."
The Company also entered into a Direct Charge Administrative Services
Agreement with XL Vision. Under this agreement, XL Vision provides
administrative services to the Company at the request of the Company as needed.
The Company accrues fees payable to XL Vision monthly based on actual hours
incurred at individual rates of XL Vision employees who perform the services
plus actual costs incurred. The Direct Charge Administrative Services Agreement
is on a month-to-month basis and provides for termination by either party with
30 days written notice.
In July 1998, the Company entered into a VAR agreement with Integrated
Visions, which is engaged in the business of providing integrated security
solutions incorporating biometric identification to its clients in vertical
markets such as healthcare and financial services. Integrated Visions is a
subsidiary of XL Vision. See "Management -- Certain Relationships."
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as calculated pursuant to Rule 13d-3 of the
Exchange Act as of the date of this Prospectus and as adjusted to reflect the
sale of the shares offered hereby (i) by each selling stockholder, (ii) by each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (iii) by each director of the Company, (iv)
by each Named Officer and (v) by all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) NUMBER OF AFTER THIS OFFERING(1)
------------------------ SHARES TO BE ----------------------
NUMBER OF SOLD IN NUMBER OF
NAME AND ADDRESS SHARES PERCENTAGE THIS OFFERING(2) SHARES PERCENTAGE
- ---------------- ---------- ----------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics, Inc.(3)............ 5,341,989 28.7% 116,667 5,225,322 20.8%
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Koninklijke Philips Electronics N.V....... 3,700,000 19.9 -- 3,700,000 14.8
3200 North First Street
San Jose, CA 95135
XL Vision, Inc.(4)........................ 1,769,031 9.5 200,000 1,569,031 6.3
10305 102nd Terrace
Sebastian, FL 32958
Technology Leaders II(4).................. 1,204,839 6.5 -- 1,204,839 4.8
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Technology Leaders I(4)................... 1,130,592 6.1 -- 1,130,592 4.5
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Citicorp Venture Capital, Ltd(5).......... 765,000 4.1 -- 765,000 3.1
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
Alexander G. Dickinson, Ph.D.(6).......... 531,250 2.9 -- 531,250 2.1
John S. Scott, Ph.D.(7)................... 501,250 2.7 -- 501,250 2.0
Applewood Associates, L.P.(8)............. 437,472 2.4 8,333 429,139 1.7
Tzu-Chiang Hsieh, Ph.D.................... 234,375 1.3 -- 234,375 *
James W. Kerrigan(9)...................... 75,000 * -- 75,000 *
Charles A. Root........................... 40,365 * -- 40,365 *
Walter W. Buckley, III.................... 32,812 * -- 32,182 *
Alex W. Hart.............................. -- -- -- -- --
Edward Anderson........................... -- -- -- -- --
James Ionson, Ph.D........................ -- -- -- -- --
Christopher Moller, Ph.D.(10)............. -- -- -- -- --
All executive officers and directors as a
group (10 persons)(11).................. 1,228,315 6.6 -- 1,228,315 4.9
</TABLE>
- ------------------
* Less than 1% of the outstanding Common Stock.
54
<PAGE>
(1) Solely for the purpose of the percentage ownership calculation for each
beneficial owner depicted herein, the number of shares of Common Stock
deemed outstanding prior to the offering (i) assumes 18,582,704 Common
Stock outstanding as of the date of this Prospectus, (ii) the conversion of
all shares of Preferred Stock outstanding as of the date of this
prospectus, (iii) includes additional shares issuable pursuant to options
held by such owner which may be exercised within 60 days after the date of
this Prospectus ("presently exercisable options"), as set forth below, (iv)
includes all restricted stock grants, as set forth below, and (v) includes
additional shares to be issued to Phoenix prior to the date of the
offering. Solely for the purpose of the percentage ownership calculation
for each beneficial owner depicted herein, the number of shares of Common
Stock deemed outstanding after the offering (i) assumes 25,081,704 shares
of Common Stock will be outstanding upon the successful completion of this
offering, (ii) includes shares of Common Stock which are subject to certain
vesting conditions, and (iii) includes additional shares to be issued to
Phoenix prior to the date of this offering. The beneficial ownership after
this offering does not account for the exercise of rights by such
stockholders in this offering.
(2) Represents an aggregate of 325,000 shares of Common Stock being sold to
certain persons selected by the Company. Assuming that the underwriters'
over allotment option is exercised in full, Safeguard, XL Vision and
Applewood Associates, L.P. will sell an additional 233,334 shares, 400,000
shares and 16,666 shares in this offering, respectively.
(3) The shares of Safeguard are held of record by Safeguard XL Capital, L.P., a
limited partnership of which the sole general partner is Safeguard
Delaware, Inc., a wholly-owned subsidiary of Safeguard. The limited
partnership interests are held by executives and employees of Safeguard,
subject to vesting. Safeguard disclaims beneficial ownership of all but its
proportionate interest in the shares held by the partnership. Excludes all
shares of Common Stock beneficially owned by Technology Leaders I,
Technology Leaders II, XL Vision and Internet Capital, in each of which
Safeguard has a beneficial interest. Safeguard owns approximately 18% of
the voting common stock of XL Vision, 3.3% of the limited partnership
interests in Technology Leaders I and 4.4% of the limited partnership
interests in Technology Leaders II. See "Management -- Certain
Relationships" for a description of the relationships between Safeguard,
Technology Leaders I, Technology Leaders II, XL Vision and Internet
Capital. The largest shareholder of Safeguard is Warren V. Musser, the
chairman and chief executive officer of Safeguard, who is the record holder
of approximately 9.0% of the total Safeguard Common Shares outstanding.
(4) Technology Leaders Management, Inc. a wholly-owned subsidiary of Safeguard,
owns directly or indirectly (i) 31% of the general partnership interests in
Technology Leaders Management L.P., the sole general partner of Technology
Leaders I, and (ii) 39% of the general partnership interests in Technology
Leaders II Management L.P., the sole general partner of Technology Leaders
II, Safeguard, Technology Leaders I and Technology Leaders II collectively
beneficially own approximately 41% of the voting common stock of XL Vision
and have the right to designate two of the nine members of XL Vision's
Board of Directors. See "Management -- Certain Relationships" for a
description of the relationships between Safeguard and Technology Leaders
I, Technology Leaders II, XL Vision and Internet Capital.
(5) Citibank owns a controlling interest of Citicorp Venture Capital, Ltd.
(6) Represents shares of Common Stock subject to certain vesting conditions.
(7) Includes 501,250 shares held by a family partnership, and excludes 30,000
shares held by certain family members for which Dr. Scott disclaims
beneficial ownership. Excludes shares owned by XL Vision, of which Dr.
Scott is Chairman and Chief Executive Officer.
(8) The address of this stockholder is 68 Wheatley Road, Brookville, NY 11545.
Applewood Associates, L.P. is a limited partnership. The general partners,
Barry Rubenstein, Barry Fingerhut, Irwin Lieber, Jonathan Lieber, Seth
Lieber and Applewood Capital Corp, own, in aggregate, approximately 27% of
the partnership.
(9) Represents 75,000 shares of Common Stock subject to certain vesting
conditions.
(10) Excludes shares owned by Technology Leaders I and Technology Leaders II,
for each of which Dr. Moller serves as an indirect general partner. Dr.
Moller disclaims beneficial ownership of such shares.
(11) Includes shares of Common Stock subject to certain vesting conditions and
issuable pursuant to stock options exercisable within 60 days after the
date of this Prospectus.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, $.01 par value per share, and 15,000,000 shares of Preferred
Stock, $.01 par value per share. As of January 15, 1999, there were 5,148,823
shares of Common Stock, 8,258,881 shares of Series A Preferred Stock, 1,400,000
shares of Series B Preferred Stock and 3,775,000 shares of Series C Preferred
Stock issued and outstanding.
COMMON STOCK
As of January 15, 1999, there would have been 18,582,704 shares of Common
Stock outstanding, after giving effect to the conversion of the shares of
Preferred Stock. After giving effect to the issuance of the 6,500,000 shares of
Common Stock offered by the Company hereby, there will be 25,082,704 shares of
Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast and, except as otherwise required by law, all other matters
are determined by a majority of the votes cast. Accordingly, holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. See "Risk
Factors -- Control by Principal Stockholders." Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor, subject to any
preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company in
this offering will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
class or series of Preferred Stock which the Company may designate and issue in
the future. See " -- Preferred Stock."
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any
further vote or action by the stockholders, has the authority, subject to
certain limitations prescribed by law, to issue from time to time up to an
aggregate of 15,000,000 shares of Preferred Stock in one or more classes or
series and to determine the designation and the number of shares of any class or
series as well as the voting rights, preferences, limitations and special
rights, if any, of the shares of any such class or series, including dividend
rights, dividend rates, conversion rights and terms, redemption rights and
terms, and liquidation preferences. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the Company.
As of the date of this Prospectus, assuming conversion of all outstanding shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock into Common Stock, there will be no shares of Preferred Stock outstanding,
and the Company has no plans to issue any shares of Preferred Stock.
RIGHTS
The Company is granting on the date hereof the rights to the holders of
Safeguard common shares. The rights, subject to minimum exercise requirements,
are each exercisable for one share of Common Stock at an exercise price of $5.00
per share. Persons may not exercise rights for fewer than 20 shares of Common
Stock. For purposes of this offering, a person that holds Safeguard common
shares in multiple accounts must meet the 20 share minimum purchase requirement
in each account. Accordingly, persons holding fewer than 20 rights in an account
should consider the advisability of consolidating their rights in one account,
selling rights, or purchasing additional rights to comply with the minimum
exercise requirements of this offering. Rights may be transferred, in whole or
in part, by
56
<PAGE>
endorsing and delivering to ChaseMellon a rights certificate that has been
properly endorsed for transfer, with instructions to reissue the rights, in
whole or in part, in the name of the transferee. ChaseMellon will reissue
certificates for the transferred rights to the transferee, and will reissue a
certificate for the balance, if any, to the holder of the rights, in each case
to the extent it is able to do so prior to the expiration date of the rights.
This offering will terminate and the rights will expire at 5:00 p.m., New York
City time, on the expiration date, which is , 1999. After the
expiration date of the rights, unexercised rights will be null and void. For
more information about the rights and the offering process, reference should be
made to "The Offering" and to "Risk Factors -- Cancellation of Rights Offering."
LIMITATION ON LIABILITY
The Company's Certificate of Incorporation limits or eliminates the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware General Corporation Law, as amended (the "DGCL"). The DGCL provides
that a director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability (i) for any breach of such person's duty of
loyalty, (ii) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law, (iii) for the payment of unlawful
dividends and certain other actions prohibited by Delaware corporate law and
(iv) for any transaction resulting in receipt by such person of an improper
personal benefit.
The Company intends to apply for directors' and officers' liability
insurance to provide its directors and officers with insurance coverage for
losses arising from claims based on breaches of duty, negligence, error and
other wrongful acts to be effective contemporaneously with the closing of this
offering. See "Business -- Legal Proceedings" for a discussion of pending
litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board to establish the rights of, and to
issue, substantial amounts of Preferred Stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges and
preferences, as the Company's Board may determine in the exercise of its
business judgment, may, among other things, be used to create voting impediments
with respect to changes in control of the Company or to dilute the stock
ownership of holders of Common Stock seeking to obtain control of the Company.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions, financings and other corporate transactions, may
have the effect of discouraging, delaying or preventing a change in control of
the Company. The Company has no present plans to issue any shares of Preferred
Stock. See "Risk Factors -- Possible Issuance of Preferred Stock," " -- Common
Stock" and " -- Preferred Stock."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits certain business combinations between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. For purposes of Section 203, business
combinations are defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation. Section 203 prohibits any such business combination for a period of
three years commencing on the date the interested stockholder becomes an
interested stockholder, unless (i) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
becomes an interested stockholder, (ii) the interested stockholder acquired at
least 85% of the voting stock of the corporation (other than stock held by
directors who are also officers or by
57
<PAGE>
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of two-thirds of
the outstanding voting stock that is not owned by the interested stockholder.
See "Risk Factors -- Possible Issuances of Preferred Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park,
New Jersey 07660.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 25,082,704 shares
of Common Stock outstanding, excluding 1,030,156 shares of Common Stock subject
to stock options outstanding as of January 15, 1999 and any stock options
granted by the Company after January 15, 1999. Of these shares, the Common Stock
sold by the Company and the selling stockholders in this offering, except for
certain shares described below, will be freely tradeable without restriction or
further registration under the Act. The remaining shares of Common Stock (the
"Restricted Shares") were issued and sold by the Company in private transactions
in reliance upon exemption from the registration requirements of the Act and are
therefore deemed "restricted securities" as defined in Rule 144 and may not be
sold in the absence of registration under the Act unless an exemption is
available, including an exemption afforded by Rule 144 or Rule 701. See "Risk
Factors -- Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if two years have
elapsed since the date of acquisition of restricted securities from the Company
or any affiliate and the acquiror or subsequent holder is not deemed to have
been an affiliate of the Company for at least three months prior to a proposed
transaction, such person would be entitled to sell such shares under Rule 144(k)
without regard to the limitations described below. If one year has elapsed since
the date of acquisition of restricted securities from the Company or any
affiliate, the acquiror or subsequent holder thereof (including persons who may
be deemed affiliates of the Company) is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock or the average weekly trading volume in
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information about the Company. Without considering the
contractual restrictions described below, approximately (i) 1,250 Restricted
Shares will be eligible for sale ninety days after the date of this Prospectus,
subject to manner of sale and other resale conditions imposed by Rule 144, and
(ii) 18,255,454 Restricted Shares will be eligible for future sale subject to
the holding period and other conditions imposed by Rule 144. Certain
restrictions apply to any shares of Common Stock purchased in this offering by
affiliates of the Company, which may generally only be sold in compliance with
the limitations of Rule 144, except for the holding period requirements
thereunder. See "Risk Factors -- Shares Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption from
the registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests on a discretionary basis at least $100 million in securities of
issuers that are not affiliated with the entity, as long as these securities
when issued were not of the same class as securities listed on a national
securities exchange or quoted on Nasdaq. The shares of Common Stock outstanding
as of the date of this Prospectus would be eligible for resale under Rule 144A
because such shares, when issued, were not of the same class as any listed or
quoted securities.
58
<PAGE>
STOCK OPTIONS
As of October 15, 1998, there were outstanding options to purchase an
aggregate of 1,030,156 shares of Common Stock (85,270 of which were exercisable
at October 15, 1998 at a weighted average exercise price of $1.60) at a weighted
average exercise price of $2.43 per share. As of October 15, 1998, the Company
had an additional 51,084 shares of Common Stock available for future grant under
the Plan. The holders of options which are exercisable upon the offering to
purchase a total of 33,333 shares are subject to Lock-Up Agreements, which
restrict, until after the Lock-Up Expiry Date (without the prior written consent
of the underwriters), the holders' ability to sell or otherwise dispose of
Common Stock acquired upon the exercise of such options. See "Management --
Equity Compensation Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, employees of the Company who prior
to this offering purchased shares upon the exercise of options granted under the
Plan are entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule 144
and they may begin making such sales on the 90th day after the date of this
Prospectus. Rule 701 also permits the shares subject to unexercised options
granted under the Plan to be sold upon exercise without having to comply with
the foregoing provisions of Rule 144. As of October 15, 1998, approximately
1,285,156 shares of Common Stock and shares of Common Stock subject to
unexercised options will be eligible for sale under Rule 701 by Company
employees (subject to applicable vesting provisions).
It is anticipated that a Registration Statement on Form S-8 covering the
Common Stock that may be issued pursuant to the options granted under the Plan
will be filed prior to the Lock-Up Expiry Date and that shares of Common Stock
that are so acquired and offered thereafter pursuant to this Registration
Statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of the Company, whom generally may
only resell such shares in accordance with each provision of Rule 144, other
than the holding period requirement.
LOCK-UP AGREEMENTS
The Principal Stockholders, who will beneficially own 12,829,784 shares of
Common Stock after the completion of this offering, certain other shareholders
of the Company and each executive officer and director of the Company have
agreed with the underwriters that they will not sell or otherwise dispose of any
shares of Common Stock until after the Lock-Up Expiry Date without the prior
written consent of the underwriter. In addition, Warren V. Musser has agreed
that he and/or his assignees will not sell or otherwise dispose of 280,000
shares of Common Stock until after the Lock-Up Expiry Date without the prior
written consent of Robert W. Baird & Co. Incorporated.
REGISTRATION RIGHTS
The Company has granted certain piggyback and demand registration rights to
holders of Preferred Stock. Holders of a certain number of shares of Preferred
Stock have the right to request that the Company effect the registration, under
the Act, of the Common Stock issuable upon the conversion of the Preferred
Stock, provided that the securities to be registered have a value of at least
$5,000,000. These registration rights become exercisable at any time after the
earlier of six months after the completion of this offering and January 13,
2002. In addition, the holders of Preferred Stock have the right to include
their securities in the offerings of the Company's securities under the Act. By
exercising such registration rights, subject to certain limitations, such
holders could cause a significant number of shares to be registered and sold in
the public market. Such sales may have an adverse effect on the market price for
the Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities. All holders of registration rights have
waived their respective rights to participate in this offering.
59
<PAGE>
UNDERWRITING
The Company, the selling stockholders and the underwriters have entered
into the Standby Underwriting Agreement on the date hereof, pursuant to which
the underwriters are required, subject to certain terms and conditions (all of
which are set forth below), to purchase the shares of Common Stock offered and
not purchased in the rights offering (the "Excess Unsubscribed Shares") in
accordance with the percentages set forth below. If all of the rights are
exercised, there will be no Excess Unsubscribed Shares.
<TABLE>
<CAPTION>
UNDERWRITERS: % OF UNDERWRITER SHARES
- ------------- -----------------------
<S> <C>
Robert W. Baird & Co. Incorporated.......................... %
Janney Montgomery Scott Inc................................. %
</TABLE>
The underwriters have agreed, severally and not jointly, subject to the
condition that the Company and the selling stockholders comply with their
obligations under the Standby Underwriting Agreement and subject to the
underwriters' right to terminate its obligations under the Standby Underwriting
Agreement (as specified below), to purchase all of the Excess Unsubscribed
Shares. The Company will pay the underwriters the financial advisory fee equal
to 3% of the exercise price for each share of Common Stock included in this
offering. The financial advisory fee is for services and advice rendered in
connection with the structuring of the offering, valuation of the business of
the Company and financial advice to the Company before and during the offering.
An additional fee of 4% of the exercise price will be paid to the underwriters
(i) for each share of Common Stock purchased by the underwriters pursuant to the
Standby Underwriting Agreement and (ii) for each share of Common Stock purchased
upon the underwriters' exercise of rights if such rights were purchased by the
underwriters at a time when the Common Stock was trading (on a "when-issued"
basis) at a per share price of less than 120% of the exercise price or if the
underwriters purchase such rights with Safeguard's prior written acknowledgment
that they would be entitled to receive the underwriting discount for Common
Stock purchased pursuant to the exercise of such rights. In addition, the
Company has agreed to pay the underwriters a non-accountable expense allowance
in the aggregate amount of $200,000, provided, however, such non-accountable
expense allowance shall be reduced to $100,000 or zero if, on the Expiration
Date, the closing price for the Common Stock traded on a "when issued" basis is
at least $7.25 per share or greater than $8.25 per share, respectively. The
selling stockholders have granted to the underwriters a 20-day option commencing
on the Expiration Date to purchase a maximum of 650,000 additional shares of
Common Stock at a per share price equal to the exercise price less the financial
advisory fee and the underwriting discount. The underwriters may exercise such
option in whole or in part only to cover over-allotments made in connection with
the sale of shares of Common Stock by the underwriters.
Prior to this Expiration Date, the underwriters may offer shares of Common
Stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of rights, at prices set from time to time by the
underwriters. It is not contemplated that the offering price set on any calendar
day will be increased independently by the underwriters more than once during
such day. After the Expiration Date, the underwriters may offer shares of Common
Stock, whether acquired pursuant to the Standby Underwriting Agreement, the
exercise of the rights or the purchase of Common Stock in the market, to the
public at a price or prices to be determined. The underwriters may thus realize
profits or losses independent of the underwriting discount and the financial
advisory fee. Shares of Common Stock subject to the Standby Underwriting
Agreement will be offered by the underwriters when, as and if sold to, and
accepted by, the underwriters and will be subject to its right to reject orders
in whole or in part.
Prior to this offering, there has been no public market for the Common
Stock or the rights. Consequently, the exercise price was determined by
negotiations among the Company, the selling stockholders and the underwriters.
In determining the exercise price, the underwriters, the selling stockholders
and the Board of Directors of the Company considered such factors as the future
prospects and historical growth rate in revenues and earnings of the Company;
its industry in general and the Company's position in its industry; revenues,
earnings and certain other financial and operating
60
<PAGE>
information of the Company in recent periods; market valuations of the
securities of companies engaged in activities similar to those of the Company;
the management of the Company; and, with respect to the Company, the advice of
the underwriters.
The underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the underwriters have completed its participation in the
distribution of shares offered hereby. As a result, the underwriters may be
unable to provide a market for the Company's when-issued Common Stock and Common
Stock should they desire to do so during certain periods while the rights are
exercisable.
In connection with this offering, the underwriters and certain selling
group members may engage in stabilizing, syndicate covering transactions or
other transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. A "syndicate covering transaction" is the placing of any
bid or the effecting of any purchase on the behalf of the underwriters to reduce
a short position created in connection with this offering. After the opening of
quotations for the Common Stock on the Nasdaq National Market, stabilizing bids
for the purpose of preventing or retarding a decline in the market price may be
initiated by the underwriters or selling group members in any market at a price
no higher than the last independent transaction price for the Common Stock and
then maintained, reduced or raised to follow the independent market. Such
transactions may stabilize the market price of the Common Stock at a level above
that which might otherwise prevail and, if commenced, may be discontinued at any
time.
The Company and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement of
which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
underwriters may be required to make.
The underwriters may terminate their obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted the general securities market in the United
States; (ii) if trading in the Common Stock (on a when-issued basis) shall have
been suspended by the SEC or Nasdaq; (iii) if trading on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or in the
over-the-counter market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the SEC or any other government authority having jurisdiction; (iv) if the
United States shall have become involved in a war or major hostilities which, in
the underwriters' opinion, will affect the general securities market in the
United States; (v) if a banking moratorium has been declared by a California,
New York, Pennsylvania, Wisconsin or federal authority; (vi) if a moratorium in
foreign exchange trading (with respect to a foreign exchange on which the
Company's securities are traded) has been declared; (vii) if the Company shall
have sustained a loss material to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute or
any legal or governmental proceeding; (viii) if there shall be such material
adverse market conditions (whether occurring suddenly or gradually between the
date of this Prospectus and the closing of the offering) affecting markets
generally as in the underwriters' reasonable judgment would make it inadvisable
to proceed with the offering, sale or delivery of the shares of Common Stock
offered hereby; or (ix) if there shall have been such material adverse change,
or any development involving a prospective material adverse change, in the
financial condition, net worth or results of operations of the Company since
September 30, 1998 or in the business prospects or condition of the Company
since the date of this Prospectus, or that materially and adversely impacts the
Standby Underwriting Agreement.
The Company has agreed that, without the prior written consent of the
underwriters, it will not offer, sell, grant any option for the sale of or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the "Securities") acquired in this
offering or held by it as of the date hereof until after the Lock-Up Expiry
Date, other than (i) Common
61
<PAGE>
Stock to be sold in this offering, (ii) Company option issuances and sales of
Common Stock pursuant to the Plan and (iii) Securities issued as consideration
for an acquisition if the party being issued the Securities agrees not to
transfer, sell, offer for sale, contract or otherwise dispose of such Securities
until after the Lock-Up Expiry Date. The Principal Stockholders, each executive
officer and each director of the Company and certain other stockholders, who
will in the aggregate own approximately 11,579,601 shares of Common Stock after
the completion of this offering and will be deemed to beneficially own an
additional 47,638 shares of Common Stock, have agreed with the underwriters that
they will not sell or otherwise dispose of any shares of Common Stock until
after the Lock-Up Expiry Date without the prior written consent of the
underwriters. See "Management -- Equity Compensation Plan" and "Shares Eligible
for Future Sale." In addition, Warren V. Musser has agreed that he and/or his
assignees will not sell or otherwise dispose of 280,000 shares of Common Stock
without the prior written consent of the underwriters. See "Management -- Equity
Compensation Plan" and "Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the rights and shares of Common Stock offered hereby will
be passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Drinker Biddle & Reath LLP, Philadelphia,
Pennsylvania.
EXPERTS
The financial statements of the Company as of December 31, 1997 and
September 30, 1998 and for the period from May 1, 1997 (inception) through June
29, 1997, the period from June 30, 1997 (incorporation) through December 31,
1997, the period from May 1, 1997 (inception) through December 31, 1997, the
nine months ended September 30, 1998 and the period from May 1, 1997 (inception)
through September 30, 1998 have been included in this Prospectus and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Act with respect to the Common Stock and Rights offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock and Rights offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or
any part thereof may be obtained from such office upon payment of the prescribed
fees. In addition, the Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy statements, information statements and other
information regarding the Company.
62
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1997 and September 30,
1998...................................................... F-3
Statements of Operations for the period from May 1, 1997
(inception) through June 29, 1997, the period from June
30, 1997 (incorporation) through December 31, 1997, the
period from May 1, 1997 (inception) through December 31,
1997, the nine months
ended September 30, 1998 and the period from May 1, 1997
(inception) through September 30, 1998.................... F-4
Statements of Stockholders' Equity (Deficit) for the period
from May 1, 1997 (inception) through June 29, 1997, the
period from June 30, 1997 (incorporation) through December
31, 1997 and the nine months ended September 30, 1998..... F-5
Statements of Cash Flows for the period from May 1, 1997
(inception) through June 29, 1997, the period from June
30, 1997 (incorporation) through December 31, 1997, the
period from May 1, 1997 (inception) through December 31,
1997, the nine months
ended September 30, 1998 and the period from May 1, 1997
(inception) through September 30, 1998.................... F-6
Notes to Financial Statements............................... F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Who? Vision Systems, Inc.:
We have audited the accompanying balance sheets of Who? Vision Systems, Inc. (a
development stage enterprise) as of December 31, 1997 and September 30, 1998 and
the related statements of operations, stockholders' equity (deficit) and cash
flows of Who? Vision Systems (a development stage enterprise), a division of XL
Vision, Inc., for the period from May 1, 1997 (inception) through June 29, 1997,
and Who? Vision Systems, Inc. (a development stage enterprise) for the period
from June 30, 1997 (incorporation) through December 31, 1997, the period from
May 1, 1997 (inception) through December 31, 1997, for the nine months ended
September 30, 1998, and for the cumulative development stage from May 1, 1997
(inception) through September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Who? Vision Systems, Inc. (a
development stage enterprise) as of December 31, 1997 and September 30, 1998 and
the results of operations and cash flows of Who? Vision Systems (a development
stage enterprise), a division of XL Vision, Inc., for the period from May 1,
1997 (inception) through June 29, 1997, and Who? Vision Systems, Inc. (a
development stage enterprise) for the period from June 30, 1997 (incorporation)
through December 31, 1997 the period from May 1, 1997 (inception) through
December 31, 1997, for the nine months ended September 30, 1998, and for the
cumulative development stage from May 1, 1997 (inception) through September 30,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
November 19, 1998
F-2
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, 1998
1997 1998 (NOTE 2(C))
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 500 $ 9,405 $ 9,405
Prepaid expenses.............................. 6,734 57,567 57,567
---------- ----------- -----------
Total current assets.................... 7,234 66,972 66,972
Property and equipment, net (note 3)............ 170,336 762,869 762,869
Capitalized offering costs...................... -- 248,356 248,356
Deposits and other.............................. 10,136 26,245 26,245
---------- ----------- -----------
Total assets............................ $ 187,706 $ 1,104,442 $ 1,104,442
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 209,541 $ 680,640 $ 680,640
Accrued liabilities:
Salaries and benefits...................... 167,599 559,781 559,781
Severance costs............................ -- 65,000 65,000
Other...................................... 19,776 117,562 117,562
Due to XL Vision, Inc. (note 7)............... 2,728,448 6,526,383 6,526,383
---------- ----------- -----------
Total current liabilities............... 3,125,364 7,949,366 7,949,366
---------- ----------- -----------
Equity purchase option (note 11)................ -- 3,000,000 --
---------- ----------- -----------
Commitments and contingencies (notes 8 and 11)
Stockholders' equity (deficit) (notes 4, 6, 8,
and 11):
Preferred stock, $.01 par value, authorized
15,000,000 shares:
Series A preferred stock, (aggregate
involuntary liquidation preference of
$-0- and $8,844,922 in 1997 and 1998,
respectively), designated 8,300,000
shares, issued and outstanding -0-
shares in 1997 and 8,258,881 in 1998.... -- 82,589 --
Series B preferred stock, (aggregate
involuntary liquidation preference of
$-0- and $4,340,384 in 1997 and 1998,
respectively), designated 1,400,000
shares, issued and outstanding -0-
shares in 1997 and 1,400,000 shares in
1998.................................... -- 14,000 --
Series C preferred stock, (aggregate
involuntary liquidation preference of
$-0- and $18,880,171 in 1997 and 1998,
respectively), designated 3,800,000
shares, issued and outstanding -0-
shares in 1997 and 3,775,000 shares in
1998.................................... -- 37,750 --
Common stock $.01 par value, authorized
60,000,000 shares, issued and outstanding
5,037,031 shares in 1997, 5,147,823 shares
in 1998 and 18,581,704 shares in pro forma
as adjusted................................ 50,370 51,478 185,817
Additional paid-in capital.................... 251,787 28,649,513 31,649,513
Accumulated deficit during the development
stage...................................... (3,239,815) (38,680,254) (38,680,254)
---------- ----------- -----------
Total stockholders' equity (deficit).... (2,937,658) (9,844,924) (6,844,924)
---------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $ 187,706 $ 1,104,442 $ 1,104,442
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
MAY 1, 1997 JUNE 30, 1997 MAY 1, 1997 MAY 1, 1997
(INCEPTION) (INCORPORATION) (INCEPTION) NINE MONTHS (INCEPTION)
THROUGH THROUGH THROUGH ENDED THROUGH
JUNE 29, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1997 1998 1998
----------- --------------- ------------ ------------- ------------------
(DIVISIONAL
OPERATIONS
-- NOTE 1)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ -- $ -- $ -- $ -- $ --
Cost of revenue................ -- -- -- -- --
--------- ----------- ----------- ------------ ------------
Gross profit (loss).... -- -- -- -- --
--------- ----------- ----------- ------------ ------------
Operating expenses:
Selling, general and
administrative............ 123,940 1,440,406 1,564,346 2,849,740 4,414,086
Research and development
(note 8).................. 58,804 1,540,950 1,599,754 3,224,658 4,824,412
In-process research and
development
(notes 7 and 11).......... -- -- -- 29,000,000 29,000,000
--------- ----------- ----------- ------------ ------------
Total operating
expenses............ 182,744 2,981,356 3,164,100 35,074,398 38,238,498
--------- ----------- ----------- ------------ ------------
Profit (loss) from
operations.......... (182,744) (2,981,356) (3,164,100) (35,074,398) (38,238,498)
--------- ----------- ----------- ------------ ------------
Interest expense (note 7).... (1,216) (74,499) (75,715) (366,041) (441,756)
--------- ----------- ----------- ------------ ------------
Profit (loss) before
income taxes........ (183,960) (3,055,855) (3,239,815) (35,440,439) (38,680,254)
Income tax expense (benefit)
(note 5)..................... -- -- -- -- --
--------- ----------- ----------- ------------ ------------
Net profit (loss)...... $(183,960) $(3,055,855) $(3,239,815) $(35,440,439) $(38,680,254)
========= =========== =========== ============ ============
Net profit (loss) subsequent to
incorporation (notes 1 and
2)........................... $(3,055,855) $(35,440,439)
=========== ============
Net profit (loss) per common
share subsequent to
incorporation
(notes 1 and 2):
Basic..................... $ (2.46) $ (6.98)
=========== ============
Diluted................... $ (2.46) $ (6.98)
=========== ============
Weighted average number of
common shares outstanding.... 1,241,467 5,076,980
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C COMMON STOCK
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 1, 1997
(inception).................... -- $ -- -- $ -- -- $ -- -- $ --
Net profit (loss)................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balances at June 29, 1997........ -- -- -- -- -- -- -- --
Issuance of common stock to XL
Vision upon incorporation at
$.008 per share................ -- -- -- -- -- -- 1,250 10
Issuance of common stock to XL
Vision for cash at $.06 per
share (note 7)................. -- -- -- -- -- -- 4,223,281 33,786
Grant of common stock to officers
as compensation at $.06 per
share (note 6)................. -- -- -- -- -- -- 750,000 6,000
Grant of common stock to The
Phoenix Group, Inc. at $.06 per
share (note 8)................. -- -- -- -- -- -- 62,500 625
Five for four common stock split
(note 9)....................... -- -- -- -- -- -- -- 9,949
Net profit (loss)................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balances at December 31, 1997.... -- -- -- -- -- -- 5,037,031 50,370
Sale of Series A preferred stock
for cash at $1.00 per share
(note 4)....................... 8,258,881 82,589 -- -- -- -- -- --
Sale of Series B preferred stock
for cash at $3.00 per share
(note 4)....................... -- -- 1,400,000 14,000 -- -- -- --
Exercise of stock options for
cash at an average of $1.11 per
share.......................... -- -- -- -- -- -- 81,250 812
Grant of common stock to The
Phoenix Group, Inc. at an
average of $1.40 per share
(note 8)....................... -- -- -- -- -- -- 29,542 296
Issuance of Series C preferred
stock at $5.00 per share (notes
4 and 11)...................... -- -- -- -- 3,775,000 37,750 -- --
Reclassification of equity
purchase option (note 11)...... -- -- -- -- -- -- -- --
Net profit (loss)................ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balances at September 30, 1998... 8,258,881 $82,589 1,400,000 $14,000 3,775,000 $37,750 5,147,823 $51,478
========= ======= ========= ======= ========= ======= ========= =======
<CAPTION>
ACCUMULATED
DEFICIT
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
CAPITAL STAGE TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Balances at May 1, 1997
(inception).................... $ -- $ -- $ --
Net profit (loss)................ -- (183,960) (183,960)
----------- ------------ ------------
Balances at June 29, 1997........ -- (183,960) (183,960)
Issuance of common stock to XL
Vision upon incorporation at
$.008 per share................ -- -- 10
Issuance of common stock to XL
Vision for cash at $.06 per
share (note 7)................. 219,611 -- 253,397
Grant of common stock to officers
as compensation at $.06 per
share (note 6)................. 39,000 -- 45,000
Grant of common stock to The
Phoenix Group, Inc. at $.06 per
share (note 8)................. 3,125 -- 3,750
Five for four common stock split
(note 9)....................... (9,949) -- --
Net profit (loss)................ -- (3,055,855) (3,055,855)
----------- ------------ ------------
Balances at December 31, 1997.... 251,787 (3,239,815) (2,937,658)
Sale of Series A preferred stock
for cash at $1.00 per share
(note 4)....................... 8,176,292 -- 8,258,881
Sale of Series B preferred stock
for cash at $3.00 per share
(note 4)....................... 4,186,000 -- 4,200,000
Exercise of stock options for
cash at an average of $1.11 per
share.......................... 89,188 -- 90,000
Grant of common stock to The
Phoenix Group, Inc. at an
average of $1.40 per share
(note 8)....................... 108,996 -- 109,292
Issuance of Series C preferred
stock at $5.00 per share (notes
4 and 11)...................... 18,837,250 -- 18,875,000
Reclassification of equity
purchase option (note 11)...... (3,000,000) -- (3,000,000)
Net profit (loss)................ -- (35,440,439) (35,440,439)
----------- ------------ ------------
Balances at September 30, 1998... $28,649,513 $(38,680,254) $ (9,884,924)
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
FROM PERIOD FROM PERIOD FROM PERIOD FROM
MAY 1, 1997 JUNE 30, 1997 MAY 1, 1997 MAY 1, 1997
(INCEPTION) (INCORPORATION) (INCEPTION) NINE MONTHS (INCEPTION)
THROUGH THROUGH THROUGH ENDED THROUGH
JUNE 29, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1997 1998 1998
----------- --------------- ------------ ------------- -------------
(DIVISIONAL
OPERATIONS
-- NOTE 1)
<S> <C> <C> <C> <C> <C>
Cash flows from development stage activities:
Net profit (loss)........................... $(183,960) $(3,055,855) $(3,239,815) $(35,440,439) $(38,680,254)
Adjustments to reconcile net profit (loss)
to net cash used in operating activities:
Depreciation and amortization........... 105 18,777 18,882 89,644 108,526
Loss on disposal of property and
equipment............................ -- -- -- 26,603 26,603
Non-cash compensation -- issuance of
common stock......................... -- 45,000 45,000 -- 45,000
Non-cash consideration for software
license -- issuance of common
stock................................ -- 3,750 3,750 109,292 113,042
Non-cash considersation -- issuance of
preferred stock for in-process
research and development............. -- -- -- 18,875,000 18,875,000
Changes in operating assets and
liabilities:
Prepaid expenses..................... -- (6,734) (6,734) (50,833) (57,567)
Deposits............................. -- (10,136) (10,136) (16,109) (26,245)
Accounts payable..................... 71,102 138,439 209,541 554,968 680,640
Accrued liabilities.................. 38,391 148,984 187,375 471,099 742,343
--------- ----------- ----------- ------------ ------------
Net cash used in operating
activities......................... (74,362) (2,717,775) (2,792,137) (15,380,775) (18,172,912)
--------- ----------- ----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (51,336) (137,882) (189,218) (708,780) (897,998)
--------- ----------- ----------- ------------ ------------
Cash flows from financing activities:
Net borrowings from XL Vision, Inc.......... 125,698 2,602,750 2,728,448 3,797,935 6,526,383
Sale of common stock........................ -- 253,407 253,407 90,000 343,407
Sale of preferred stock..................... -- -- -- 12,458,881 12,458,881
Capitalized offering costs.................. -- -- -- (248,356) (248,356)
--------- ----------- ----------- ------------ ------------
Net cash provided by financing
activities......................... 125,698 2,856,157 2,981,855 16,098,460 19,080,315
--------- ----------- ----------- ------------ ------------
Net increase in cash................. -- 500 500 8,905 9,405
Cash -- beginning of period................... -- -- -- 500 --
--------- ----------- ----------- ------------ ------------
Cash -- end of period......................... $ -- $ 500 $ 500 $ 9,405 $ 9,405
========= =========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) ORGANIZATION
Overview. Who? Vision Systems, Inc. (a development stage enterprise) ("Who?
Vision" or the "Company") is a Delaware corporation. Prior to the incorporation
of the Company on June 30, 1997, the Company's business was conducted as the
Who? Vision Systems Division (the "Division") of XL Vision, Inc. ("XL Vision").
On June 30, 1997, the assets and liabilities of the Division were
contributed to the Company, which was a wholly-owned subsidiary of XL Vision.
This transaction was accounted for as a reorganization of entities under common
control and, accordingly, the assets and liabilities were recorded at their
historical book value. As of the date of incorporation, the Division had assets
of $51,231, assumed liabilities of $235,191 and had an accumulated deficit of
$183,960. The Company assumed a liability to XL Vision totaling $125,688 after
$10 in consideration for the issuance of 1,250 shares of common stock.
Operations of the Company subsequent to incorporation have been funded by loans
from XL Vision (see note 7).
On January 14, 1998, the Company entered into an agreement with XL Vision
for the transfer of certain technology that will be used by the Company in the
sale of its products for $10.0 million (see note 10). In February 1998, the
Company raised $8,258,881 from a private equity placement. The proceeds were
used to fund the repayment of amounts due to XL Vision.
The accompanying financial statements for the period from May 1, 1997
(inception) through June 29, 1997 reflect operations within XL Vision.
Significant management assumptions were made in allocating indirect costs from
XL Vision in order to present the balance sheet and statement of operations for
that period. The Company was allocated all incremental costs and certain
indirect or common costs based upon the proportional value of all expenses
incurred by XL Vision. Management of the Company believes the allocated costs
reasonably reflect the costs of the entity as if it were on a stand alone basis.
From inception on May 1, 1997, the Company has devoted substantially all of
its resources to developing its TactileSense(Trademark) fingerprint
identification technology which it intends to manufacture and distribute to
various markets through strategic partners. In order to fulfill its
manufacturing and distribution requirements, the Company has selected original
equipment manufacturing partners which provide existing global sales,
manufacturing and distribution infrastructures in the Company's target markets.
Initial Public Offering. On April 21, 1998, the Company's Board of
Directors authorized the filing of a registration statement on Form S-1. The IPO
will be conducted as a rights offering primarily to Safeguard's stockholders and
will result in the expected sale of 6,500,000 new shares of common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DEVELOPMENT STAGE
From the inception of the Company on May 1, 1997, the Company was
considered to be in the development stage as defined by the Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." Until the Company begins to realize significant
revenue associated with its planned operations, the Company will be considered
in the development stage.
(B) MANAGEMENT'S PLANS
At September 30, 1998, the Company had a working capital deficiency of
$7,882,394 and a stockholders' deficit of $9,844,924. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts leading to initial revenues from its products. The
Company's business plans anticipate reliance on manufacturing and distribution
of its
F-7
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
products through two or more companies. In addition, to support the
Company's future cash needs, it may consider additional debt or equity
financing. XL Vision has agreed to fund the Company's operations for at least
eighteen months from March 31, 1998 or until the successful completion of the
Company's initial public offering ("IPO"). Although management believes that its
IPO will be successful, there can be no assurances that it will be achieved or
that the Company will be successful in raising other financing. The Company
anticipates that net proceeds from its planned IPO of common stock will be
sufficient to satisfy its operating cash needs for at least eighteen months
following the IPO. If the Company is unable to obtain sufficient additional
funds, the Company may have to delay, scale back or eliminate some or all of its
marketing and development activities.
(C) REVENUE RECOGNITION
The Company will recognize revenue in accordance with the terms of the
sale, generally as products are shipped by the Company to its customers.
(D) DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets which are generally 5 years for engineering and
manufacturing equipment and 3-7 years for all other assets.
(E) CAPITALIZED OFFERING COSTS
Capitalized offering costs consist of legal and accounting fees and other
related expenses in connection with the Company's proposed IPO. Should the IPO
prove unsuccessful, these costs, as well as any additional expenses to be
incurred, will be charged to operations.
(F) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. In-process
research and development costs in 1998 includes a one-time technology fee
payable to XL Vision in the amount of $10.0 million and purchased technology
in the amount of $19.0 million (see note 11).
(G) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to June 30, 1997, the Company operated as a division of XL Vision.
(H) STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25") and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
F-8
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(I) USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates. In
particular, as further described in note 1, significant assumptions were made to
allocate indirect costs from XL Vision to Who? Vision for the period prior to
incorporation.
(J) NET PROFIT (LOSS) PER SHARE
Net profit (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," by dividing the net profit (loss) allocable to common
stockholders by the weighted average number of shares of common stock
outstanding. As of December 31, 1997 and September 30, 1998, the Company's
options (286,250 at December 31, 1997 and 901,425 at September 30, 1998) and
convertible preferred stock (-0- at December 31, 1997 and 13,433,881 at
September 30, 1998) (see notes 4 and 6), have not been used in the calculation
of diluted net profit (loss) per share because to do so would be anti-dilutive.
As such, the numerator and the denominator used in computing both basic and
diluted net profit (loss) per share allocable to common stockholders are equal.
Calculation of net profit (loss) per share is based upon operations subsequent
to the initial capitalization (incorporation) of the Company on June 30, 1997.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 and SEC staff policy, all common stock and common stock
equivalents issued for nominal consideration during the periods presented herein
and through the filing of the registration statement for the IPO are to be
reflected in a manner similar to a stock split or stock dividend for which
retroactive treatment is required in the calculation of net profit (loss) per
share; the Company did not have any such issuances.
(K) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts payable and accrued liabilities
reflected in the financial statements approximates fair value due to the
short-term maturity of these instruments.
(L) FISCAL YEAR END
On December 8, 1998, the Company changed its fiscal year end to September
30. References to 1998 and 1997 refer to the nine months ended September 30,
1998 and the period from May 1, 1997 (inception) through December 31, 1997,
respectively.
(3) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Office and computer equipment...................... $119,732 $323,895
Furniture and fixtures............................. 12,169 409,298
Engineering and manufacturing equipment............ 57,317 109,572
Leasehold improvements............................. -- 1,142
-------- --------
189,218 843,907
Less: accumulated depreciation and amortization.... (18,882) (81,038)
-------- --------
Property and equipment, net........................ $170,336 $762,869
======== ========
</TABLE>
F-9
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PREFERRED STOCK
As of September 30, 1998, the Company had authorized the issuance of
15,000,000 shares of preferred stock and had designated 8,300,000 as Series A
shares, 1,400,000 as Series B shares and 3,775,000 as Series C shares.
SERIES A -- Each share of Series A preferred stock is convertible into one
share of common stock at the option of the holder or upon the vote of holders of
two-thirds of the Series A preferred stock outstanding. The Series A preferred
stock is automatically converted into common stock upon a qualified initial
public offering of at least $10,000,000 with a Company valuation of at least
$35,000,000 or upon a public rights offering of the Company to shareholders of
Safeguard Scientifics, Inc. ("Safeguard"). The holders of Series A preferred
stock are entitled to vote as a separate class to elect two directors to the
Board of Directors of the Company. The Series A shares are entitled to a
liquidation preference before any distribution to common stockholders equal to
the greater of (a) $1.00 per share plus an additional $.10 per year (pro rated
for partial year) from January 14, 1998 or until the date of distribution of
available assets or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to common stock prior to
liquidation.
SERIES B -- Each share of Series B preferred stock is convertible into one
share of common stock at the option of the holder or upon the vote of holders of
two-thirds of the Series B preferred stock outstanding. The Series B preferred
stock is required to be converted upon a qualified initial public offering of at
least $10,000,000 with a Company valuation of at least $35,000,000 or a public
rights offering of the Company to shareholders of Safeguard. The Series B shares
are entitled to a liquidation preference before any distribution to common
stockholders equal to the greater of (a) $3.00 per share plus an additional $.30
for each year per year from May 31, 1998 or until the date of distribution of
available assets or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to common stock prior to
liquidation. Series B shares are on parity with Series A shares.
SERIES C -- Each share of Series C preferred stock is convertible into one
share of common stock at the option of the holder or upon the vote of holders of
two-thirds of the Series C preferred stock outstanding. The Series C preferred
stock is required to be converted upon a qualified initial public offering of at
least $10 million with a Company valuation of at least $35 million or a public
rights offering of the Company to shareholders of Safeguard. The Series C shares
are entitled to a liquidation preference before any distribution to common
stockholders equal to the greater of (a) $5.00 per share plus an additional $.50
for each year from September 30, 1998 or until the date of distribution of
available assets or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to common stock prior to
liquidation. Series C shares are on parity with Series A shares.
(5) INCOME TAXES
Prior to June 30, 1997 (incorporation), the Company operated as a division
of XL Vision and as such was not directly subject to income taxes. The results
of the Company's operations were included in the consolidated income tax return
of XL Vision for the period from May 1, 1997 through June 29, 1997. As of
September 30, 1998 the Company has net operating loss carryforwards for federal
income tax purposes of approximately $10,275,000 which are available to offset
future federal taxable income, if any, through 2018.
In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing prior to a
change in control in the Company may be limited.
F-10
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets and
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................ $ 960,000 $ 4,090,000
Intangible assets, net of amortization......... 69,000 11,082,000
Accrued liabilities and other deferred tax
assets...................................... 13,000 298,000
---------- ------------
Deferred tax assets......................... 1,042,000 15,470,000
Deferred tax liability:
Depreciation................................... (6,000) (4,000)
---------- ------------
Total....................................... 1,036,000 15,466,000
Less valuation allowance for net deferred tax
assets......................................... (1,036,000) (15,466,000)
---------- ------------
Deferred tax asset (liability), net......... $ -- $ --
========== ============
</TABLE>
The difference between the "expected" tax benefit (computed by applying the
federal corporate income rate of 34% to the loss before income taxes) and the
actual tax benefit is primarily due to the effect of the valuation allowance.
(6) STOCK PLAN
In September 1997, the Company adopted an equity compensation plan (the
"Plan") pursuant to which the Company's Board of Directors may grant shares of
common stock or options to acquire common stock to certain directors, advisors
and employees. As of September 30, 1998, the Plan authorizes grants of shares or
options to purchase up to 2,400,000 shares of authorized but unissued common
stock. Stock options granted have a maximum term of ten years and have vesting
schedules which are at the discretion of the Compensation Committee of the Board
of Directors and determined on the effective date of the grant. The Plan allows
the Compensation Committee to change a vesting schedule after the date of grant
and allows for the exercise prior to vesting.
In May 1998, the Compensation Committee of the board of directors of the
Company approved the exercise of outstanding stock options for certain
executives of the Company prior to their scheduled vesting date. Any shares
issued pursuant to an exercise prior to the scheduled vesting date are subject
to restrictions on transfer until such shares are vested, and in the event the
executive ceases to be employed by the Company prior to vesting of the shares
obtained upon exercise, the Company may repurchase any unvested shares at the
lesser of the exercise price and the then fair value of the common shares.
A total of 750,000 shares were granted to officers as compensation out of
the Plan in 1997.
F-11
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) STOCK PLAN -- (CONTINUED)
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE AVERAGE CONTRACTUAL
PRICES EXERCISE LIFE
SHARES PER SHARE PRICE (IN YEARS)
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Balance outstanding June 30, 1997
(incorporation)............................. -- $ -- $ --
Granted..................................... 286,250 .80 .80
--------
Balance outstanding December 31, 1997......... 286,250 $ .80 $ .80 9.92
======== ========== ===== ====
Granted..................................... 854,175 $1.00-5.00 $1.93
Exercised................................... (81,250) .80-2.00 1.11
Canceled.................................... (157,750) .80-1.00 .81
--------
Balance outstanding September 30, 1998........ 901,425 $ .80-5.00 $1.85 9.60
======== ========== ===== ====
</TABLE>
At December 31, 1997 and September 30, 1998, there were -0- and 34,333
shares exercisable, respectively. The weighted average exercise price for shares
exercisable at September 30, 1998 was $1.99.
At December 31, 1997 and September 30, 1998, 588,750 and 667,325 shares
were available for grant under the Plan, respectively.
The per share weighted-average fair value of stock options granted during
1997 and 1998 was $-0- and $1.04, respectively, on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions for 1997 and 1998 respectively: expected dividend yield 0% and 0%,
risk-free interest rate of 5.94% and 5.42%, and an expected life of 6.75 and
4.80 years. No volatility was assumed due to the use of the Minimum Value Method
of computation for options issued by the Company prior to becoming a public
entity as prescribed by SFAS No. 123.
All stock options granted through December 31, 1997 had been granted to
directors or employees. The Company applies APB Opinion No. 25 for issuances to
directors and employees in accounting for its Plan. Accordingly, compensation
cost of $-0- and $15,484 in 1997 and 1998, respectively, has only been
recognized in the financial statements for stock options which were issued below
fair market value to employees and options issued to a consultant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss for
the nine months ended September 30, 1998 would have increased to the pro forma
amounts indicated below:
<TABLE>
<S> <C>
Net loss as reported..................................... 35,440,439
Pro forma net loss....................................... 35,472,472
Net loss per share as reported........................... $(6.98)
Pro forma net loss per share............................. $(6.99)
</TABLE>
Under SFAS No. 123, the Company's 1997 net loss would not have increased
since the exercise price of the options was significantly greater than the fair
market values on the dates of the grants.
F-12
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) RELATED PARTY TRANSACTIONS
Administrative Services Fee. Prior to January 1998, personnel and other
administrative services were provided by XL Vision and allocated to Who? Vision.
Effective January 1, 1998, the Company entered into an administrative services
agreement with XL Vision which allows for cost-based administrative charges
based upon actual hours incurred. Administrative service fees incurred between
May 1, 1997 (inception) and December 31, 1997 and for the nine months ended
September 30, 1998 were approximately $420,000 and $432,000, respectively.
Management Services Fee. Effective May 18, 1998, the Company entered into
an agreement which requires accrual of a management services fee based upon a
percentage of gross revenues. The fee for administrative support services,
including management consultation, investor relations, legal services and tax
planning, is payable monthly to XL Vision and Safeguard Scientifics, Inc., the
majority shareholder of XL Vision, based upon an aggregate of 1.5% of gross
revenues subject to an annual minimum of $100,000 and an annual limit of
$300,000. The fee is accrued monthly but is only payable in months during which
the Company has achieved positive cash flow from operations. The agreement
extends through May 18, 2003 and continues thereafter unless terminated by any
party.
Amounts Due to XL Vision. As of December 31, 1997 and September 30, 1998,
the Company owed XL Vision $2,728,448 and $6,526,383, respectively. The advances
from XL Vision as of December 31, 1997 were made pursuant to a loan agreement
entered into in November 1997 and as of September 30, 1998 were made pursuant to
such loan agreement and a note payable issued on January 14, 1998. The loan
agreement bears interest at prime plus 1% (9.5% at December 31, 1997 and 9.25%
at September 30, 1998). The note payable bears interest at 7%. Intercompany
interest charges for the period from May 1, 1997 (inception) through June 29,
1997, the period from June 30, 1997 (incorporation) through December 31, 1997
and the nine months ended September 30, 1998 were $1,216, $74,499 and $366,041,
respectively.
The average outstanding balance due to XL Vision for the period from May 1,
1997 (inception) through June 29, 1997, the period from June 30, 1997
(incorporation) to December 31, 1997 and the nine months ended September 30,
1998 was $51,980, $1,563,845 and $6,280,573, respectively. An analysis of
amounts due to XL Vision is summarized as follows:
<TABLE>
<S> <C>
Amounts due to XL Vision at May 1, 1997..................... $ --
Allocation of costs and funding of working capital to the
Company................................................ 125,698
Consideration for 1,250 shares of common stock at June 30,
1997................................................... (10)
-----------
Amount due to XL Vision at June 30, 1997 (incorporation).... 125,688
Allocation of costs and funding of working capital to the
Company................................................ 2,856,157
Consideration for 4,223,281 shares of common stock issued
to XL Vision........................................... (253,397)
-----------
Amounts due to XL Vision at December 31, 1997............... 2,728,448
Allocation of costs and funding of working capital to the
Company................................................ 6,346,816
Transfer of technology (note 10).......................... 10,000,000
Cash transferred to XL Vision............................. (12,548,881)
-----------
Amounts due to XL Vision at September 30, 1998.............. $ 6,526,383
===========
</TABLE>
F-13
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) RELATED PARTY TRANSACTIONS -- (CONTINUED)
Technology Fee. On January 14, 1998, the Company entered into an agreement
with XL Vision for the transfer of certain technology that will be used by the
Company in the sale of its products for $10,000,000. The Company expensed the
cost of this technology as in-process research and development expense during
the nine months ended September 30, 1998.
(8) COMMITMENTS AND CONTINGENCIES
Agreement with The Phoenix Group, Inc. On November 5, 1997, the Company
entered into a software license agreement with The Phoenix Group, Inc. The
agreement provides for the Company to buy up to a total of 55.1 million licenses
through December 31, 2002 with one year renewal terms thereafter. The agreement
includes an upfront payment of $200,000 and issuance of 62,500 shares (at $.06
per common share) of the Company's common stock. As a result of this agreement,
the Company recognized $203,750 of research and development expenses for the
period from June 30, 1997 (incorporation) through December 31, 1997.
The agreement also contains a provision which requires the Company to issue
additional common stock to The Phoenix Group, Inc. equal to one-half of one
percent (0.5%) of the number of issued and outstanding shares of the Company's
combined common and preferred stock that exceeds 12,500,000 shares. During the
nine months ended September 30, 1998, there were 29,542 additional shares
issuable to The Phoenix Group, Inc. based upon this provision. The Company
recognized expense of $109,292 based upon the fair value of the shares on the
date they were issuable, related to the issuance of these shares as additional
research and development expense during the nine months ended September 30,
1998.
Shares issued to The Phoenix Group, Inc. are summarized as follows:
<TABLE>
<CAPTION>
FAIR
GRANTS OF VALUE OF
COMMON SHARES AT AMOUNT
DATE TRIGGERING EVENT STOCK ISSUANCE EXPENSED
- ---- ---------------- --------- --------- --------
<S> <C> <C> <C> <C>
November 5, 1997........ Original Agreement 62,500 $ .06 $ 3,750
January 14, 1998........ Issuance of Series A Preferred Stock 3,667 .25 917
June 3, 1998............ Issuance of Series B Preferred Stock 7,000 2.00 14,000
September 30, 1998...... Issuance of Series C Preferred Stock 18,875 5.00 94,375
------ --------
Total..................................................... 92,042 $113,042
====== ========
</TABLE>
Voluntary Employee Savings 401(k) Plan. The Company established a
voluntary employee savings 401(k) plan in 1997 which is available to all
full-time employees 21 years or older. The plan provides for a matching by the
Company of the employee's contribution to the plan for 50% of the first 6% of
the employee's annual compensation. The Company's matching contributions were
approximately $14,000 for the period from May 1, 1997 (inception) through
December 31, 1997 and $50,692 for the nine months ended September 30, 1998.
Lease Commitments. On January 8, 1998, the Company entered into a five
year lease for office space beginning May 18, 1998. The lease provides for a
monthly base rent of approximately $22,000 and for allocations of direct expense
charges for building upkeep, maintenance and property taxes.
(9) STOCK SPLIT
On January 14, 1998, the Company authorized a five-for-four common stock
split. Stock options outstanding and common shares outstanding have been
adjusted to retroactively reflect the effect of this stock split.
F-14
<PAGE>
WHO? VISION SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) MAJOR SUPPLIERS AND DISTRIBUTORS
On July 1, 1998 and July 16, 1998, the Company finalized an agreement with
a Taiwanese company, Silitek Corporation, to serve as a contract manufacturer of
the Company's products.
The Company has no minimum purchase requirements under its contract
manufacturing agreement with Silitek Corporation.
On July 1, 1998, the Company finalized separate distribution agreements
with a Taiwanese company, Silitek Corporation and a related party, Integrated
Visions, Inc. Pursuant to these agreements, these companies will purchase
products from the Company and integrate them into other products to be sold
through various channels.
(11) TECHNOLOGY TRANSFER AGREEMENTS
On September 15, 1998, the Company designated 3,800,000 shares of preferred
stock as Series C and issued those shares for technology acquired as discussed
below.
Effective September 30, 1998, the Company reached agreements with
Koninklijke Philips Electronics, N.V. ("Philips") for the transfer of certain
technology from Philips, related to the development of advanced fingerprint
module devices, valued at $18,500,000 and in exchange issued 3,700,000 shares of
Series C preferred stock.
The issuance of Series C preferred stock included a buyback provision to
repurchase 600,000 preferred shares at $5.00 per share which is triggered if the
Company's IPO is not declared effective on or before March 31, 1999. The value
of the buyback provision of $3,000,000 is reflected in the accompanying balance
sheet outside of stockholders' equity as "equity purchase option."
The Company also incurred fees related to this transaction which totaled
$500,000. The Company issued 75,000 shares of Series C preferred stock to
satisfy $375,000 of this obligation, the remaining $125,000 of this obligation
is included in accounts payable in the accompanying balance sheet as of
September 30, 1998.
The Company is also obligated to pay Philips a quarterly royalty of 5% of
net sales of the Company's products.
The technology acquired from Philips is related to a project to develop a
fingerprint sensor based on processes and patents that were under development
and work to be contracted out to third parties. If the Company is successful in
completing research and developing such a sensor, it has the opportunity to
purchase certain components that would be used in such a sensor on an exclusive
basis from Philips. The Company's exclusivity provision is subject to certain
conditions including satisfying specific minimum volume purchase requirements of
the Philips components, honoring the buyback provision, if invoked, as described
above, and satisfying certain development milestones. The technology acquired
from Philips is incomplete and under development and requires significant
additional research and development. If the Company is unsuccessful in its
development, the agreement with Philips to supply components, the non-exclusive
licenses granted by Philips, which are limited to the fingerprint module field
of use, or the agreement under which Philips would purchase components from the
Company would have no value or alternative future use to the Company.
Accordingly, the Company has expensed the costs related to this technology
has been expensed as in-process research and development expense in the nine
months ended September 30, 1998.
F-15
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR
THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 3
Risk Factors........................ 8
The Offering........................ 18
Federal Income Tax Consequences..... 22
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Financial Data............. 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 27
Business............................ 32
Management.......................... 45
Certain Transactions................ 52
Principal and Selling
Stockholders...................... 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 58
Underwriting........................ 60
Legal Matters....................... 62
Experts............................. 62
Additional Information.............. 62
Index to Financial Statements....... F-1
------------------------------
UNTIL , 1999 (25 DAYS AFTER THE EXPIRATION DATE), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
6,825,000 SHARES
(AND RIGHTS TO ACQUIRE
UP TO 6,500,000 OF SUCH SHARES)
WHO? VISION
SYSTEMS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ROBERT W. BAIRD & CO.
INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and the
underwriters' non-accountable expense allowance) payable in connection with this
offering of the rights and the sale of the Common Stock offered hereby are as
follows:
Securities and Exchange Commission registration fee......... $ 11,026
NASD filing fee............................................. 4,237
Nasdaq filing fee........................................... 100,000
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 200,000
Blue Sky fees and expenses (including legal fees)........... 25,000
Transfer agent and rights agent and registrar fees and
expenses.................................................. 25,000
Miscellaneous............................................... 209,737
--------
Total............................................... $950,000
All expenses are estimated except for the SEC fee and the NASD fee.
ITEM 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation permits indemnification to
the fullest extent permitted by Delaware law. The Registrant's By-laws require
the Registrant to indemnify any person who was or is an authorized
representative of the Registrant, and who was or is a party or is threatened to
be made a party to any corporate proceeding, by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal third party proceeding (including
any action or investigation which could or does lead to a criminal third party
proceeding) had no reasonable cause to believe such conduct was unlawful. The
Registrant shall also indemnify any person who was or is an authorized
representative of the Registrant and who was or is a party or is threatened to
be made a party to any corporate proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such corporate action if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Registrant, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Registrant unless and only to the extent that the
Delaware Court of Chancery or the court in which such corporate proceeding was
pending shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Such
indemnification is mandatory under the Registrant's By-laws as to expenses
actually and reasonably incurred to the extent that an authorized representative
of the Registrant has been successful on the merits or otherwise in defense of
any third party or corporate proceeding or in defense of any claim, issue or
matter therein. The determination of whether an individual is entitled to
indemnification may be made by a majority of disinterested directors,
independent legal counsel in a written legal opinion or the stockholders.
Delaware law also permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its favor.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public
II-1
<PAGE>
policy as expressed in that Act and is therefore unenforceable. The Registrant
expects to obtain a directors and officers liability insurance policy prior to
the effective date of this Registration Statement.
The Standby Underwriting Agreement provides that the underwriter is
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of Standby
Underwriting Agreement which will be filed by amendment as Exhibit 1.1 hereto.
ITEM 15. Recent Sales of Unregistered Securities
In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:
Since its inception, the Company has issued to employees and certain other
persons (i) an aggregate of 5,148,823, shares of Common Stock, including 606,250
shares issued pursuant to the Company's 1997 Equity Compensation Plan, (ii) an
aggregate of 8,258,881 shares of Series A Preferred Stock, at a price of $1.00
per share and (iii) an aggregate of 1,400,000 shares of Series B Preferred
Stock, at a price of $3.00 per share. All of such sales were made under the
exemption from registration provided under Section 4(2) of the Act.
Pursuant to the Company's 1997 Equity Compensation Plan, the Company has
granted since inception (i) options to purchase a total of 1,030,156 shares of
Common Stock at a weighted average exercise price of $2.43 per share and (ii)
750,000 shares of restricted Common Stock to its employees and certain other
persons. Options for 75,000 shares have been exercised. For a more detailed
description of the Company's Equity Compensation Plan, see "Management -- Equity
Compensation Plan" in this registration statement. In granting the options and
selling the underlying securities upon exercise of the options, the Company is
relying upon exemptions from registration set forth in Rule 701 and Section 4(2)
of the Act.
On September 30, 1998 the Company issued an aggregate of 3,775,000 shares
of Series C Preferred Stock to third party entities in consideration of the
transfer of technology and certain other obligations. Such shares were valued at
$5.00 per share. The issuance of such shares was made under the exemption from
registration provided under Section 4(2) of the Act.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(A) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1.1 Form of Standby Underwriting Agreement.**
3.1 Amended and Restated Certificate of Incorporation of the
Company.**
3.2 Amended and Restated By-laws of the Company.**
5.1 Opinion of Morgan, Lewis & Bockius LLP.***
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax
matters.***
10.1 1997 Equity Compensation Plan of the Company.**
10.2 Lease Agreement, dated as of January 8, 1998, between the
Company and Olen Properties Corp.**
10.5 Manufacturing Agreement, dated as of July 1, 1998, between
the Company and Silitek Corporation.**+
10.6 Distribution Agreement, dated as of July 1, 1998, between
the Company and Silitek Corporation.**+
10.7 Administrative Services Agreement, dated as of May 21, 1998,
among the Company, XL Vision, and Safeguard.**
10.8 Direct Charge Administrative Services Agreement, dated as of
December 9, 1997, between the Company and XL Vision.**
10.9 Value Added Reseller Agreement, dated as of July 9, 1998,
between the Company and Integrated Visions.**+
10.10 Purchase Agreement, dated as of September 30, 1998, between
the Company and Philips Electronics North America
Corporation.**+
10.11 Supply Agreement, dated as of September 29, 1998, between
the Company and Philips Flat Panel Display Co. B.V.**+
10.12 Technology Transfer Agreement, dated as of September 30,
1998, between the Company and Philips Flat Panel Display Co.
B.V.**+
10.13 Technology Services Agreement, dated as of September 30,
1998, between the Company and Philips Flat Panel Display Co.
B.V.**+
10.14 License Agreement, dated as of September 30, 1998 between
the Company and Koninklijke Philips Electronics N.V.**+
10.15 Professional Services Framework Agreement, dated as of
September 30, 1998, among the Company, Cadence Design
Systems Limited and Philips Flat Panel Display Co. B.V.**+
II-3
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.16 Investment Agreement, dated as of September 30, 1998,
between the Company and Koninklijke Philips Electronics
N.V.**
10.17 Services and Stock Purchase Agreement, dated as of September
30, 1998, among the Company, Philips Flat Panel Display Co.
B.V. and A3 Ventures Incorporated.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of KPMG LLP*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).***
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 8.1).***
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.*
99.1 Consent of Dataquest*
99.2 Consent of Forrester*
- ------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
+ Confidential Treatment requested. The entire agreement
will be filed separately with the Securities and
Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement; and
II-4
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriter at the closing specified in the standby underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriter during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriter, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriter is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Lake Forest,
California on January 22, 1999.
WHO? VISION SYSTEMS, INC.
By: /s/ Alexander G. Dickinson
---------------------------------
Alexander G. Dickinson,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Alexander G. Dickinson Chief Executive Officer and Director January 22, 1999
- ------------------------------- (Principal Executive Officer)
Alexander G. Dickinson, Ph.D.
/s/ JAMES W. KERRIGAN Chief Financial Officer (Principal January 22, 1999
- ------------------------------- Financial and Accounting Officer)
James W. Kerrigan
* Chairman of the Board January 22, 1999
- -------------------------------
John S. Scott, Ph.D.
* Director January 22, 1999
- -------------------------------
Edward Anderson
* Director January 22, 1999
- -------------------------------
Charles A. Root
* Director January 22, 1999
- -------------------------------
Walter W. Buckley, III
* Director January 22, 1999
- -------------------------------
James Ionson
* Director January 22, 1999
- -------------------------------
Alex W. Hart
* Director January 22, 1999
- -------------------------------
Christopher Moller
*By: /s/ JAMES W. KERRIGAN
-------------------------
James W. Kerrigan
as Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- -------------- ----------- --------
<C> <S> <C>
1.1 Form of Standby Underwriting Agreement.**
3.1 Amended and Restated Certificate of Incorporation of the
Company.**
3.2 Amended and Restated By-laws of the Company.**
5.1 Opinion of Morgan, Lewis & Bockius LLP.***
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax
matters.***
10.1 1997 Equity Compensation Plan of the Company.**
10.2 Lease Agreement, dated as of January 8, 1998, between the
Company and Olen Properties Corp.**
10.5 Manufacturing Agreement, dated as of July 1, 1998, between
the Company and Silitek Corporation.**+
10.6 Distribution Agreement, dated as of July 1, 1998, between
the Company and Silitek Corporation.**+
10.7 Administrative Services Agreement, dated as of May 21, 1998,
among the Company, XL Vision, and Safeguard.**
10.8 Direct Charge Administrative Services Agreement, dated as of
December 9, 1997, between the Company and XL Vision.**
10.9 Value Added Reseller Agreement, dated as of July 9, 1998,
between the Company and Integrated Visions.**+
10.10 Purchase Agreement, dated as of September 30, 1998, between
the Company and Philips Electronics North America
Corporation.**+
10.11 Supply Agreement, dated as of September 29, 1998, between
the Company and Philips Flat Panel Display Co. B.V.**+
10.12 Technology Transfer Agreement, dated as of September 30,
1998, between the Company and Philips Flat Panel Display Co.
B.V.**+
10.13 Technology Services Agreement, dated as of September 30,
1998, between the Company and Philips Flat Panel Display Co.
B.V.**+
10.14 License Agreement, dated as of September 30, 1998, between
the Company and Koninklijke Philips Electronics N.V.**+
10.15 Professional Services Framework Agreement, dated as of
September 30, 1998, among the Company, Cadence Design
Systems Limited and Philips Flat Panel Display Co. B.V.**+
10.16 Investment Agreement, dated as of September 30, 1998,
between the Company and Koninklijke Philips Electronics
N.V.**
</TABLE>
<PAGE>
<TABLE>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- -------------- ----------- --------
<C> <S> <C>
10.17 Services and Stock Purchase Agreement, dated as of September
30, 1998, among the Company, Philips Flat Panel Display Co.
B.V. and A3 Ventures Incorporated.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of KPMG LLP*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).***
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 8.1).***
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.*
99.1 Consent of Dataquest.*
99.2 Consent of Forrester.*
</TABLE>
- ------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
+ Confidential treatment requested. The entire agreement will
be filed separately with the Securities and Exchange
Commission.
Consent of Independent Certified Public Accountants
The Board of Directors
Who? Vision Systems, Inc.:
We consent to the use of our report dated November 19, 1998, included herein
and to the references to our firm under the headings "Selected Financial Data"
and "Experts" in the prospectus.
/s/ KPMG LLP
---------------------
Orlando, Florida
January 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67
<PP&E> 844
<DEPRECIATION> 81
<TOTAL-ASSETS> 1,104
<CURRENT-LIABILITIES> 7,949
<BONDS> 0
0
134
<COMMON> 51
<OTHER-SE> (10,031)
<TOTAL-LIABILITY-AND-EQUITY> 1,104
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 35,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366
<INCOME-PRETAX> (35,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,440)
<EPS-PRIMARY> (6.98)
<EPS-DILUTED> (6.98)
</TABLE>
Exhibit 99.1
[Gartner Logo] 251 River Oaks Parkway
San Jose, CA 95134-1913
GartnerGroup
408.468.8000
408.954.1730
http://www.gartner.com
June 10, 1998
Dear Katherine,
As per our conversation, Dataquest grants Who?Vision Systems, Inc.
permission to use the information contained in the "Personal Computers 1998
Worldwide Forecast" and the press release entitled "PC Penetration Continues to
Swell in U.S. Households" in its SEC prospectus with the mutual understanding
that Dataquest will be cited as the source of the information.
Sincerely,
/s/ Mark L. Pon
- -------------------------
Mark L. Pon
Direct Products Consultant
[LOGO]
January 21, 1999
To Whom It May Concern,
Forrester Research, Inc. has verified that the information contained in the
attached paragraph is accurate and reflects Forrester's views. Forrester
Research thereby gives Who? Vision Systems, Inc. permission to use this
information in its required SEC filings. If you have any questions or need
additional information, please feel free to contact me at the number below.
/s/ Michael Shirer
- -----------------------------
Michael Shirer
Public Relations Manager
Forrester Research, Inc.
617-806-6011
Attachment (1)
