UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-30090
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IMAGIS TECHNOLOGIES INC.
(Name of small business issuer in its charter)
British Columbia, Canada Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1300 - 1075 West Georgia Street
Vancouver, British Columbia V6E 3C9
(Address of principal executive offices) (Zip Code)
(604) 684-2449
(Issuer's telephone number, including area code)
_________________________
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, no par
value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $722,193
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of March 27, 2000. $47,304,457
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IMAGIS TECHNOLOGIES INC.
FORM 10-KSB
For the Year Ended December 31, 1999
INDEX
PART I 3
Item 1. Description of Business 3
Item 2. Description of Property 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II 16
Item 5. Market for Common Equity and Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis 17
Item 7. Financial Statements 20
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 21
PART III 21
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 21
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners and Management 24
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits and Reports on Form 8-K 26
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NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information contained herein
constitutes "forward-looking statements," including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects,"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results or achievements of the
Registrant to be materially different from any future results or achievements
of the Registrant expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, the following: the Registrant's limited
operating history, history of losses, risks involving new product development,
competition, management of growth and integration, risks of technological
change, the Registrant's dependence on key personnel, marketing relationships
and third party suppliers, the Registrant's ability to protect its intellectual
property rights and the other risks and uncertainties described under
"Description of Business - Risk Factors" in this Form 10-KSB. Certain of the
forward-looking statements contained in this annual report are identified with
cross-references to this section and/or to specific risks identified under
"Description of Business - Risk Factors".
CURRENCY AND EXCHANGE RATES
The following table sets out the exchange rates for one Canadian dollar ("Cdn$")
expressed in terms of one United States dollar ("US$") in effect at the end of
the following period, and the average exchange rates (based on the average of
exchange rates on the last day of each month in such periods) and the range of
high and low exchange rates for such periods.
U.S. Dollars Per Canadian Dollar
Fiscal Year Ended December 31,
1999 1998 1997 1996 1995
End of period 0.6925 0.6504 0.6999 0.7301 0.7323
High for period 0.6744 0.7105 0.7487 0.7513 0.7527
Low for period 0.6925 0.6341 0.6945 0.7235 0.7023
Average for period 0.6535 0.6714 0.7197 0.7329 0.7305
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York. The noon rate of exchange on December 31, 1999 as
reported by the United States Federal Reserve Bank of New York for the
conversion of Canadian dollars into United States dollars was Cdn$1.00 =
US$0.6925. Unless otherwise indicated in this annual report on Form 10-KSB
(the "Annual Report" or "Form 10-KSB"), all references herein are to Canadian
dollars.
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PART I
Item 1. Description of Business.
History of the Company
Incorporation/Name Changes/Initial Business
Imagis Technologies Inc. ("Imagis" or the "Company"), a British Columbia
corporation, and its wholly-owned subsidiary, Imagis Cascade Technologies Inc.
("Imagis Cascade"), a British Columbia corporation, is in the business of
developing and marketing computer software applications for the law
enforcement, security and gaming industries.
Imagis was incorporated on March 23, 1998, as a British Columbia corporation
under the name 561648 B.C. Ltd., and commenced trading on the Vancouver Stock
Exchange (the "VSE") on September 29, 1998 as a Venture Capital Pool ("VCP").
A VCP is a "blind pool" company formed by qualified individuals that raises
funds through an initial public offering ("IPO") of securities, the proceeds
of which must be used primarily to investigate business opportunities for
acquisition by the VCP. As a VCP, Imagis' sole business from the time of
incorporation was to investigate business opportunities with a view to
completing a Qualifying Transaction under the applicable rules of the VSE. A
Qualifying Transaction is a transaction whereby the VCP: (a) issues or makes
issuable securities representing more than 25% of its securities issued and
outstanding immediately prior to the issuance in consideration for the
acquisition of significant assets; (b) enters into an arrangement,
amalgamation, merger or reorganization with another issuer with significant
assets, whereby the ratio of securities which are distributed to the security
holders of the VCP and the other issuer results in the security holders of the
other issuer acquiring control of the resulting entity; or (c) otherwise
acquires "significant assets", but excludes a transaction whereby, prior to
completion of the Qualifying Transaction, a VCP issues for cash securities
representing more than 25% of its securities issued and outstanding
immediately prior to the issuance. "Significant assets" means assets other
than cash or securities of another issuer which, when acquired by the VCP,
results in the VCP meeting the minimum listing requirements set by the VSE for
a venture company, in accordance with the applicable rules of the VSE. On
July 6, 1998 Imagis changed its name from 561648 B.C. Ltd. to Colloquium
Capital Corp.
On February 23, 1999, Imagis acquired all of the outstanding shares of Imagis
Cascade, thereby completing a Qualifying Transaction and becoming classified
as a venture company by the VSE. As a result of the acquisition, the Company
changed its name from Colloquium Capital Corp. to Imagis Technologies Inc. on
February 25, 1999.
Acquisition of Imagis
On February 23, 1999, Imagis acquired one hundred percent (100%) of the shares
in the capital of Imagis Cascade pursuant to a Share Purchase Agreement among
Imagis, Imagis Cascade and the former shareholders of Imagis Cascade (the
"Former Imagis Shareholders") dated December 14, 1998 (the "Imagis
Acquisition"). Imagis paid a purchase price of $2,632,000, plus contingent
additional consideration of up to $400,000 (see discussion of contingency
below) to the Former Imagis Shareholders, allocated as described below. The
Former Imagis Shareholders were Pacific Cascade Consultants Ltd. ("Pacific"),
Sonora Logging Limited ("Sonora") and 385078 B.C. Ltd. ("B.C. Ltd"). Pacific,
a Canadian company is owned by FWC Holdings Ltd., an entity controlled by
Frederick W. Clarke, a current director of Imagis, and Andrew Amanovich, the
current Chief Technology Officer of Imagis. Sonora, a private Canadian
company, is controlled by Pamela Markie Clarke, the daughter of Mr. Clarke.
B.C. Ltd., a private Canadian company, has no other affiliation with Imagis
other than as a former shareholder of Imagis Cascade.
Under the terms of the Share Purchase Agreement, the parties thereto agreed to
the following:
(a) Imagis collectively paid Pacific, Sonora and B.C. Ltd. $2,632,000, plus
contingent additional consideration of up to $400,000. The purchase price was
paid to the Former Imagis Shareholders as follows:
(i) $100,000 to Pacific, by application of the sum of $100,000 paid by
Imagis to Imagis Cascade on behalf of the Former Imagis Shareholders pursuant
to a Confidentiality and Standstill
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Agreement among Imagis, Imagis Cascade and the Former Imagis Shareholders,
dated October 6, 1998, in part payment of the purchase price (which amount
has been applied),
(ii) $1,632,000 by allotment and issue to the Former Imagis Shareholders and
First Capital Invest Corp. ("FCIC") (a corporation to which the Former Imagis
Shareholders were indebted in connection with a $350,000 bridge loan provided
to Imagis Cascade by FCIC) of 3,400,000 shares of common stock of Imagis (the
"Shares") at $0.48 per Share allocated as follows:
(A) 1,764,706 Shares to Pacific,
(B) 441,176 Shares to Sonora,
(C) 294,118 Shares to B.C. Ltd. and
(D) 900,000 Shares to FCIC
The Shares are subject to a one-year hold period;
(iii) $900,000 by certified cheque to be paid to Pacific on or before April
30, 1999; $150,000 of this amount has been paid through the subscription by
Pacific on March 19, 1999 on a private placement basis for 267,857 Shares at
$0.56 per Share, and the balance of which was paid and accepted on May 6,
1999; and
(iv) up to $400,000 payable to Pacific if, as and when, certain warrants
issued by Imagis are exercised to raise up to $400,000 net to Imagis'
treasury.
(b) In consideration for renouncing his right to acquire up to a 6% equity
interest in Imagis Cascade, Imagis issued a warrant to purchase 400,000 Shares
at an exercise price of $1.25 per share to Iain Drummond (the "Drummond
Warrant"). See "ITEM 6 - EXECUTIVE COMPENSATION".
(c) In consideration for locating and negotiating an employment agreement
between Imagis and Iain Drummond, Imagis issued a warrant to purchase 24,000
Shares at an exercise price of $1.25 per Share to Armitage Associates Ltd.
(the "Armitage Warrant").
History of Business
Imagis' wholly owned subsidiary, Imagis Cascade, acquired substantially all of
its current assets pursuant to two technology purchase agreements, dated March
6, 1998, between Imagis Cascade, Pacific and B.C. Ltd. Pursuant to the
purchase agreements, Pacific and B.C. Ltd. became the holders of all of the
issued and outstanding shares of Imagis Cascade. Pacific received 3,000,000
common shares of Imagis Cascade and B.C. Ltd. received 400,000 common shares
of Imagis Cascade. Pacific subsequently transferred 600,000 Imagis Cascade
common shares to Sonora.
Pacific was established in 1989 by Andrew Amanovich, Imagis' Chief Technology
Officer and Frederick Clarke, a director of Imagis. Pacific's core business
was the engineering of complex timber harvesting systems, the management of
map-based data and the development of 3D landscape visualization technology.
The Imagis Cascade technology and Imagis' initial customer base was developed
originally by B.C. Ltd., a company incorporated in 1990 and founded by Penny
Walker of Victoria, B.C. B.C. Ltd. was a software developer and reseller in
the area of geographical information systems and remote sensing services for
the natural resources industry. B.C. Ltd. also developed and marketed several
software systems to manage digital images and recognized the commercial
opportunity for software tools that manage digital image databases.
In July 1994, Pacific entered into a strategic alliance with B.C. Ltd. and
loaned B.C. Ltd. funds to provide working capital in exchange for an option to
acquire shares. The two companies worked cooperatively on the development of
several software projects. In 1995, Pacific acquired the operations and
revenues of B.C. Ltd., as well as its intellectual property, the rights to the
developed products, products under development and source code.
Pursuant to two technology purchase agreements dated March 6, 1998, Pacific
and B.C. Ltd. sold to Imagis Cascade all rights to the business that is now
carried on by Imagis and the intellectual property. Under these agreements,
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Pacific and B.C. Ltd. became the holders of all of the issued and outstanding
shares of Imagis Cascade. The terms of these technology purchase agreements
were as follows:
- - - Agreement between B.C. Ltd. and Imagis Cascade: B.C. Ltd. sold its business
and technology to Imagis Cascade for a purchase price of $600,000 which paid
by issuance of 400,000 shares of Imagis Cascade at a price of $1.50 per share.
- - - Agreement between Pacific and Imagis Cascade: Pacific sold its business and
technology to Imagis Cascade for a purchase price of $1.5 million which paid
by issuance of 3,000,000 shares of Imagis Cascade at a price of $0.50 per
share plus a royalty equal to 5% of gross sales of the software products (the
"5% Royalty").
The technology purchase agreements transferred the technology associated with
CABS, ID-Inmate, Fraud-ID, ENVISAGE, ELMS AND AIREIS to Imagis Cascade,
including all source code, object code, link libraries, applications function
calls, file structures, screen layouts, hardware integration routines and
documentation for both current and past releases. All relevant documentation,
including manuals and brochures used in operation, manufacturing, maintenance
and marketing of the products was included.
As part of the acquisition by Imagis of all the issued and outstanding shares
of Imagis Cascade, Pacific agreed to cancel the 5% Royalty.
The technology purchase agreements described above transferred the technology
associated with CABS, ID-Inmate, Fraud-ID, ENVISAGE, ELMS AND AIREIS to Imagis
Cascade, including all source code, object code, link libraries, applications
function calls, file structures, screen layouts, hardware integration routines
and documentation for both current and past releases.
Imagis' Chief Technology Officer, Andrew Amanovich and its Chief Engineer,
David Lutes, who was instrumental in developing the original Imagis Cascade
product line, continue their work in the research, development, applications
of all software and the core technology within Imagis' subsidiary, Imagis
Cascade.
Business of the Company
General Overview
Imagis develops, markets, implements and supports computer software
applications for digital identification and image management to clients in the
law enforcement and security industries. Imagis' principal product is the
Computerized Arrest and Booking System ("CABS") which is used by law
enforcement agencies for compiling information associated with booking a
suspect, including capturing images of the person and any identifying marks.
In addition, Imagis has developed, markets, implements and supports other
computer software applications for the law enforcement industry, including
ID-INMATE, an integrated information and video imaging system for use in
corrections facilities admission and discharge, and for the security industry,
namely ENVISAGE, an electronic identification and security access system.
Imagis has also developed a facial recognition system for the law enforcement
and security industries called ID-2000.
Law enforcement agencies face a common challenge of a need for time and cost
efficient arrest and booking systems. Historically, law enforcement agencies
have relied on manual arrest and booking systems. More recently, the law
enforcement industry has begun to recognize the need for automated systems to
increase the efficiency of police officers and to control costs. CABS
substantially reduces the time needed for an officer to process and book
offenders into the judicial system. By removing the "paper and picture"
element from this tedious procedure, Imagis believes that an officer can
process a repeat offender in less than one third the time required by manual
systems. This translates directly into substantial cost savings for police
departments of any size, in addition to the operational benefits that they
gain, such as faster identification of suspects.
Products
Current Products
Imagis' current products are designed to run on PCs under Windows 95, Windows
98, and Windows 2000. The software's graphical user interface is based on
Microsoft ACCESS and the underlying database is built on ORACLE
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RDBMS and SRL SERVER. The software is modular in design, permitting specific
functions to be added to meet individual client preferences.
The current release of CABS is Version 7.0 which provides fast program
execution due to its use of 32-bit program code and specialized code for
enhancing data sharing over wide-area networks. Imagis has integrated its
ID-2000 proprietary facial recognition software, as part of the image analysis
portion of the CABS software. See "Note Regarding Forward Looking
Statements."
CABS - Computerized Arrest & Booking System
CABS is an integrated information and imaging system developed for the Royal
Canadian Mounted Police ("RCMP") and other law enforcement agencies. CABS
currently has separate modules for offenders, non-offenders, staff and
evidence. The offender module automates booking activities and reports, the
production of mugshots and the generation of line-ups. Pictures of criminal
suspects, as well as their marks, scars, tattoos and fingerprints, are all
captured in the offender module of CABS. The non-offender module provides an
electronic database of persons, such as teachers and day-care providers, who
are required to be registered with the RCMP. The staff module provides for
the creation and management of staff identification. The evidence module
provides for electronic management of photographs of evidence obtained in
connection with a criminal arrest.
The CABS system is designed to collect the same information that would be
recorded manually during a traditional booking situation and to store all of
the information and photo images that are required in connection with
arresting and prisoner reports. Compared to manual bookings, CABS offers the
following advantages:
- - - captures more information than manual booking systems and allows the
information to be retrieved quickly from multiple locations;
- - - allows offender information to be used for multiple inquiries and report
generating purposes;
- - - generates automated line-ups based on user-specified criteria;
- - - provides a variety of required reports and other documents with the
offender's photograph;
- - - allows the collection and retrieval of photographs of the offender,
including identifying physical marks such as tattoos, scars and other
markings;
- - - creates a database of offender information for access in the case of
subsequent arrests or for generation of suspect lists;
- - - can be integrated with livescan electronic fingerprinting systems and with
other computer software systems; and
- - - integrates with key dispatch systems, digital composite drawing programs and
digital fingerprint systems to provide a complete police information
management system.
CABS advanced data sharing capabilities allow different authorities to access
decentralised information. Imagis has recently implemented its first regional
data sharing system. This allows RCMP detachments to share live information
entered by their individual detachments. The major advantage of this data
sharing system is that it allows one detachment to search a larger database
containing offender information when booking a suspect, increasing the
probability that the booking officer will discover prior arrests for the same
individual. The RCMP does not retain any ownership interest or residual
rights over the CABS system.
ID-INMATE - Corrections Admission/Discharge System
ID-INMATE is an integrated information and video imaging system developed for
correction agencies. ID-INMATE is a variant of CABS developed to manage
records in corrections agencies, hospitals and other institutions. ID-INMATE
currently has separate modules for the admission and discharge of persons to
and from corrections agencies and for staff records. The admission and
discharge module automates admissions and discharge activities and reports.
It is designed to collect the same information that would be recorded manually
during a traditional admission or discharge situation, providing image capture
of the inmate's face and other physical features, as well as personal effects.
In addition, this module provides automatic line-up creation. The staff
module provides for the creation and management of staff identification using
staff photos to create identification cards and staff photo listings.
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ENVISAGE - Electronic Identification System
ENVISAGE is an electronic identification system developed specifically for the
security market. ENVISAGE enables the electronic production of customised
full-color identification cards. These identification cards can be produced
within minutes and include options such as photographs, graphic images, text,
barcodes, and fingerprints. In addition, ENVISAGE integrates advanced photo
identification capabilities, including signature, single impression
fingerprint, ghosting, and access control. In most cases, ENVISAGE can be
integrated with existing security systems.
ID-2000 - Image Detection and Biometric Facial Recognition
This is the key software product that is positioning Imagis in the biometric
market.
ID-2000 is a facial recognition software system designed for the law
enforcement, gaming and security industries that captures an offender's image,
typically via a video camera and then creates a biometric code that can be
compared to other encoded images in a database. ID-2000 allows an individual
in a database to be identified in seconds, using only an image or photograph
as the search criterion. Matching records will be displayed as a list,
together with their associated thumbnail images. From this, any record can be
selected and full details, together with a full size image, displayed.
Extensive linkages enable the database to be mined to display details of
aliases, known associates, vehicles, etc., as well as images of other
distinguishing features such as marks, scars and tattoos. Where appropriate,
details of previous crimes, gang memberships, etc. can also be displayed.
Markets
CABS has been installed in more than 35 sites in Canada and the United States.
As part of its customer support activities, Imagis has assisted in the
development of a CABS Users Group in British Columbia. Besides serving to
coordinate user requests for new features, the Users Group has assisted in
gaining acceptance of the product by the British of Columbia Association of
Chiefs of Police and led to approval for a pilot project to link Greater
Vancouver mainland police departments into a regional data-sharing system.
The security industry targeted by Imagis consists of organizations
implementing software-based security systems. ENVISAGE and its predecessor
product have been installed in over 60 sites in the U.S. and Canada, including
a number of Revenue Canada offices. This system has been interfaced to
student registration systems on various college and university campuses, as
well as to point-of-sale systems in hospitals, transportation facilities, and
other commercial locations.
Competition
The law enforcement and security software markets are highly competitive and
fragmented, consisting of many fast growing rapidly changing competitors. The
principle competitive factors affecting the market for Imagis' products
include: supplier competency, product functionality, performance and
reliability of technology, depth and experience in distribution and
operations, ease of implementation, rapid deployment, customer service and
price. There are at least twenty-seven companies which have commercially
available products that have some application similarities to Imagis' products
for CABS, ID-INMATE and POSITIVE-ID. Twenty-one of these companies have
products that include arrest and booking or jail management functions and six
of them market facial recognition software. The following software products
compete most directly with CABS and ID-INMATE:
IWS (ImageWare Software)
Smith & Wesson - EBS (Electronic Booking System)
Spillman - BookMate and Jail Management
The Company believes that IWS' installations are across the United States,
including statewide mugshot/booking software installed in Arizona. Smith &
Wesson markets comprehensive software portfolio for use in the law enforcement
and security industries. Spillman's market is primarily located in Utah and
the Pacific Northwestern United States. These companies are likely to be the
most significant competitors to Imagis in their respective geographic areas.
Imagis believes, however, that its strong reference base in Canada will
provide it with a competitive advantage in expanding into new geographic
markets.
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In the area of facial recognition, Miros (TrueFace), Smith & Wesson (ASID -
Automated Suspect Identification System), Vissage Technology (Vissage Gallery)
and Visionics (FaceIt) are companies that have products with application
similarities to ID-2000.
It is also evident that there are large high technology companies with
sophisticated image capturing and processing software, particularly associated
with facial image analysis and recognition. These companies appear to be
focused on other industries where image analysis has commercial,
entertainment, scientific, or medical applications, but they could also enter
the law enforcement and security areas by adding the appropriate software
modules.
Intellectual Property Rights
The Company's success is dependent on its ability to protect its intellectual
property rights. Imagis relies principally on a combination of copyright and
trade secret laws, non-disclosure agreements and other contractual provisions
to establish and maintain its proprietary rights.
As part of its confidentiality procedures, Imagis generally enters into
nondisclosure and confidentiality agreements with each of its key employees,
consultants and business partners and limits access to and distribution of its
technology, documentation and other proprietary information. In particular,
Imagis has entered into non-disclosure agreements with each of its employees
and business partners. The terms of the employee non-disclosure agreements
include provisions requiring assignment to Imagis of employee inventions. In
addition, Imagis' source code for its software products is maintained in a
controlled environment within the technology and development group. For
security purposes, a copy of the source code is maintained in a lock-box at
the Bank of Montreal in Vancouver, accessible only by the Board of Directors
of Imagis. There can be no assurance that Imagis' efforts to protect its
intellectual property rights will be successful. Despite Imagis' efforts to
protect its intellectual property rights, unauthorized third parties,
including competitors, may from time to time copy or reverse engineer certain
portions of Imagis' technology and use such information to create competitive
products.
Policing the unauthorized use of Imagis' technology is difficult, and, while
Imagis is unable to determine the extent to which piracy of Imagis' technology
exists, such piracy can be expected to be a persistent problem. In
addition, the laws of certain countries in which Imagis' technology is or may
be licensed do not protect its products and intellectual property rights to
the same extent as do the laws of Canada and the United States. As a result,
sales of products based on Imagis' technology in such countries may increase
the likelihood that Imagis' technology might be infringed upon by unauthorized
third parties.
It is possible that the scope, validity and/or enforceability of Imagis'
intellectual property rights could be challenged by competitors or other
parties. Imagis is currently in the process of recording its interests in
certain of its intellectual property rights with relevant authorities in
applicable jurisdictions. The results of such challenges before
administrative bodies or courts depend on many factors which cannot be
accurately assessed at this time. Unfavorable decisions by such
administrative bodies or courts could have a negative impact on Imagis'
intellectual property rights. Any such challenges, whether with or without
merit, could be time consuming, result in costly litigation and diversion of
resources, cause product shipment delays or require Imagis to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to Imagis or at all. In
the event of a claim of product infringement against Imagis and Imagis'
failure or inability to license the infringed or similar technology, Imagis'
business, operating results and financial condition could be materially
adversely affected.
Imagis has not registered any trademarks in the Canada, the United States or
elsewhere.
Research & Development
The integrated information and video imaging systems is characterized by rapid
technological change and increasing user requirements. Accordingly, Imagis
must be able to provide new products to modify and enhance existing products
on a timely and continuing basis in order to be competitive. To accomplish
this objective, Imagis' strategy is to utilize proven technology to further
enhance its existing products and to create new products. Where appropriate,
Imagis may acquire complementary technology developed by third parties for
integration into Imagis' products.
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Imagis personnel have considerable experience and expertise in the development
of integrated information and video imaging systems specifically designed for
use in the law enforcement industry. Imagis' chief technology personnel were
initial developers of Imagis' imaging products and have been involved in the
development of each of the eight versions of the CABS product. Imagis'
software product development personnel employ modular software architecture,
object-oriented software development and graphical user interface design
technologies to develop scaleable, modular products.
In order to add significant additional value to Imagis' product line and a
major differentiator to CABS and other Imagis products, Imagis plans to
release ID-2000 commercially during 1999. Imagis plans further enhancements
to ID-2000 to increase its market share in the law enforcement industry. In
addition, Imagis plans to further enhance the product for introduction into
the security industry, particularly in the area of access control.
As of December 31, 1999, Imagis' research and development staff consisted of
nine employees in the Victoria office and the Chief Technology Officer in our
Vancouver head office.
During the fiscal year ended December 31, 1999, Imagis' total expenditures for
research and development was $614,509. Management believes that timely and
continuing product development is critical to Imagis' success and plans to
continue to allocate significant resources to product development.
Plan of Operation and Business Strategy
Imagis' objective is to be a leading provider of biometric facial recognition
systems in Canada, the United States and globally. Imagis' strategy
encompasses the following key elements:
Leverage core capabilities to develop configurable products. Imagis has
substantial experience and expertise in (I) software application development
for integrated information and video imaging systems; (ii) a variety of
computer platforms and operating environments; (iii) the technical issues
associated with installing an integrated information and video imaging system;
and (iv) the business and operating issues in planning, managing and
installing integrated information and video imaging systems. Imagis intends
to utilize these core capabilities to develop configurable products that can
be scaled and expanded to meet a customer's specific requirements.
Expand market share of automated arrest and booking and facial recognition
systems. Imagis designed CABS to the specifications of the RCMP and has
installed the system in over 30 RCMP detachments, including the two largest
detachments in Canada. Imagis intends to focus on expanding its existing
market share in the area of automated arrest and booking systems in Canada and
the United States by incorporating enhancements, such as ID-2000, and increasing
the functionality of CABS, and by continuing to provide its customers, through
its network of business partners, with superior service and support.
Leverage key business partner relationships. To market its products to a
wider variety of potential customers, Imagis has developed key relationships
with a select number of companies in Canada, the United States and Mexico to
resell or market Imagis' products directly or as a part of an integrated
solution and to provide consulting, integration and after-sales product
support. Imagis plans to add additional business partner relationships to
enhance the distribution of its products world-wide.
Business Partners
Imagis has several business partners in Canada and the United States that
resell and market Imagis' products and that provide consulting, integration
and after-sales product support to Imagis' clients. Imagis believes that
business partners can provide substantial sales leverage, including access to
established client bases, and can serve as a source of qualified sales and
technical staff at a relatively low cost. Imagis plans to expand the business
partner network, thereby minimizing the cost of establishing new offices and
training personnel. With its current business strategy of developing business
partners and utilizing value-added resellers ("VARs") for both sales and
installation support services, Imagis intends to leverage its position in
Canada to secure key installations in the United States. See "Note Regarding
Forward Looking Statements."
Imagis currently has business partner agreements with the following companies:
Maritime Information Technology Inc. ("MITI"); Impact Solutions Corporation;
West Covina Service Group; Radian Inc.; Vilsa; Orion Scientific Systems Inc.;
Cerulean Technology Inc.; Fujitsu (Malaysia); ExWay; RCM Technologies; and
PICS SmartCard.
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The major terms of the business partner agreements are similar. All agreements
are non-exclusive; typically have a three-year term; define a relationship in
which the business partner is responsible for selling Imagis' products to
end-users, and subsequently providing first-line customer support, while
Imagis provides technical support to the business partner. The business
partner earns a discount on list price of Imagis' products, typically 40%.
Imagis frequently integrates its products with those of its business
partners.
MITI is a large information technology provider in Canada with offices in
Toronto, Ottawa, Saint John, Fredericton, Moncton and Halifax. MITI provides
information technology sales, service, and support to large corporations and
government agencies in Canada, through their staff of over 450. Under MITI's
agreement with Imagis, MITI is authorized to sell all of Imagis' products in
the Atlantic Provinces of Canada (including New Brunswick, Nova Scotia, Prince
Edward Island, and Newfoundland), and the Province of Ontario.
Impact is a California-based developer of law-enforcement software, which
Imagis believes is complimentary to Imagis' products. Under its agreement
with Imagis, Impact is authorized to sell all of Imagis' products in the
United States.
The West Covina Service Group is a police department which markets
law-enforcement products to other police departments. Based east of Los
Angeles, West Covina has customer base of 30 departments, mostly on the US
West Coast, which uses their text-based Record Management System ("RMS").
West Covina recently installed CABS to add imaging facilities to RMS, and are
now promoting this capability to their users.
Radian is a Virginia-based developer of comprehensive management systems for
the jail-administration market. Radian has signed an agreement with Imagis to
use CABS as an arrest and booking module as part of their jail administration
product.
Vilsa is a systems integrator based in Mexico City. Vilsa has offices
throughout Central and South America. Under their agreement with Imagis,
Vilsa is authorized to sell all Imagis products throughout Central and South
America.
ORION Scientific Systems is an international software consulting firm founded
in 1978. Based in Sacramento, California, Orion has approximately 140
employees.
Cerulean Technology Inc. develops and markets advanced real-time wireless
technology for application in a number of markets, including cable, HVAC,
financial services, healthcare, utilities, and public safety. Imagis is
working with Cerulean and their partner network on the provision of our
applications in a wireless environment. Based in Marlborough, Massachusetts,
Cerulean was founded in 1992.
Fujitsu in Kuala Lumpur, Malaysia are the principal supplier of IT systems to
the Royal Malaysian Police. We are currently working with them on a project
to supply CABS / ID-2000 to the Police. They also have a significant
opportunity to supply ID-2000-based security systems to the Malaysia-based
Star Cruise Group, for security purposes in cruise ships.
ExWay is a Tokyo, Japan based company which is 80% owned by NTT. Their focus
is on SmartCards, and we are working with them on adding facial recognition to
the card which NTT plans to propose for the National Social Security Systems
in Japan and Peru. NTT have requested our agreement for them to sell this
system anywhere in the world.
RCM Technologies is a Pennsauken, New Jersey based company which was founded
in 1971. They are a provider of Business, Technology and Resource solutions
in Information Technology and Professional Engineering to customers in the
corporate and government sectors. RCM is promoting CABS through its offices
in North America.
PICS SmartCard is a Burnaby, British Columbia company which was founded in
1967. To capture high-quality images can require specialist hardware,
particularly in terms of cameras and capture cards. As the provision of these
is not part of our business model, we have come to an agreement with PICS
SmartCard, who have offices in Seattle and Vancouver, to provide the necessary
hardware components to our Business Partners when required.
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Under the business partner agreements, the Business Partners have agreed to
sell Imagis' products as part of their standard product line. While they
typically have designated territories (as described above), the Business
Partners may sell Imagis' products anywhere they have opportunities, including
Canada, the United States and other countries. Imagis provides training and
ongoing support, through training and support programs, on product
demonstration, operation, installation, and customer support to the Business
Partners' staff. The Business Partners have agreed to promote the products
and maintain sales and support teams to handle these functions.
During 1999, Imagis added several partners in the United States, Japan and
Latin America.
Sales & Marketing
Other than in western Canada, Imagis sells its products exclusively through
its business partner network. Sales within western Canada are conducted
principally by Imagis' direct sales force. Imagis' target customer typically
prefers to purchase from a supplier with whom they have an established
relationship, who understands their business needs, can provide local
demonstrations and demonstration systems, can directly supply hardware
components in addition to software and provides local software support within
the customer's time zone. By relying on its local direct sales force in
British Columbia and the local sales force of its business partners elsewhere,
Imagis believes it satisfies its customers' preferences, while increasing the
sales resources promoting the product.
Imagis offers its customers the option to license or subscribe to its software
products. Under the subscription model, a customer is charged 1/24th of the
license price per month for the duration of the subscription agreement,
thereby providing Imagis an ongoing revenue stream. The subscription model
provides customers with free software upgrades and updates. The Newmarket,
Ontario detachment of the RCMP was the first customer to use the subscription
model.
The modular design of CABS enables the installation of an inexpensive
entry-level departmental system for approximately $20,000 (where budgetary
considerations preclude the user from investing in a larger system), while
providing the opportunity to enhance the system over time as funds become
available. A comprehensive system for a large police department costs up to
approximately $100,000. CABS is priced on a server basis, the license covering
the specific number of police officers using the server. The price per
officer declines incrementally as the total number of police officers
increases.
Imagis focuses its marketing efforts primarily on the CABS product. Imagis
markets CABS directly to police detachments through Internet advertising
(www.imagis-cascade.com) and through attendance at national and international
law enforcement conferences and trade shows. Imagis also relies on its
business partners to market CABS directly to police detachments in their local
sales region.
Employees
As of December 31, 1999, Imagis had 20 full-time employees, including 7 in
research and development, 4 in marketing and sales, 3 in customer support and
6 in management, finance and administration. Imagis' success will depend in
large part on its ability to attract and retain skilled and experienced
employees. None of Imagis' employees are covered by a collective bargaining
agreement and Imagis believes that its relations with its employees is good.
Imagis does not currently have any key man life insurance on any of its
directors or executive officers.
Risk Factors
Imagis' business is subject to the following risks. These risks also could
cause actual results to differ materially from results projected in any
forward-looking statement in this report.
Limited Operating History; History of Losses; Increased Expenses
Imagis commenced operations in March 1998 and therefore has only a limited
operating history upon which an evaluation of its business and prospects can
be based. Imagis and its predecessors incurred net losses of $2,141,386 and
$1,320,439 in the years ended December 31, 1999 and December 31, 1998,
respectively. Imagis has never been profitable and there can be no assurance
that, in the future, Imagis will be profitable on a quarterly or annual basis.
Imagis plans to increase its operating expenses to expand its sales and
marketing operations, fund greater levels of research and development, broaden
its customer support capabilities and increase its administration resources.
In view of the rapidly evolving nature of Imagis' business and markets and
limited operating history,
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Imagis believes that period-to-period comparisons of financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
New Product Development
Imagis expects that a significant portion of its future revenue will be
derived from the sale of newly introduced products and from enhancement of
existing products. See "Forward-Looking Statements." Imagis' success will
depend in part upon its ability to enhance its current products on a timely
and cost-effective basis and to develop new products that meet changing market
conditions, including changing customer needs, new competitive product
offerings and enhanced technology. There can be no assurance that Imagis will
be successful in developing and marketing on a timely and cost-effective basis
new products and enhancements that respond to such changing market conditions.
If Imagis is unable to anticipate or adequately respond on a timely or
cost-effective basis to changing market conditions, to develop new software
products and enhancements to existing products, to correct errors on a timely
basis or to complete products currently under development, or if such new
products or enhancements do not achieve market acceptance, Imagis' business,
financial condition, operating results and cash flows could be materially
adversely affected. In light of the difficulties inherent in software
development, Imagis expects that it will experience delays in the completion
and introduction of new software products. See "Forward-Looking Statements."
Lengthy Sales Cycles
The purchase of a computerized arrest and booking system is often an
enterprise-wide decision for prospective customers and requires Imagis
(directly or through its business partners) to engage in sales efforts over an
extended period of time and to provide a significant level of education to
prospective customers regarding the use and benefits of such systems. Due in
part to the significant impact that the application of CABS has on the
operations of a business and the significant commitment of capital required by
such a system, potential customers tend to be cautious in making acquisition
decisions. As a result, Imagis' products generally have a lengthy sales cycle
ranging from three to nine months. Consequently, if sales forecast from a
specific customer for a particular quarter are not realized in that quarter,
the Company may not be able to generate revenue from alternative sources in
time to compensate for the shortfall. The loss or delay of a large contract
could have a material adverse effect on Imagis' quarterly financial condition,
operating results and cash flows, which may cause such results to be less than
analysts' expectations. Moreover, to the extent that significant contracts
are entered into and required to be performed earlier than expected, operating
results for subsequent quarters may be adversely affected.
Dependence on Key Personnel
Imagis' performance and future operating results are substantially dependent
on the continued service and performance of its senior management and key
technical and sales personnel. Imagis intends to hire a number of additional
technical and sales personnel. See "Forward-Looking Statements." Competition
for such personnel is intense, and there can be no assurance that Imagis can
retain its key technical, sales and managerial employees or that it will be
able to attract or retain highly qualified technical and managerial personnel
in the future. The loss of the services of any of Imagis' senior management
or other key employees or the inability to attract and retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon Imagis' business, financial condition, operating results and cash flows.
With the exception of Andy Amanovich, Chief Technology Officer, and David
Lutes, Chief Engineer, Imagis does not currently maintain "key man" insurance
for any senior management or other key employees.
Dependence on Marketing Relationships
Imagis' products are primarily marketed by Imagis' business partners. Imagis'
existing agreements with business partners of its products are nonexclusive
and may be terminated by either party without cause. Such organizations are
not within the control of Imagis, are not obligated to purchase products from
Imagis and may also represent and sell competing products. There can be no
assurance that Imagis' existing business partners will continue to provide the
level of services and technical support necessary to provide a complete solution
to Imagis' customers or that they will not emphasize their own or third-party
products to the detriment of Imagis' products. The loss of these business
partners, the failure of such parties to perform under agreements with Imagis
or the inability of Imagis to attract and retain new business with the
technical, industry and application experience required to market Imagis'
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products successfully could have a material adverse effect on Imagis' business,
financial condition, operating results and cash flows.
Additionally, with respect to most sales, Imagis supplies products and
services to a customer through a third party supplier acting as a project
manager or systems integrator. In such circumstances, Imagis has a
sub-contract to supply its products and services to the customer through the
prime contractor. In these circumstances, Imagis is at risk that situations
may arise outside of its control that could lead to a delay, cost over-run or
cancellation of the prime contract which could also result in a delay, cost
over-run or cancellation of Imagis' sub-contract. The failure of a third
party supplier to supply its products and services or perform its contractual
obligations to the customer in a timely manner could have a material adverse
effect on Imagis' financial condition, results of operations and cash flows.
Competition
The markets for arrest and booking systems, jail management systems, facial
recognition software, security software and fraud detection and tracking
systems are highly competitive. Numerous factors affect Imagis' competitive
position, including supplier competency, product functionality, performance
and reliability of technology, depth and experience in distribution and
operations, ease of implementation, rapid deployment, customer service and
price.
Imagis primarily competes in the arrest and booking systems market with Epic
Solutions, ImageWare Software, Smith & Wesson and Spillman. Imagis' primary
competitors in the facial recognition software market with ImageWare (FaceID),
Miros (Trueface), Smith & Wesson (ASID - Automated Suspect Identification
System), Vissage Technology (Vissage Gallery) and Visionics (FaceIt).
Certain of Imagis' competitors have substantially greater financial,
technical, marketing and distribution resources than Imagis. As a result,
they may be able to respond more quickly to new or emerging technologies and
changing customer requirements, or to devote greater resources to the
development and distribution of existing products. There can be no assurance
that Imagis will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by Imagis will not materially adversely affect its business, financial
condition, operating results and cash flows.
Proprietary Technology
Imagis' success is dependent on its ability to protect its intellectual
property rights. Imagis relies principally upon a combination of copyright
and trade secret laws, non-disclosure agreements and other contractual
provisions to establish and maintain its rights. The source codes for Imagis'
products and technology are protected both as trade secrets and as unpublished
copyrighted works. To date, Imagis has not applied for any patents or
trademarks. As part of its confidentiality procedures, Imagis enters into
nondisclosure and confidentiality agreements with each of its key employees,
consultants, distributors, customers and corporate partners, to limit access
to and distribution of its software, documentation and other proprietary
information. There can be no assurance that Imagis' efforts to protect its
intellectual property rights will be successful. Despite Imagis efforts to
protect its intellectual property rights, unauthorized third parties,
including competitors, may be able to copy or reverse engineer certain
portions of Imagis' software products, and use such copies to create
competitive products.
Policing the unauthorized use of Imagis' products is difficult, and, while
Imagis is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to continue. In addition,
the laws of certain countries in which Imagis' products are or may be licensed
do not protect its products and intellectual property rights to the same
extent as do the laws of Canada and the United States. As a result, sales of
products by Imagis in such countries may increase the likelihood that Imagis'
proprietary technology is infringed upon by unauthorized third parties.
In addition, because third parties may attempt to develop similar technologies
independently, Imagis expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in Imagis' industry segments grow and the functionality of
products in different industry segments overlaps. Although Imagis believes
that its products do not infringe on the intellectual property rights of third
parties, there can be no assurance that third parties will not bring
infringement claims (or claims for indemnification resulting from infringement
claims) against Imagis with respect to copyrights, trademarks, patents and
other proprietary rights. Any such claims, whether with or without merit, could
be time consuming, result in costly
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litigation and diversion of resources, cause product shipment delays or require
Imagis to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Imagis or
at all. A claim of product infringement against Imagis and failure or
inability of Imagis to license the infringed or similar technology could have
a material adverse effect on Imagis' business, financial condition, operating
results and cash flows.
Exchange Rate Fluctuations
Because Imagis' reporting currency is the Canadian dollar, its operations
outside Canada face additional risks, including fluctuating currency values
and exchange rates, hard currency shortages and controls on currency exchange.
Currently Imagis has limited operations outside Canada, but it intends to
begin marketing its products in the United States, Europe and Mexico later
this year. Imagis does not currently engage in hedging activities or enter
into foreign currency contracts in an attempt to reduce Imagis' exposure to
foreign exchange risks. In addition, to the extent Imagis has operations
outside Canada, Imagis is subject to the impact of foreign currency
fluctuations and exchange rate charges on Imagis' reporting in its financial
statements of the results from such operations outside Canada. Since such
financial statements are prepared utilizing Canadian dollars as the basis for
presentation, results from operations outside Canada reported in the financial
statements must be restated into Canadian dollars utilizing the appropriate
foreign currency exchange rate, thereby subjecting such results to the impact
of currency and exchange rate fluctuations.
Need for Additional Financing
Revenue from Imagis' operations is not sufficient to finance the cost of
development and marketing of its technology. Accordingly, Imagis must raise
substantial additional funding. Imagis expects to be able to meet its
financial obligations for approximately the next 12 months. There is no
assurance that, after such period, Imagis will be able to secure financing or
that such financing will be obtained on terms favorable to Imagis. Failure to
obtain adequate financing could result in significant delays in development of
new products and a substantial curtailment of operations.
Risk of Software Defects
Software products as complex as those offered by Imagis frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. Despite product testing, Imagis has in the past
released products with defects in certain of its new versions after
introduction and experienced delays or lost revenue during the period required
to correct these errors. Imagis regularly introduces new versions of its
software. There can be no assurance that, despite testing by Imagis and its
customers, defects and errors will not be found in existing products or in new
products, releases, versions or enhancements after commencement of commercial
shipments. Any such defects and errors could result in adverse customer
reactions, negative publicity regarding Imagis and its products, harm to the
Imagis' reputation, loss or delay in market acceptance or required product
changes, any of which could have a material adverse effect upon its business,
results of operations, financial condition and cash flows.
Product Liability
The license and support of products by the Registrant may entail the risk of
exposure to product liability claims. A product liability claim brought
against the Registrant or a third party that the Registrant is required to
indemnify, whether with or without merit, could have a material adverse effect
on the Registrant's business, financial condition, operating results and cash
flows.
Directors' and Officers' Involvement in Other Projects
Many of the officers and directors of Imagis serve as directors, officers
and/or employees of companies other than Imagis. While Imagis believes that
such officers and directors will be devoting adequate time to effectively
manage Imagis, there can be no assurance that such other positions will not
negatively impact an officer's or director's duties for Imagis.
Item 2. Description of Property.
The Company subleases an approximately 800 square foot facility at 1300-1075
West Georgia Street in Vancouver, British Columbia from International Portfolio
Management Inc. These premises are used as the Company's
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headquarters, and includes the finance team as well as a large portion of the
sales team. This lease is on a month to month basis, with monthly payments
totaling $6,000.
The Company leases an approximately 5,600 square foot facility at 1027 Pandora
Avenue in Victoria, British Columbia from Walter & Norman Lee. These premises
house the Company's development and technical support teams, as well as handles
the coordination of the sales and marketing function. This leasing agreement
is for a three-year term, with monthly payments of $6,300.
The Company leases an approximately 300 square foot facility used as a small
sales office at 200-38 Auriga Drive in Nepean, Ontario. The payments under this
lease are $963 per month, with an expiry date of June 30, 2000.
Item 3. Legal Proceedings.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this report, the Company is not a party to any legal proceedings,
the adverse outcome of which, in management's opinion, individually or in the
aggregate, would have a material effect on the Company's results of operations
or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
None
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock, no par value (the "Common Stock"), began trading on
the Canadian Venture Exchange under the symbol "CAP" on September 29, 1998 and
changed its symbol to "NAB" on February 25, 1999. The table below establishes
the reported high and low sales prices for the Common Stock for the period from
September 29, 1998 to December 31, 1999 (as reported on the Canadian Venture
Exchange). The last reported closing price of the Common Stock on the Canadian
Venture Exchange on March 27, 2000 was Cdn $5.85.
High Low
---- ----
September 30, 1998 Cdn $0.55 Cdn $0.50
December 31, 1998 0.90 0.50
March 31, 1999 1.20 0.65
June 30, 1999 1.24 0.80
September 30, 1999 0.90 0.60
December 31, 1999 0.95 0.60
As of March 27, 2000, there were 13 holders of record based on the records of
the Company's transfer agent which does not include beneficial owners of
Common Stock whose shares are held in the names of various securities brokers,
dealers and registered clearing agencies.
The Company has never paid dividends on the Common Stock and does not intend
to pay dividends on the Common Stock in the foreseeable future. The Board of
Directors of the Company intends to retain any earnings to provide funds for
the operation and expansion of the Company's business. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Sources of Funds."
On October 1, 1999, the Company agreed to sell convertible debentures having an
aggregate principal value of $595,200 to three placees. Each debenture has a
one year term and bears interest at the rate of 8% per annum. The debenture
was convertible into units at the rate of $0.64 per unit, each unit consisting
of one common share and one non-transferable share purchase warrant. Subsequent
to year end, all of the debentures were converted. The attached warrants enable
the debenture holders to purchase an equal number of additional common shares
for two years, at a price of $0.64 per share if exercised in the first year and
$0.74 per share if exercised in the second year. As of March 27, 2000, all but
200,000 of the warrants had been exercised.
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Item 6. Management's Discussion and Analysis
Forward Looking Statements:
Statements in this Annual Report on Form 10-KSB, including those concerning
our expectations of future sales revenues, gross profits, technology
development, sales and marketing, and administrative expenses, product
introductions and cash requirements, include forward-looking statements. As
such, our actual results may vary materially from our expectations. Factors
which could cause our actual results to differ from expectations include
variations in the level of orders which can be affected by general economic
conditions, and in the markets served by our customers, the international
economic and political climates, difficulties or delays in product
functionality or performance, the timing of future product releases, failure
to respond adequately to either changes in technology or customer preferences,
changes in our pricing or our competitors, ability to manage growth, risk of
nonpayment of accounts receivable and changes in budgeted costs, all of which
constitute significant risks. There can be no assurance that our results of
operations will not be adversely affected by one or more of these factors.
Overview:
In February, 1999, we completed our acquisition of Imagis-Cascade Technologies
Inc., a privately-held company, and in the second quarter, we completed a
financing raising approximately Cdn$2.9 million before financing costs. Our
acquisition, more fully described in the notes to the audited financial
statements appended and in our Form 10-SB filed in 1999, was accounted for as
a reverse take-over whereby the company acquired is deemed the parent for
reporting purposes and the acquirer is considered to be the acquired entity.
This treatment conforms with generally accepted accounting principles in
Canada and provide the same results as those applicable in the United States
for such transactions.
Prior to the acquisition, Imagis-Cascade Technologies Inc. had developed
software programs directed to the security industry, primarily jails and other
government agencies, and was in the process of developing its current primary
product, CAB's, and other related products for the law enforcement sector. In
addition, due to the lack of funding, the company's management was heavily
focussed on finding funds to continue operations. Consequently the results
reported for the prior year, before the acquisition, are not particularly
comparable to the current period, either in respect to products and operations
or to functional cost categorization. In addition, prior to the acquisition,
as the company was small and privately held, many specific details on
individual product sales information as well as certain detailed functional
costing information that could be used for analytical purposes were not
tracked either in the company's accounting system or by other means in a
meaningful manner. The comparative numbers reported in the past for some
functional costs included reasonable management allocations between
categories.
Results of Operations for the years ended December 31, 1999 and 1998:
Revenues:
Our revenues for 1999 were $722,193, representing a gain of $167,033 or 30 per
cent over the previous year level of $555,160. The 1999 revenues include
approximately $332,114 from sales of our new CAB's software product and
accounts for essentially all of the year over year improvement. There were no
sales of this product in 1998. Revenues in 1999 from annual support contracts
related to older software programs sold in the past and other services
amounted to $173,639, and from hardware and other equipment sales were
$216,440.
As noted previously, prior year sales revenues were for older products sold
into other markets and for related hardware. Aggregate sales of these older
software products and revenues from support services provided in 1998
aggregated $335,160, almost twice that of 1999 sales revenues, while sales of
hardware approximated $220,000.
Purchases of materials:
Our 1999 purchases of hardware and other materials aggregated $222,919, 41 per
cent more than our expenditures in the prior year of $158,472. The hardware
required is dependent on individual customer needs dictated to some degree by
the size of the installation, so year to year changes reflect primarily the
mix of customers and their needs in each year and don't reflect a trend.
Moreover, in the future we expect that both hardware sales revenues and costs
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will decline substantially due to a significant change of sales strategy which
we recently adopted. The change involves the establishment of strategic
partners to market our products to their customer bases. We expect that these
partners will be quite able to directly fulfil this hardware component need,
and this transfer will thereby cause a reduction in our hardware revenues and
costs. But we anticipate that our software sales will grow as a result of the
contribution of these partners to more than compensate for our loss of this
hardware revenue source and any contribution to profits.
Sales and marketing:
Our expenditures on Sales and marketing for the year were $927,593 which is
substantially higher than for the comparable prior year of $606,775. As
previously indicated, we changed our marketing approach during the year to
engage strategic partners which can provide a far wider geographic reach and
also supplement the technical support requirements of customers. This strategy
expands our effective sales force through the partners and frees our technical
staff to focus more exclusively on product development. We also engaged three
regional sales managers mid-year to develop and manage our partner
relationships. Sales and marketing costs in the current year included salaries
of $294,768, travel of $375,878 and other advertising materials and support
costs of $256,947. In 1998, while salaries appear higher at approximately
$376,000, as previously indicated all prior period costs reported include some
reasonable allocations to sales and marketing activities from the
administrative category as detailed records separating all costs by function
were not maintained. The above 1998 salary and other cost categories include
costs for some technology development activity also. The 1998 travel was
$84,000 and all other costs amounted to $146,775. The lower travel and other
support costs reflects Imagis Cascades' limited funds during this prior
period.
Technology development:
Our development costs in the current year were $614,509. The technical staff
was more than doubled in size over the year and two new product modules,
Evidence ID and ID 2000, were advanced to the beta stage and then released
before year end. Salary costs of $465,428 were the largest cost component at
76 per cent of the total. Travel and support costs constituted the remaining
24 per cent or $149,081. Prior year costs for the year to date, as previously
noted, were not segregated, but included in the Sales and marketing category
and with Administrative costs.
Administrative:
Our Administrative costs for the current year were $900,013, slightly lower
than the prior year level of $950,608. Included in this function are salaries
and other office support costs of $620,997, professional fees, primarily
legal, of $153,548, shareholder and regulatory costs of $59,920 and travel and
other of $65,548. The 1998 comparative administrative costs included salaries
and support costs of $649,000, legal and other professional fees of $131,000
and travel and other of $170,608. As noted above, some Technology development
costs are included in the 1998 amounts reported in this category and
consequently comparability is affected.
Other Costs and Expenses:
Other costs and expenses include amortization of $56,109, approximately 64 per
cent higher than the previous year amount of $34,252. The increase reflects
our added expenditures to equip our new staff. As well, there was an inventory
valuation reduction of $111,836 following our acquisition of Imagis Cascade
and a detailed review of the inventories.
Loss for the Year:
Overall we experienced a net loss for the period of $2,110,786 or $(0.28) per
share. The loss is considerably larger than that of the prior year of
$1,320,439 or $(0.39) per common share. The higher loss this year essentially
reflects the higher Sales and marketing and Technology development costs from
year to year. The current year per share amount, however, is a lessor amount
due to the effect of the common share issuances arising from our acquisition
and financing transactions in the year.
18
<PAGE>
Due to the addition of the three regional sales managers, we expect our Sales
and marketing costs to be significantly higher in future periods, the increase
reflecting salary and travel costs of these new individuals. We have also
recently adopted an expanded biometric direction and plan to add a number of
development staff over the next year. This will increase Technology
development costs, primarily salaries, in the coming year also.
Liquidity and Capital Resources:
We completed our acquisition of Imagis-Cascade Technologies Inc. in February
with the issue of 3.4 million common shares to the Imagis Cascade
shareholders. Following this, we completed a public offering and sold 2.4
million common shares at a per share value of $1.23. This yielded to us gross
proceeds of $2,952,000. We also completed a private placement of 535,714
common shares issued at a price of $0.56 per share to yield
proceeds of $300,000, and together after costs they aggregated $3,017,484. We
used some of these funds to repay a cash obligation which was part of the
negotiated terms of the acquisition in the amount of $900,000. We used an
additional $280,000 to reduce notes payable to a balance of $130,000 at year
end.
The remaining funds allowed us to operate through to the latter part of the
year. During the year, we incurred total operating costs $2,832,979 offset to
some degree by our sales revenues of $722,193, both amounts adjusted for
delays in collections of receivables and payments of costs. Our cash resources
were reduced from delayed collections reflected in the increase of trade
receivables at year end amounting to $124,910. However this benefit was more
than offset by necessary payments of overdue trade payables of $216,569.
Also during the year, we purchased office equipment and software totaling
$70,161. In our view, this relatively low level is fairly representative of
our expected annual capital expenditure levels in the future since we will
require additional equipment only when we engage more development and other
staff.
Due to the reduced cash position which arose in the fourth quarter, we
undertook to raise additional capital by issuing 595.2 convertible debenture
units yielding $595,200 in cash to our company. Each debenture unit valued at
$1,000 has a one year term and bears interest at the rate of eight(8) per
cent, and has a full warrant attached. At year end, we had received $356,480
of the above total. These partial proceeds sustained us through to year end,
although at year end, our cash position had fallen to $9,682, and our working
capital position had declined to a deficit of ($198,034).
Subsequent to the year end, we received the remainder of the debenture
subscription funds and issued the debenture units. Our cash position was
strengthened further when a portion of the debenture warrants were exercised
in February which contributed additional cash of $395,200. And in March, we
were successful in completing a private placement of 875,000 common shares
priced at $0.80 per share which added cash of $700,000 more for operations.
With the additional equity subscription subsequent to year end, our cash
position as of March 27, 2000 is approximately $495,000. While we believe
that this will be sufficient to fund our current level of operations for the
remainder of the year, as a result of our expanded focus on developing new
biometric applications and capabilities, we expect to be seeking additional
funding in the latter part of the current year to finance this extensive
development work.
19
<PAGE>
Item 7. Financial Statements and Supplementary Data.
The financial statements of Imagis required by this Item 7 are set forth at
the pages indicated at Item 13 (a)(1).
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
20
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Executive Officers and Directors
The following table sets forth certain information concerning Imagis'
executive officers and directors as of December 31, 1999:
Name Age Position with the Company
Iain Drummond 54 President, Chief Executive Officer
and Director
Ross Wilmot 56 Chief Financial Officer
Andy Amanovich 42 Chief Technology Officer
Sandra E. Buschau 49 Secretary and Director
Altaf Nazerali* 46 Director
Rory Godinho* 41 Director
Frederick Clarke* 64 Director
_____________________
* Audit Committee Member
Iain Drummond has served as a Director since February 12, 1999, as President
and Chief Executive Officer of Registrant since February 23, 1999 and of
Imagis Cascade Technologies Inc. since September 1, 1998. He has extensive
management experience in the high technology industry. Most recently he
served as the Vice-President, Strategic Partnerships with Alis Technologies of
Montreal, Quebec, a provider of integrated language-handling technologies and
translation solutions, from 1990 to 1998, where he set up the international
sales network for its language translation software products. Previously, he
was President of Clan Technologies, a developer and marketer of executive
information systems, in Canada from 1988 to 1990. Prior to that, he worked
with International Computers Limited, a supplier of integrated computer
systems, from 1966 to 1988, including serving as President for ICL Canada, a
wholly owned subsidiary of International Computers Limited focused on selling
integrated computer systems to large retailers.
Ross Wilmot has served as the Chief Financial Officer of Imagis since July 7,
1998. Mr. Wilmot was a Director of Imagis from July 7, 1998 to February 12,
1999. Mr. Wilmot has over 25 years of international business experience in
the resources and technology industries. His principal occupation is as a
corporate executive of a number of publicly traded companies. He serves as
the President of Paloma Ventures Inc., an inactive Vancouver Stock Exchange
issuer with no current business activity, and as Vice-President, Finance of
the following companies: (a) Multivision Communications Corp., the operator
of MMDS TV systems in Bolivia (August 1995 to present); (b) Breckenridge
Resources Ltd., a junior exploration company with mining interests in China
(January 1995 to present); (c) CTF Technologies Inc., a company engaged in the
servicing of electronic refueling technology in Brazil (July 1996 to present);
(d) Harambee Mining Corp., an inactive Vancouver Stock Exchange junior
exploration company with exploration projects in Africa (January 1997 to
present); (e) Botex Industries Corp., a company engaged in the development and
manufacturing of plastic-based material used as replacement for traditional
rubber, plastic, and latex compounds in many applications (June 1996 to
present); (f) Intacta Technologies Inc. (formerly, InfoImaging Technologies
Inc.), a software technology company, (1997 to present); (g) Plata Minerals
Corp., an inactive Vancouver Stock Exchange company with no current business
interest (January 1995 to present). Mr. Wilmot holds a Bachelor of Science
and a Masters of Science in metallurgical engineering from the University of
Toronto and is a chartered accountant.
Andrew Amanovich has served as the Chief Technology Officer of Imagis since
February 23, 1999. In addition, Mr. Amanovich serves as the Chief Technology
Officer of Imagis. In 1989, Mr. Amanovich founded Pacific, a consulting
service engaged in forestry mapping and surveys, where he developed computer
simulation models for forest visualization modeling and was involved in forest
engineering, geotechnical engineering, digital mapping and software
development of technology in March of 1998. Mr. Amanovich holds a Bachelor of
Science from the University of British Columbia.
21
<PAGE>
Sandra E. Buschau has served as the Secretary of Imagis since March 10, 1999.
Ms. Buschau has been a Director of Imagis since July 7, 1998. In addition,
Ms. Buschau has served in the following capacities of other companies: (a)
Secretary and Director of Multivision Communications Corp., the operator of
MMDS TV systems in Bolivia (November 1995 to present); (b) Corporate Secretary
of CTF Technologies Inc., a company engaged in the servicing of electronic
refueling technology in Brazil (April 1998 to present); (c) Secretary of Plata
Minerals Corp., an inactive Vancouver Stock Exchange company with no current
business interest (February 1998 to present); (d) Secretary of Intacta
Technologies Inc. (formerly, InfoImaging Technologies Inc.), a software
technology company (May 1997 to present); and (e) Secretary of Breckenridge
Resources Ltd., a junior exploration company with mining interests in China
(September 1992 to present).
Altaf Nazerali has served as a Director of Imagis since July 7, 1998. Mr.
Nazerali also served as President and Chief Executive Officer from July 7,
1998 through February 23, 1999. In addition, Mr. Nazerali has served in the
following capacities of other companies: (a) Chief Executive Officer
(November 1995 to present), President and Director (each October 1995 to
present) of Multivision Communications Corp., the operator of MMDS TV systems
in Bolivia (b) Director of CTF Technologies Inc., a company engaged in the
servicing of electronic refueling technology in Brazil (April 1998 to
present); (c) President and Director of Intacta Technologies Inc. (formerly,
InfoImaging Technologies Inc.), a software technology company (October 1997 to
present); and (d) Chief Executive Officer and President of Canbras
Communications Corp., an operator of pay television and telephone systems in
Brazil (November 1994 to October 1995).
Rory Godinho has been a Director of Imagis since July 7, 1998. Mr. Godinho is
a Principal with the law firm of Godinho Sinclair (since its formation in
1991). Mr. Godinho restricts his practice to the areas of securities and
corporate commercial law. In addition, he serves in the following capacities
of other companies: (a) Secretary of Harambee Mining Corp., an inactive
Vancouver Stock Exchange junior exploration company with exploration projects
in Africa (August 1996 to present); (b) Secretary of Intertech Minerals Corp.,
a junior diamond exploration company with property in Northwest Territories
Canada (January 1999 to present); and President and Director of dot.com
Technologies Inc., an inactive Vancouver Stock Exchange company with no
current business (July 1999 to present). Mr. Godinho holds an LL.B. from the
University of British Columbia.
Frederick Clarke has been a Director of Imagis since February 12, 1998. In
addition, over the past five years, Mr. Clarke has divided his time serving in
the following positions of the following companies: (a) founder and Chairman
of the Board of The Clarke Group Companies, a diversified forestry
conglomerate based in Mission, British Columbia; (b) advisor/consultant to
Green River Log Sales (1996) Ltd.; (c) chairman of the board of Re-Con
Building Products Inc., provider of building materials; and (d) officer and
Director of Pacific Cascade Consultants Ltd.
Board of Directors
Each member of the Board of Directors is elected annually and holds office
until the next annual meeting of shareholders or until his successor has been
elected or appointed, unless his office is earlier vacated in accordance with
the Bylaws of Imagis. Officers serve at the discretion of the Board and are
appointed annually. The Board currently has one committee, the Audit
Committee and an Advisory Board.
None of Imagis' directors or executive officers are parties to any arrangement
or understanding with any other person pursuant to which said individual was
elected as a director or officer of Imagis. No director or executive officer
of Imagis has any family relationship with any other officer or director of
Imagis.
Audit Committee
The Audit Committee recommends independent accountants to Imagis to audit
Imagis' financial statements, discusses the scope and results of the audit
with the independent accountants, reviews Imagis' interim and year-end
operating results with Imagis' executive officers and Imagis' independent
accountants, considers the adequacy of the internal accounting controls,
considers the audit procedures of Imagis and reviews the non-audit services to
be performed by the independent accountants. The members of the Audit
Committee are Fred Clarke, Altaf Nazerali and Rory Godinho.
22
Advisory Board
The following table sets forth the members of the Company's Advisory Board as
of December 31, 1999:
Name
----
Oliver Revell
Reid Morden
Wade Nesmith
Robert Gordon
The Advisory Board's main purpose is to participate in defining the business
strategy of Imagis and to aid in implementing that strategy by acting as a
liaison to persons and organizations in the law enforcement and security
industries.
Oliver Revell has served as a member of the Advisory Board to Imagis since
March 25, 1999. Mr. Revell served for over 30 years in the U.S. Federal
Bureau of Investigation ("FBI"). Mr. Revell served in various positions with
the FBI, eventually becoming Associate Deputy Director of the FBI, the second
highest career position within the FBI. Throughout his FBI career, he served on
numerous presidential and vice-presidential task forces and was appointed as
Vice-Chairman of the Interagency Group for Counter-Intelligence and the
Terrorist Crisis Management Committee of the National Security Council. Mr.
Revell is a Life Member of the International Association of Chiefs of Police
and was the founding Chairman of its Committee on Terrorism.
Reid Morden has served as a member of the Advisory Board of Imagis since April
12, 1999. Mr. Morden is currently a Partner of Sussex Circle Toronto. He is
also a member of the Advisory Board, York University International MBA
Program, a member of the Canadian Committee of the Council for Security and
Cooperation in Asia Pacific and a member of the International Advisory Board
of the (Washington, D.C.-based) Institute for the Study of Terrorism and
Violence. Mr. Morden served as the President and Chief Executive Officer of
Atomic Energy of Canada from 1994 through 1998. From 1991 to 1994 he served
as Deputy Minister, Department of Foreign Affairs and International Trade.
From 1987 to 1991 he directed the Canadian Security Intelligence Service.
Wade Nesmith has served as a member of the Advisory Board to Imagis since
March 11, 1999. Mr. Nesmith has practiced law since 1979 mainly in the
securities and regulatory environment. He served as the Superintendent of
Brokers for the Province of British Columbia from 1989 to 1992.
Robert Gordon is currently the senior vice president of Oracle Corporation
responsible for Oracle's operations in the Netherlands, Belgium, the Middle
East and Africa. Previously, Mr. Gordon was President and CEO of Oracle
Canada. Prior to joining Oracle in 1991, Mr. Gordon held senior management
positions at IBM, Northern Telecom and Bell Atlantic. Mr. Gordon is a past
chair of the Information Technology Association of Canada (ITAC).
The Company is a foreign private issuer and, as such, its insiders are not
required to file reports under Section 16(a).
Item 10. Executive Compensation.
Compensation of Executive Officers
The following table sets forth compensation information for the fiscal year of
Imagis ended December 31, 1999:
23
<PAGE>
Summary Compensation Table
Name and Principal Position Iain Drummond, President and Chief Executive
Officer
Fiscal Year 1999
Compensation
Salary ($) $137,500
Bonus ($) N/A
Other Annual Compensation ($) N/A
Long Term Compensation
Securities Under Options (#) N/A
All Other Compensation ($) $500,000(1)
(1) Mr. Drummond was issued a warrant to purchase 400,000 shares of Imagis
at an exercise price of $1.25 per share in consideration for renouncing his
right to acquire up to a 6% equity in Imagis Cascade.
Employment Agreements
Pursuant to an agreement dated February 23, 1999, the Registrant retained Iain
Drummond to act as President and Chief Executive Officer effective September
1, 1998 (the "Employment Agreement"). Pursuant to the Employment Agreement,
Mr. Drummond's current annual salary is $144,000. If the Registrant achieves
its annual sales targets during Mr. Drummond's first year of employment, Mr.
Drummond will receive a bonus of $75,000. If the Registrant exceeds sales
targets during Mr. Drummond's first year of employment, Mr. Drummond's bonus
could equal up to 100% of his salary, as determined in the discretion of the
Board of Directors. For all years after Mr. Drummond's first year of
employment, Mr. Drummond will receive a bonus of 50% of his base salary for
that year, if the Registrant achieves its annual sales targets during that
year. Any bonus paid to Mr. Drummond must be paid in cash within 90 days of
fiscal year end. In addition, under the terms of the Employment Agreement and
the Share Purchase Agreement, the Registrant issued a warrant to purchase
400,000 shares at an exercise price of $1.25 to Mr. Drummond (the "Drummond
Warrant"). The Drummond Warrant is exercisable in accordance with the
following vesting schedule:
(a) 133,333 Shares may be acquired after February 23, 2000;
(b) 133,333 Shares may be acquired after February 23, 2001;
(c) 133,334 Shares may be acquired after February 23, 2002.
Once vesting has occurred with respect to a portion of the shares, Mr.
Drummond has two years from the date of vesting with respect to that portion
of the vested shares only to purchase the Common Shares. In addition, the
Drummond Warrant is exercisable only if on the date of such exercise, Mr.
Drummond is a director, officer or employee of Imagis
There were no stock options granted to the named executive officer during the
fiscal year ended December 31, 1999.
Compensation of Directors
During the most recently completed financial year ended December 31, 1999,
there was no compensation paid by Imagis to the directors for their services
as directors except as otherwise disclosed herein. There are no standard
arrangements for any such compensation to be paid other than reimbursement for
expenses incurred in connection with their services as directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information concerning the number of
shares of Common Stock owned beneficially as of December 31, 1999 by: (i) each
person known to Imagis to own more than five percent (5%) of any class of
Imagis' voting securities; (ii) each director of Imagis; and (iii) all
directors and officers as a group. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to
the shares shown.
24
<PAGE>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNER OF CLASS(1)
Common Stock Iain Drummond (2) 400,000 5.7%
3307 W. 6th
Vancouver, B.C. V6R 1T2
Canada
Common Stock Sandra E. Buschau (3) 230,000 3.5%
2337 Quayside Drive
Vancouver, B.C. V5P 4W9
Canada
Common Stock Altaf Nazerali (4) 330,000 5.0%
555 Palisade Drive
N. Vancouver, B.C. V7R 2H9
Canada
Common Stock Rory Godinho (5) 200,000 3.0%
1590 23rd Street
W. Vancouver, B.C. V7V 4W9
Canada
Common Stock Frederick Clarke (6) 2,082,563 31.5%
33610 E. Broadway Ave.
Mission, B.C. V2V 4M4
Canada
Common Stock Andy Amanovich 2,032,563 31.0%
1300-1075 W. Georgia St.
Vancouver, B.C. V6E 3C9
Canada
Common Stock First Capital Invest Corp. (7)1,167,857 17.8%
International Trust Bldg.
Wickham Cay
Road Town Tortola
PO Box 659, BVI
Common Stock All directors and officers 3,242,563 44.6%
as a group (7 persons) (8)
(1) Based on an aggregate 6,558,214 Shares outstanding as of March 31, 1998.
(2) All 400,000 Shares are issuable pursuant to a warrant and are
exercisable within 60 days of March 31, 1999.
(3) Includes options to purchase 75,000 Shares within 60 days of March 31,
1999.
(4) Includes options to purchase 80,000 Shares within 60 days of March 31,
1999.
(5) Includes options to purchase 100,000 Shares within 60 days of March 31,
1999.
(6) 2,032,563 Shares are indirectly held through Pacific. Mr. Clarke
controls FWC Holdings Ltd. which owns 50% of Pacific. Andy Amanovich, the
current Chief Technology Officer of the Corporation, owns the other 50% of
Pacific. Includes Fred Clarke options to purchase 50,000 Shares within 60
days of March 31, 1999.
(7) Based on regulatory filings with the British Columbia Securities
Commission, First Capital Invest Corp. is controlled by Kurt Dalmata.
(8) Includes options and warrants to purchase 705,000 Shares within 60 days
of March 31, 1999.
Imagis is not aware of any arrangement which might result in a change in
control in the future.
Item 12. Certain Relationships and Related Transactions.
On February 23, 1999, Imagis acquired one hundred percent of the shares in the
capital of Imagis Cascade pursuant to a Share Purchase Agreement among Imagis,
Imagis Cascade and the shareholders of Imagis Cascade dated December 14, 1998.
Certain officers and directors and persons related to them were involved in
the transaction. See "ITEM 1- DESCRIPTION OF BUSINESS - Acquisition of
Imagis".
The promoters of Imagis were Altaf Nazerali, Rory Godhino, Sandra Buschau and
Ross Wilmot. The promoters of Imagis Cascade (prior to the acquisition by
Imagis of February 23, 1999) were Pacific Cascade Consulting,
25
<PAGE>
Frederick Clarke and Andrew Amanovich, 385078 B.C. Ltd., a British Columbia
company controlled by Penny Walker, and Sonora Logging, controlled by Pamella
Markie Clarke.
Except as otherwise disclosed herein, no director, senior officer, principal
shareholder, or any associate or affiliate thereof, had any material interest,
direct or indirect, in any transaction since the beginning of the last
financial year of Imagis that has materially affected Imagis, or any proposed
transaction that would materially affect Imagis, except for an interest arising
from the ownership of shares of Imagis where the member will receive no extra or
special benefit or advantage not shared on a pro rata basis by all holders of
shares in the capital of Imagis.
Item 13. Exhibits and Reports on Form 8-K.
(a)1. Financial Statements:
See Index to Financial Statements and Schedule on page F-1
2. Financial Statement Schedule:
See Index to Financial Statements and Schedule on page F-1
3. Exhibits. The following exhibits are filed (or incorporated by
reference herein) as part of this Form 10-KSB:
3.1* Articles of Incorporation
4.1* Shareholder Agreement dated February 23, 1999 among the Original
Shareholders and the Former Imagis Shareholders
4.2* Escrow Agreement for a Venture Capital Pool Issuer dated July 3,
1998 among Colloquium Capital Corp., CIBC Mellon Trust Company
and Sandra Buschau, Altaf Nazerali, Shafiq Nazerali, Rory
Godinho and Ross Wilmot
4.3 Convertible Note Subscription Agreement dated October 1, 1999
10.1* Incentive Stock Option Agreements dated July 7, 1998 between the
Registrant and each of Sandra E. Buschau, Altaf Nazerali and
Ross Wilmot
10.2* Confidentiality and Non-Competition Agreement dated February 23,
1999 among the Registrant, Imagis, the Former Imagis
Shareholders and the principals of the Former Imagis
Shareholders
10.3* Revenue Assignment Agreement dated December 15, 1998 among
Imagis, Pacific, Imagis Solutions (US) Incorporated and Imagis
North West Solutions Inc.
10.4* Agency Agreement dated March 29, 1999 among the Registrant and
the Agents
10.5* Subscription Agreement dated January 26, 1999 between the
Registrant and Pacific Cascade Consultants Ltd.
10.6* Subscription Agreement dated January 26, 1999 between the
Registrant and First Capital Invest Corp.
10.7* Incentive Stock Option Agreements dated February 25, 1999 and
March 25, 1999 between the Registrant and certain directors,
employees and service providers of the Registrant or affiliates
or subsidiaries thereof
26
<PAGE>
10.8* Consulting Services Agreement effective February 25, 1999
between the Registrant and Shafiq Nazerali-Walji
10.9* Drummond Warrant
10.10* Armitage Warrant
10.11* Employment Agreement dated February 23, 1999 between the
Registrant and Iain Drummond
10.12* Technology Purchase Agreement among Imagis Technologies Ltd.,
Imagis Cascade Technologies Inc. and Penelope Walker, Richard
Graham and William Hawkes dated March 6, 1998
10.13* Technology Purchase Agreement between Pacific Cascade
Consultants Ltd. and Imagis Cascade Technologies Inc. dated
March 6, 1998
10.14* Share Purchase Agreement
10.15* Confidentiality and Standstill Agreement
10.16 Loan Agreement between the Registrant and Rexton Corporation
dated October 15, 1999
16.1* Letter to SEC from Elliott Tulk Pryce and Anderson dated December
10, 1998 regarding change in certifying accounts
21.1* List of Subsidiaries
27.1 Financial Data Schedule
* Previously filed as part of the Registrant's Registration Statement on Form
10-SB (File No. 000-30090).
_________________________
(b) Reports on Form 8-K.
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Vancouver,
Province of British Columbia, on March 30, 2000.
IMAGIS TECHNOLOGIES INC.
/s/ Iain Drummond
--------------------------------
Iain Drummond
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Iain Drummond President, Chief Executive Officer March 30, 2000
Iain Drummond and Director
/s/ Ross Wilmot Vice President Finance and Chief March 30, 2000
Ross Wilmot Financial Officer
/s/ Sandra Buschau Director March 30, 2000
Sandra Buschau
/s/ Frederick Clarke Director March 30, 2000
Frederick Clarke
/s/ Altaf Nazerali Director March 30, 2000
Altaf Nazerali
28
<PAGE>
IMAGIS TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operation and Deficit F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
F-1
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Imagis Technologies Inc.
(formerly Colloquium Capital Corp.) as at December 31, 1999 and 1998 and the
consolidated statements of operations and deficit and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and
1998 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
As required by the Company Act (British Columbia), we report that, in our
opinion, these principles have been applied on a consistent basis.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected shareholders' equity as at December 31, 1999 and 1998 and
the results of operations for the years then ended to the extent summarized in
note 14.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 11, 2000
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-US REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt
on the Company's ability to continue as a going concern, such as those
described in note 1 to the financial statements. Our report to the
shareholders dated February 11, 2000 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 11, 2000
F-2
<PAGE>
IMAGIS TECHNOLOGIES INC.
(Formerly Colloquium Capital Corp.)
Consolidated Balance Sheets
(Expressed in Canadian dollars)
December 31, 1999 and 1998
1999 1998
Assets
Current assets:
Cash $ 9,682 $ 38,804
Accounts receivable 251,073 126,163
Inventories 45,834 111,836
---------- ----------
306,589 276,803
Capital assets (note 3) 84,176 70,124
---------- ----------
$ 390,765 $ 346,927
========== ==========
Liabilities and Deficiency in Net Assets
Current liabilities:
Accounts payable and accrued liabilities $ 299,920 $ 644,681
Notes payable (note 4) 130,000 590,000
Deferred revenue 68,025 --
Current portion of obgligation under capital lease 6,678 6,667
---------- ----------
504,623 1,241,348
Obligation under capital lease (note 5) 2,226 9,445
Advances payable (note 6) 356,480 --
Payable to Pacific Cascade Consultants Ltd. (note 7) 463,342 416,572
---------- ----------
1,326,671 1,667,365
Deficiency in net assets:
Share capital (note 8) 3,223,995 1
Deficit (4,159,901) (1,320,439)
---------- ----------
(935,906) (1,320,438)
Operations (note 1)
Commitments (note 11)
Subsequent events (note 13)
---------- ----------
$ 390,765 $ 349,927
========== ==========
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Iain Drummond /s/ Sandra Buschau
President, CEO & Director Director
F-3
<PAGE>
IMAGIS TECHNOLOGIES INC.
(Formerly Colloquium Capital Corp.)
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
Period from
incorporation on
Year ended January 9, 1998
December 31, to December 31,
1999 1998
Revenues $ 722,193 $ 555,160
Expenses:
Purchase of materials 222,919 158,472
Sales and marketing 927,593 606,775
Technology development 614,509 --
Administration 900,013 950,608
Write-off of inventory 111,836 --
Amortization 56,109 34,252
Write-off of deferred financing charges -- 125,492
---------- ----------
2,832,979 1,875,599
---------- ----------
Net loss 2,110,786 1,320,439
Deficit, beginning of period 1,320,439 --
Adjustment to deficit due to application of
accounting principles for reverse take-
over accounting 728,676 --
---------- ----------
Deficit, end of period $4,159,901 $1,320,439
========== ==========
Loss per share $ (0.28) $ (0.39)
Weighted average number of shares outstanding 7,623,034 3,400,000
========== ==========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IMAGIS TECHNOLOGIES INC.
(Formerly Colloquium Capital Corp.)
Consolidated Statement of Cash Flows
(Expressed in Canadian dollars)
Period from
incorporation on
Year ended January 9, 1998
December 31, to December 31,
1999 1998
Cash provided by (used in):
Cash flows from operating activities:
Net loss $(2,110,786) $(1,320,439)
Items not involving the use of cash:
Amortization 56,109 34,252
Gain on settlement of accounts payable and
accrued liabilities (161,205) --
Changes in non-cash operating working capital:
Accounts receivable (124,910) (126,163)
Inventories 66,002 (111,836)
Deferred revenue 68,025 --
Accounts payable and accrued liabilites (216,569) 644,681
---------- ----------
Cash flows used in operating activities (2,423,334) (879,505)
Cash flows from investing activities:
Cash consideration paid on business combination,
net of cash acquired (669,153) --
Purchase of capital assets (70,161) (84,342)
---------- ----------
(739,314) (84,342)
Cash flows from financing activities:
Issuance of common shares for cash, net of
cash costs 3,017,484 1
Repayment of notes payable (280,000) 590,000
Repayment of obligation under capital lease (7,208) (3,922)
Loan from Pacific Cascade Consultants Ltd. 46,770 416,572
Receipt of advances payable 356,480 --
---------- ----------
3,133,526 1,006,650
---------- ----------
Increase (decrease) in cash (29,122) 38,804
Cash, beginning of period 38,804 --
---------- ----------
Cash, end of period $ 9,682 $ 38,804
========== ==========
Supplementary information and disclosure of non-cash financing
and investing activities:
Interest paid $ 13,926 $ 9,851
Income taxes paid -- --
Non-cash transactions not reported above:
Acquisition of a capital asset by capital lease -- 20,034
Issuance of common shares for services rendered 87,875 --
Advances payable eliminated on business
combination (180,000) --
========== ==========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IMAGIS TECHNOLOGIES INC.
(Formerly Colloquium Capital Corp.)
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended December 31, 1999 and 1998
1. Operations:
Imagis Technologies Inc. (formerly Colloquium Capital Corp.) ("Imagis" or,
subsequent to the transaction described below, the "Company") was incorporated
under the Company Act (British Columbia) on March 23, 1998. The common shares
of the Company were listed on the Vancouver Stock Exchange, now the Canadian
Venture Exchange (the "Exchange"), on September 9, 1998 as a venture capital
pool corporation ("VCP") as defined by the policies of the exchange. Under the
terms of the exchange's policies, Imagis had 18 months from the date of listing
to complete a Qualifying Transaction.
On October 6, 1998, Imagis, Imagis Cascade Technologies ("Imagis Cascade"), a
private Canadian company which develops and markets law enforcement software
products, and the Imagis Cascade shareholders entered into a Confidentiality
and Standstill Agreement pursuant to which Imagis was able to complete due
diligence respecting the business and affairs of Imagis Cascade. On October
16, 1998, Imagis gave notice to the Imagis Cascade shareholders of its
intention to acquire all of the issued and outstanding shares of Imagis
Cascade.
Effective February 23, 1999, Imagis acquired 100% of the outstanding shares of
Imagis Cascade.
As set out in the Share Purchase Agreement, consideration for the acquisition
of all of the shares of Imagis Cascade was $2,632,000, plus contingent
additional consideration of up to $400,000, paid as follows:
(a) as to $100,000 by application of an existing deposit on the closing
date;
(b) as to $1,632,000 by allotment and issue to Imagis Cascade's shareholders
of 3,400,000 common shares of the Company at a deemed value of $0.48 per
share;
(c) as to $900,000 in cash on or before April 30, 1999; and
(d) up to $400,000 payable to a shareholder if, as and when, the warrants
comprised in the Offering described below are exercised to raise up to
$400,000 net to the Company's treasury.
In consideration for renouncing his right to acquire up to a 6% equity
interest in Imagis Cascade, on closing Imagis issued to the president of
Imagis Cascade, a warrant to purchase 400,000 common shares of the Company at
a price of $1.25 per share exercisable for a two year period subsequent to
vesting which will occur equally on an annual basis over a three year period.
In addition, Imagis issued a warrant to purchase 24,000 common shares at a
price of $1.25 per share for a one year period to an unrelated party for
services provided.
F-6
<PAGE>
1. Operations (continued):
In addition, the Company paid a finders fee with the issuance of 100,000
shares at a deemed value of $0.48 per share.
As the shares issued in this transaction resulted in the recipients gaining
voting control over Imagis, the acquisition is accounted for as a reverse
take-over in accordance with accounting principles generally accepted in
Canada. The net assets deemed to have been acquired comprised cash of
$239,522 less accounts payable of $33,012 resulting in a value assigned to the
shares issued of $206,510. During the period from January 1, 1999 to
completion of the acquisition, Imagis incurred operating costs of
approximately $30,000. Application of reverse take-over accounting results in
the following:
(a) The consolidated financial statements of the combined entity being
issued under the name of the legal parent but being considered to be a
continuation of the financial statements of the legal subsidiary; and
(b) Imagis Cascade's assets, liabilities, revenues and expenses being
included in the consolidated financial statements of the Company at
their carrying values and the comparative figures reflect the results of
operations of Imagis Cascade for its most recent fiscal period ended
December 31, 1998.
These financial statements have been prepared on a going concern basis which
includes the assumption that the Company will be able to realize its assets
and settle its liabilities in the normal course of business. At December 31,
1999, the Company has a deficiency in net assets of $935,906 and has a working
capital deficiency of $198,034 and will require continued financial support
from its shareholders and creditors. Failure to obtain ongoing support of its
shareholders and creditors may make this basis of accounting inappropriate in
which case the Company's assets and liabilities would need to be recognized at
their liquidation values. These financial statements do not include any
adjustment due to this going concern uncertainty.
2. Significant accounting policies:
The Company prepares its financial statements in accordance with generally
accepted accounting principles in Canada and reflect the following significant
accounting policies:
(a) Basis of presentation:
These financial statements include the accounts of the Company and its wholly
owned subsidiary, Imagis Cascade Technologies, Inc. All material intercompany
balances and transactions have been eliminated.
(b) Inventories:
Inventories are recorded at the lower of cost, calculated on a weighted
average basis, and estimated net realizable value.
F-7
<PAGE>
2. Significant accounting policies (continued):
(c) Capital assets:
Capital assets are recorded at cost and are amortized over their estimated
useful lives on a straight-line basis at the following annual rates:
Asset Rate
Computer hardware 30%
Computer software 100%
Furniture and fixtures 20%
(d) Revenue recognition:
(i) Software sales revenue:
Revenue is recognized on the later of title passing to the customer and
customer acceptance of the product. The Company provides for estimated
return and warranty costs on recognition of revenue.
(ii) Support revenue:
Revenue from the sales of contract support services have been deferred and are
amortized to revenue over the period that the support services will be
provided.
(e) Use of estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported or disclosed in the financial statements.
Actual amounts may differ from these estimates.
(f) Foreign currency:
Monetary items denominated in foreign currencies are translated to Canadian
dollars at exchange rates in effect at the balance sheet date. Revenues and
expenses are translated to using rates in effect at the time of the
transactions. Foreign exchange gains and losses are included in income.
(g) Income taxes:
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, future 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. Future tax assets and
liabilities are measured using enacted or substantively 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 future tax
assets and liabilities of a change in tax rates is recognized to income in the
period that includes the date of enactment or substantive enactment.
F-8
<PAGE>
2. Significant accounting policies (continued):
(h) Stock option plan:
The Company has a stock option plan, which is described in note 8. No
compensation expense is recognized when stock options are issued. Any
consideration paid on exercise of stock options is credited to share capital.
(i) Loss per share:
Loss per share is calculated using the weighted average number of shares
outstanding during the fiscal period. This average includes outstanding
common shares issued in a reporting period from their date of issuance. Fully
diluted per share amounts are not presented as the effect of outstanding
options and warrants is anti-dilutive.
(j) Comparative figures:
Certain prior year amounts have been reclassified to conform with the basis
of presentation adopted in the current year.
3. Capital assets:
Accumulated Net book
1999 Cost amortization Value
Furniture and fixtures $ 61,094 $ 17,422 $ 43,672
Computer hardware 99,362 58,858 40,504
--------- --------- ---------
$ 160,456 $ 76,280 $ 84,176
========= ========= =========
1998
Furniture and fixtures $ 12,487 $ 5,203 $ 7,284
Computer hardware 91,889 29,049 62,840
--------- --------- ---------
$ 104,376 $ 34,252 $ 70,124
========= ========= =========
F-9
<PAGE>
4. Notes payable:
1999 1998
First Capital Invest Corp., a shareholder $ 100,000 $ 350,000
Due to a director 30,000 10,000
Colloquium Capital Corp. -- 220,000
International Portfolio Management Inc. -- 10,000
--------- ---------
$ 130,000 $ 590,000
========= =========
Notes payable are non-interest bearing, unsecured and repayable on demand.
5. Obligation under capital lease:
1999 1998
Minimum lease payments:
1999 $ -- $ 7,393
2000 7,393 7,393
2001 3,080 3,080
--------- ---------
10,473 17,866
Less implicit interest portion at 9.8% (1,569) (1,754)
--------- ---------
8,904 16,112
Less current portion of capital lease obligation (6,678) (6,667)
--------- ---------
$ 2,226 $ 9,445
========= =========
6. Advances payable:
During the year ended December 31, 1999, the Company agreed to sell 595.2
convertible note units, each note unit consisting of one $1,000 convertible
debenture and 1,562.5 share purchase warrants. The convertible debenture has
a one year term and bears interest at a rate of 8% per annum.
A holder of the convertible debenture has the option to convert it into common
shares of the Company at a rate of $0.64 per share up until one year from the
closing of this placement. After the first anniversary, the Company may
convert outstanding convertible debentures to common shares of the Company at a
rate not lower than $0.15 per share.
Each share purchase warrant provides for the acquisition of one common share
of the Company at a rate of $0.64 up until the first anniversary, and at a
rate of $0.74 until the second anniversary of the closing of this placement.
As of December 31, 1999, the Company had received $356,480 of the $595,200
convertible note units. Subsequent to year end, the Company received the
remaining $238,720 (note 13).
F-10
<PAGE>
7. Payable to Pacific Cascade Consultants Ltd.:
The payable to Pacific Cascade Consultants Ltd. ("Pacific Cascade"), a
significant shareholder of the Company, is non-interest bearing, unsecured and
has no specific terms of repayment. Pacific Cascade has confirmed in writing
that it does not intend to demand repayment in the next twelve months.
8. Share capital:
(a) Authorized:
100,000,000 common shares without par value
(b) Issued:
Number
of shares Amount
Imagis Cascade prior to transaction described in
note 1:
Balance December 31, 1998 3,400,000 $ 1
========= =========
Imagis prior to transaction discussed in note 1:
Issued for cash:
On private placement 800,000 $ 120,000
On initial public offering 1,500,000 450,000
Share issuance costs -- (61,575)
--------- ---------
Balance, December 31, 1998 2,300,000 508,425
Exercise of warrants 150,000 45,000
--------- ---------
Shares capital prior to reverse take-over 2,450,000 553,425
Issued on reverse take-over business
combination (note 1) 3,400,000 206,510
Adjustment required by reverse take-over
business combination accounting principles -- (641,299)
Issued for services related to the reverse take-over 172,500 87,875
--------- ---------
6,022,500 206,511
Issued for cash on private placement 2,935,714 3,252,000
Costs of financing -- (234,516)
--------- ---------
Balance, December 31, 1999 8,958,214 $3,223,995
========= =========
F-11
<PAGE>
8. Share capital (continued):
(c) Escrowed shares:
As at December 31, 1999 and 1998, 800,000 common shares are being held in
escrow. One third of these common shares will be released on the first,
second and third anniversaries of the closing date of the acquisition of
Imagis Cascade Technologies, Inc., which was February 23, 1999.
(d) Warrants:
At December 31, 1999, the following warrants were outstanding:
December 31, December 31, Exercise
1998 Granted Exercised Expired 1999 price Expiry date
150,000 -- (150,000) -- -- $ -- --
24,000 -- -- -- 24,000 $ 1.25 02/23/00
400,000 -- -- -- 400,000 $ 1.25 02/23/01
-- 2,400,000 -- (2,400,000) -- $ -- --
-- 360,000 -- (360,000) -- $ 1.23 --
- - ------- --------- ------- --------- -------
574,000 2,760,000 (150,000)(2,760,000) 424,000
======= ========= ======= ========= =======
(e) Options:
The Company has granted stock options to certain employees, directors,
advisors and shareholders to buy an aggregate of 825,000 (1998 - 230,000)
common shares of the Company at prices ranging between $0.30 and $1.00 (1998 -
$0.30). All options expire five years from the date of grant. A summary of
the status of the Company's stock options at December 31, 1999 and 1998 and
changes during the years ended on those dates is presented below:
1999 1998
Weighted average Weighted average
Shares exercise price Shares exercise price
Outstanding,
beginning of year 230,000 $0.30 -- $ --
Granted 595,000 1.00 230,000 0.30
------- ----- ------- -----
825,000 $0.80 230,000 $0.30
======= ===== ======= =====
F-12
<PAGE>
8. Share capital (continued):
(e) Options (continued):
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options outstanding
Range of exercise prices $0.30 to $1.00
Number outstanding at
December 31, 1999 825,000
Weighted average remaining
contractual life 4.08 years
Weighted average exercise price $0.80
Options exercisable
Number exercisable at
December 31, 1999 604,583
Weighted average exercise price $0.73
9. Related party transactions:
Related party transactions not disclosed elsewhere are as follows:
(a) included in accounts payable and accrued liabilities is $74,134 (1998 -
$141,594) which is due to companies with a director in common.
(b) included in administration expense is $104,002 (1998 - $16,836) for
payments made to a company with a director in common for services
rendered to the Company.
10. Income taxes:
Income tax expense differs from the amount that would be computed by applying
the federal and provincial statutory income tax rates of 45.6% (1998 - 45.6%)
to income before income taxes due to valuation allowances provided against
losses incurred in the year:
Future income tax assets are as follows:
1999 1998
Future income tax asset:
Loss carry forwards $1,531,000 $ 533,000
Less valuation allowance (1,531,000) (533,000)
--------- ---------
$ -- $ --
========= =========
F-13
<PAGE>
10. Income taxes (continued):
As at December 31, 1999, the Company (including its subsidiary) has
non-capital loss carry forwards aggregating approximately $3,358,000 available
to reduce taxable income otherwise calculated in future years. These losses
expire as follows:
2004 $1,169,000
2005 217,000
2006 1,972,000
---------
$3,358,000
=========
As indicated above, the tax benefits related to these loss carry forwards, the
application of which may be restricted, has not been recognized in these
financial statements as management does not consider it more likely than not
that such assets will be realized in the carry forward period.
11. Commitments:
The Company is committed to the following operating lease payments for
equipment over the next five years:
2000 $ 27,144
2001 19,859
2002 6,392
2003 835
2004 --
---------
$ 54,230
=========
12. Financial instruments and risk management:
(a) Fair values
The fair value of the Company's financial instruments, represented by cash,
accounts receivable, accounts payable and accrued liabilities and advances
payable, approximates their carrying values due to their ability to be
promptly liquidated or their immediate or short term maturity. The fair value
of the notes payable and payable to Pacific Cascade Consultants Ltd. are not
readily determinable due to the nature of the relationship between the
creditors and the Company.
(b) Credit risk:
The Company is exposed to credit risk only with respect to uncertainty as to
timing and amount of collectibility of accounts receivable. At December 31,
1999, no one customer had a balance receivable of more than $52,000.
F-14
<PAGE>
12. Financial instruments and risk management (continued):
(c) Foreign currency risk:
Foreign currency risk is the risk to the Company's earnings that arises from
fluctuations in foreign currency exchange rates, and the degree of volatility
of these rates. Only a small portion of the Company's sales are derived in
United States dollars, and, accordingly, foreign exchange risk is not
considered by management to be a material risk at December 31, 1999.
13. Subsequent events:
Subsequent to December 31, 1999:
(a) The Company issued 11,581 common shares for services provided related to
the convertible debenture (note 6).
(b) The convertible note units offering was completed on January 10, 2000
when the final payment was received by the Company. The Company issued
the convertible debentures and related share purchase warrants on the
closing date of the convertible note units.
(c) On February 4, 2000, 152,000 share purchase warrants issued with the
convertible note units were exercised.
(d) The Company issued 435,000 options to employees and directors of the
Company.
14. United States generally accepted accounting principles:
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP") which
differ in certain respects with accounting principles generally accepted in
the United States ("US GAAP"). Material issues that could give rise to
measurement differences to these consolidated financial statements are as
follows:
(a) Stock-based compensation:
As described in note 8, the Company has granted stock options to certain
consultants and employees. These options are granted for services provided to
the Company. For US GAAP purposes, Statement of Financial Accounting
Standards No. 123 ("FAS 123") requires that an enterprise recognize or, at its
option, disclose the impact of the fair value of stock options and other forms
of stock-based compensation in the determination of income. The Company has
elected under FAS 123 to continue to measure compensation cost for stock
options granted to employees by the intrinsic value method set out in APB
Opinion No. 25. As options are granted at exercise prices based on the market
price of the Company's shares at the date of grant, no intrinsic value
adjustment is required. However, options granted to non-employee consultants
are required to be measured at their fair value at the date of issuance and
recognized by a charge against income over their vesting period.
F-15
<PAGE>
14. United States generally accepted accounting principles (continued):
(b) The effect of these accounting differences on deficit, net loss and loss
per share under United States accounting principles are as follows:
1999 1998
Deficit, Canadian GAAP $(4,159,901) $(1,320,439)
Cumulative stock based compensation (a) (114,224) --
--------- ---------
Deficit, US GAAP $(4,274,125) $(1,320,439)
========= =========
Net loss, Canadian GAAP $(2,110,786) $(1,320,439)
Stock based compensation (a) (114,224) --
--------- ---------
Net loss, US GAAP $(2,225,010) $(1,320,439)
--------- ---------
Net loss per share, US GAAP $ (0.29) $ (0.39)
========= =========
F-16
CONVERTIBLE NOTE SUBSCRIPTION AGREEMENT
IMAGIS TECHNOLOGIES INC.
Suite 1300 - 1075 West Georgia Street
Vancouver, British Columbia
V6E 3C9
Telephone: (604) 684-4691
Fax: (604) 684-4601
October 1, 1999
Dear Sirs:
Private Placement of Convertible Note Units
of Imagis Technologies Inc. Inc. (the "Company")
The purpose of this letter is to set out the terms pertaining to the sale to
the undersigned purchaser (the "undersigned") of convertible note units of the
Company.
1. Terms of Sale: The Company hereby offers to sell to the undersigned
_________ convertible note units (the "Units") for a purchase price of
Cdn$1,000 per Unit for an aggregate purchase price of Cdn$____.00 (the
"Purchase Funds").
2. Constitution of Units: Each Unit will consist of a $1,000 principal amount
one (1) year term eight (8%) percent per annum convertible note (a
"Convertible Note") and 1,562.5 share purchase warrants (each a "Warrant")
with a term of two years.
3. Conversion Rights: The Convertible Notes will be convertible by the
undersigned into common shares ("Shares") of the Company at $.64 per Share up
to 4:00 p.m. (Vancouver time) on the first anniversary of the date of Closing
(as defined in S7). If the entire principal amount of the Convertible Notes
subscribed for herein has not been converted into Shares by the undersigned by
4:00 p.m. (Vancouver time) on the first anniversary of the Closing, the
Company shall have the right, but not the obligation to itself convert the
balance of the said principal amount remaining unconverted at the lowest price
per Share permissible by the Vancouver Stock Exchange or any successor
exchange ("Exchange"), but in any event not less than $.15 per Share.
4. Redemption Rights: The Company may redeem the Convertible Notes in whole
or in part prior to maturity, at its sole discretion at a price equal to the
principal amount thereof plus all accrued but unpaid interest, but to do so
the Company must give the undersigned not less than 15 days prior written
notice ("Notice") of its intention to redeem the Convertible Notes and the
number and amount of Convertible Notes it wishes to redeem (the "Convertible
Notes to be Redeemed"). Upon receipt of Notice as aforesaid the undersigned
will have the right, but not the obligation, to convert the Convertible Notes
to be Redeemed into Shares at the lower of $.64 per Share and the average
price of the Shares as traded on the Exchange for the ten days prior to the
date of receipt of the Notice, less the following discounts:
<PAGE>
Average Trading Price Discount
up to $0.50 25%
$0.51 to $2.00 20%
above $2.00 15%
5. Terms of Warrants: Each Warrant will
(a) be comprised in one warrant certificate (the "Warrant Certificate"),
registered in the name of the undersigned, representing an aggregate number of
Warrants being acquired hereunder by the undersigned;
(b) be non-transferable;
(c) be subject to the terms and conditions which are adopted by the Company
for the Warrants, which terms and conditions will, amongst other things,
(i) provide for an appropriate adjustment in class and number of Shares
issuable pursuant to any exercise thereof upon the occurrence of certain
events, including any subdivision, consolidation or re-classification of the
Shares, and
(ii) not provide for any adjustment in the number of Shares issuable pursuant
to any exercise thereof in the event of the Company issuing any other Shares,
warrants or options to acquire Shares at prices either above, at or below the
exercise price of the Warrants; and
(d) provide for the acquisition of one Share at a price of $.64 at any time up
to 4:00 p.m. (Vancouver time) on the first anniversary of the date of Closing
and at a price of $.74 at any time up to 4:00 p.m. (Vancouver time) on the
second anniversary of the date of Closing.
6. Conditions Precedent: The sale of the Units to the undersigned will be
subject to the following conditions precedent:
(a) receipt by the Company of all required regulatory approvals for the sale
of the Units to the undersigned including without limitation, the approval of
the Exchange;
(b) receipt by the Company within 20 days of the date hereof, of a money order
or like instrument or certified cheque representing the Purchase Funds;
(c) if the undersigned is a corporation, receipt by the Company of the
Exchange's Corporate Placee Registration Form attached hereto as Appendix 1,
duly executed by the undersigned; and
(d) receipt by the Company of the form of Loan Agreement attached hereto as
Appendix 2, duly executed by the undersigned.
The conditions set forth in this S6 are for the exclusive benefit of the
Company and any of them may be waived in whole or in part by the Company at
any time.
<PAGE>
7. The Closing: The Closing of the purchase and sale of the Units will occur
on or before the 5th business day (the "Closing") after the last of the
conditions precedent described in S5 have either been satisfied or waived by
the Company. A "business day" will mean a day on which the Exchange is open
for the transaction of business.
8. Closing Procedure: The sale of the Units to the undersigned will take
place at the Closing. The Company will issue at Closing certificates
representing the Convertible Notes and the Warrants in the name of the
undersigned and forward them by registered mail to the undersigned.
9. Termination: In the event that the Closing has not occurred within 120
days of the date hereof, this Agreement may be terminated by either party
delivering notice thereof to the other.
10. Representations and Warranties:
(a) The Company represents and warrants to the undersigned that:
(i) it is a corporation which has been duly incorporated and is validly
existing and in good standing under the laws of British Columbia,
(ii) it is an Exchange Issuer under the Securities Act (British Columbia) (the
"Act") and has been a reporting issuer under the Act for more than 12 months,
(iii) its shares are listed for trading on the Exchange and it is in
compliance with the rules and regulations of such body,
(iv) it is not in default under the Act, and
(v) the Purchase Funds will be used for general work capital purposes;
(b) The undersigned represents and warrants to the Company that:
(i) the undersigned will be the beneficial owner of the Units and is acquiring
the Units for investment and not with a view to reselling them,
(ii) the undersigned is not acquiring the Units as a result of any information
about the material affairs of the Company that is not generally known to the
public save knowledge of the transaction described herein,
(iii) the undersigned is familiar with and will abide by the resale
restrictions which apply to the Convertible Notes, Shares and Warrants under
applicable securities legislation and, without limitation, those described in
S12 hereof, and
(iv) the undersigned has such knowledge and experience in financial, business
and investment matters that the undersigned is capable of evaluating the
merits and risks of an investment in the Units and the Company and is capable
of making an informed investment decision and does not require the services of
a representative or financial advisor; and
(c) In addition to the representations and warranties set out in S10(b)
hereof, the undersigned hereby certifies that either (i) the undersigned is
not a resident of any
<PAGE>
political sub-division of North America, or (ii) if the
undersigned is a resident of British Columbia, the aggregate acquisition cost
of the Units will not be less than $97,000. The Company represents and
warrants that it has no reasonable grounds to believe that the foregoing
certification is false.
11. The Undersigned's Acknowledgements
The undersigned, in addition to the representations, warranties and
certifications elsewhere set out herein, acknowledges that:
(a) no securities commission or similar regulatory authority has reviewed or
passed on the merits of the Units;
(b) there is no government or other insurance covering the Units;
(c) there are risks associated with the purchase of the Units;
(d) there are restrictions on the undersigned's ability to resell the
securities comprising the Units or any securities underlying them and it is
the responsibility of the undersigned to ascertain what those restrictions are
and to comply with them before reselling the securities comprising the Units
or any securities underlying them; and
(e) the Company has advised the undersigned that the Company is relying upon
an exemption from the requirements to provide the undersigned with a
prospectus and to sell securities through a person registered to sell
securities under the Act and as a consequence of acquiring securities pursuant
to this exemption, certain protections, rights and remedies provided by the
Act, including statutory rights of rescission or damages, will not be
available to the undersigned.
12. Resale Restrictions:
(a) The sale of Units by the Company is made subject to following resale
conditions which are imposed by the Act and the Securities Rules thereunder
("Rules"):
(i) a purchaser of Units will not be able to resell the Convertible Notes, the
Shares or shares acquired upon exercise of Warrants (collectively the
"Securities") until after the expiration of 4 months from the date this
Agreement is executed by the undersigned and the Company and all the conditions
set out in S6 have been met except for the condition set out in S6(a); and
(ii) upon the expiration of such 4-month hold period:
(A) the resale of any Securities must not be from the holdings of a control
person,
(B) no unusual effort must be made to prepare the market or to create a demand
for and of the Securities,
(C) no extraordinary commission or consideration is to be paid in respect of
the resale of the Securities,
(D) if the undersigned at the time of sale is an insider of the Company, other
than a director or senior officer of the Company, the undersigned has
<PAGE>
filed all records required to be filed under Sections 87 and 90 of the Act, and
(E) if the undersigned is a director or senior officer of the Company at the
time of sale, the undersigned has filed all records required to be filed under
Sections 87 and 90 of the Act and the Company has filed all records required
to be filed under Part 12 of the Act and of the Rules;
(b) The certificates representing the Securities will where required by law,
be endorsed with the following legend:
"The securities represented by this Certificate are subject to a hold period
and may not be traded in British Columbia until [expiry of 4 month hold
period] except as permitted by the Act and the Regulations thereunder."
The foregoing is a summary only of certain aspects of resale restrictions
which will apply to the Securities under British Columbia securities
legislation and is not intended to be exhaustive and does not refer to resale
restrictions which may arise by reason of securities laws other than those of
British Columbia. THE PURCHASER WILL CONSULT HIS OWN PROFESSIONAL ADVISORS
REGARDING RESALE RESTRICTIONS APPLICABLE TO THE SECURITIES.
13. General: The purchase and sale of the Units as provided for herein is
subject to the following additional terms and conditions:
(a) neither of the parties may assign any right, benefit or interest in this
Agreement without the written consent of the other, and any purported
assignment without such consent will be void;
(b) this Agreement constitutes the entire agreement between the parties and
supersedes every previous agreement, communication, expectation, negotiation,
representation, warranty or understanding whether oral or written, express or
implied, statutory or otherwise, between the parties with respect to the
subject matter of this Agreement;
(c) each party will execute and deliver such further agreements and documents
and do such further acts and things as any other party reasonably requests to
evidence, carry out or give full force and effect to the intent of this
Agreement;
(d) this Agreement is and will be deemed to have been made in British
Columbia, for all purposes will be governed exclusively by and construed and
enforced in accordance with the laws prevailing in British Columbia and the
rights and remedies of the parties will be determined in accordance with those
laws;
(e) this Agreement will enure to the benefit of and be binding upon the
respective legal representatives and successors of the parties;
(f) this Agreement may be executed by facsimile and in any number of
counterparts with the same effect as if all parties to this Agreement had
signed the same document and all counterparts will be construed together and
constitute one and the same instrument;
<PAGE>
(g) words importing the masculine gender include the feminine or neuter, words
in the singular include the plural, words importing a corporate entity include
individuals, and vice versa;
(h) a reference to "approval", "authorization" or "consent" means written
approval, authorization or consent;
(i) the headings in this Agreement are for convenience only and are not
intended as a guide to interpretation of this Agreement or any portion
thereof;
(j) all notices hereunder will be in writing and addressed to the party for
whom it is intended at the address first above given. Either party may by
notice to the other change its address for service. Any notice delivered will
be deemed to have been given or made on the date it was actually delivered, or
if sent by telex, telegram or other form of electronic facsimile will be
deemed to have been given or made on the business day next following the date
upon which it was transmitted; and
(k) all references to dollars or dollar amounts shall be deemed to be
references to Canadian dollars.
The undersigned purchaser may accept this offer by executing the counterpart
of this letter where shown.
Yours very truly,
IMAGIS TECHNOLOGIES INC.
Per: /s/ Iain Drummond
Iain Drummond, President
Agreed to and accepted as of the 1st day of October, 1999.
or
(Name of Corporate Purchaser) (Signature of Individual Purchaser)
Per:
(Office) (Print name of Individual Purchaser)
(Address) (Address)
___________________________________
(Signature of witness to execution by
individual purchaser)
<PAGE>
APPENDIX 1
CORPORATE PLACEE REGISTRATION FORM
(VANCOUVER STOCK EXCHANGE POLICIES - APPENDIX 16F*)
*New Appendix March 1999
Where subscribers to a private placement are not individuals, the Exchange
requires that the following information about the placee be provided.
This Form will remain on file with the Exchange, therefore the corporation or
other entity (the "Corporation") need only file it once, and it will be
referenced for all subsequent private placements in which it participates. If
any of the information provided in this Form changes, the Corporation must
notify the Exchange prior to participating in further placements with Exchange
listed companies.
1. Name of Corporation:
2. Address of Corporation's Head Office:
3. Jurisdiction of Incorporation:
4.(a) If the Corporation will be purchasing securities as principal, please
check the box at right and include the names and addresses of person/s having
a greater than 10% beneficial interest in the Corporation: [ ]
(b) If the Corporation will be purchasing as a portfolio manager, please
check the box at right and complete the Additional Undertaking and
Certification set out below. [ ]
Additional Undertaking and Certification - Portfolio Manager
If the undersigned is a portfolio manager purchasing as agent for accounts
that are fully managed by it, the undersigned acknowledges that it is bound by
the provisions of the Securities Act (British Columbia) (the "Act"), and
undertakes to comply with all provisions of the Act relating
to ownership of, and trading in, securities including, without limitation, the
filing of insider reports and reports pursuant to Section 111 of the Act.
<PAGE>
If the undersigned carries on business as a portfolio manager in a
jurisdiction outside of Canada, the undersigned certifies that:
a) it is purchasing securities of the Issuer on behalf of managed accounts
over which it has absolute discretion as to purchasing and selling, and in
respect of which it receives no instructions from any person beneficially
interested in such accounts or from any other person;
b) it carries on the business of managing the investment portfolios of clients
through discretionary authority granted by those clients (a "portfolio
manager" business) in [jurisdiction], and it is permitted
by law to carry on a portfolio manager business in that jurisdiction;
c) it was not created solely or primarily for the purpose of purchasing
securities of the Issuer;
d) the total asset value of the investment portfolios it manages on behalf
of clients is not less than $20,000,000;
e) it does not believe, and has no reasonable grounds to believe, that any
resident of British Columbia has a beneficial interest in any of the managed
accounts for which it is purchasing; and
f) it has no reasonable grounds to believe, that any of the directors,
senior officers and other insiders of the Issuer, and the persons that carry
on investor relations activities for the Issuer has a beneficial interest in
any of the managed accounts for which it is purchasing.
5. The undersigned acknowledges that it is bound by the provisions of the
British Columbia Securities Act including, without limitation, sections 87 and
111 concerning the filing of insider reports and reports of acquisitions.
Dated at this day of , 1999
----------- --------- ------------
(Name of Purchaser - please print)
(Authorized Signatory)
(Official Capacity - please print)
(Please print name of individual whose
signature appears above, if different
from name of purchaser printed above)
LOAN AGREEMENT
THIS AGREEMENT is dated effective October 15, 1999
BETWEEN:
IMAGIS TECHNOLOGIES INC., a Company duly incorporated under the laws of the
Province of British Columbia and having an office at Suite 1300 - 1075 West
Georgia Street, Vancouver, British Columbia, V6E 3C9
(the "Corporation")
AND: REXTON CORPORATION of MC Hatchobori Bldg. 4F, 2-chome,
11-7 Hatchobori, Chuo-ku, Tokyo 104-0032, Japan
The Parties Whose Names Are Set out in Schedule "A" Hereto,
(Collectively the "Noteholders")
WHEREAS:
(A) The Corporation is desirous of raising money for its corporate purposes
and with a view to so doing is desirous of creating and issuing the Notes, the
issuance of which is provided for by this agreement;
(B) The Corporation, under the laws relating thereto, is duly authorized to
create and issue the Notes to be issued as herein provided;
(C) All necessary resolutions of the directors and shareholders of the
Corporation have been duly enacted, passed and/or confirmed and other
proceedings taken and conditions complied with to make the creation and issue
of the Notes proposed to be issued hereunder and this agreement and the
execution thereof legal, valid and binding on the Corporation in accordance
with the laws relating to the Corporation;
(D) The foregoing recitals are made as representations and statements of fact
by the Corporation;
<PAGE>
NOW THEREFORE IT IS HEREBY COVENANTED, AGREED AND DECLARED as follows:
PART 1
INTERPRETATION
Definitions
1.1 In this agreement and in the Notes, unless there is something in the
subject matter or context inconsistent therewith, the expressions following
shall have the following meanings, namely:
(a) "this agreement", "hereto", "herein", "hereby", "hereunder", "hereof" and
similar expressions refer to this agreement and not any particular Part,
Section, subsection, clause, subdivisions or other portion hereof and include
any and every instrument supplemental or ancillary hereto;
(b) "business day" means a day which is not a Saturday or Sunday or a civic or
statutory holiday in the City of Vancouver, in the Province of British
Columbia;
(c) "Closing Date" means the date the principal amount of the Notes has been
advanced to the Corporation in full;
(d) "Common Shares" means the common shares without par value in the capital
of the Corporation, as such shares exist at the close of business on the date
of this agreement; provided that in the event of a subdivision, redivision,
reduction, combination or consolidation thereof, or successive such
subdivisions, redivisions, reductions, combinations or consolidations, then,
subject to adjustments, if any, having been made in accordance with the
provisions of S0, "Common Shares" shall thereafter mean the shares resulting
from such subdivision, redivision, reduction, combination or consolidation;
(e) "Conversion Price" means $.64 per Common Share, subject to adjustment as
provided in S0;
(f) "Corporation's Auditors" or "Auditors of the Corporation" means an
independent firm of chartered or certified public accountants duly appointed
as auditors of the Corporation;
(g) "Counsel" means a barrister or solicitor or firm of barristers or
solicitors or other legal counsel retained or employed by the Corporation;
(h) "director" means a director of the Corporation for the time being and
"directors" or 'board of directors" means the board of directors of the
Corporation or, if duly constituted and whenever duly empowered, the executive
committee of the board of directors of the Corporation for the time being, and
reference to action by the directors means action by the directors of the
Corporation as a board or action by the said executive committee as such
committee;
<PAGE>
(i) "dividends paid in the ordinary course" means cash dividends declared
payable on the Common Shares in any fiscal year of the Corporation to the
extent that such cash dividends do not exceed, in the aggregate, the greater
of:
(i) 200% of the aggregate amount of cash dividends declared payable by the
Corporation on the Common Shares in its immediately preceding fiscal year;
(ii) 300% of the arithmetic mean of the aggregate amounts of cash dividends
declared payable by the Corporation on the Common Shares in its three
immediately preceding fiscal years; and
(iii) 100% of the aggregate consolidated net earnings of the Corporation,
before extraordinary items, for its immediately preceding fiscal year;
(j) "Event of Default" means any event specified in S0, continued for the
period of time, if any, therein designated;
(k) "Notes" means the notes as set out in the form of certificate outlined in
Schedule "B" attached hereto, of the Corporation issued or to be issued
hereunder and for the time being outstanding;
(l) "Noteholders" or "holders" means the several persons for the time being
entered in the registers hereinafter mentioned as holders of Notes;
(m) "Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President or any Vice-President and by another such officers, the
Secretary or the Treasurer of the Corporation;
(n) "person" means any individual, corporation, company, partnership,
association or trust;
(o) "Redemption Price" has the meaning ascribed thereto in S0;
(p) "Subsidiary" or "Subsidiary Corporation" means any corporation of which
more than 50% of the outstanding Voting Shares are owned, directly or
indirectly, by or for the Corporation, provided that the ownership of such
shares confers the right to elect at least a majority of the board of
directors of such corporation and includes any corporation in like relation to
a Subsidiary;
(q) "Voting Shares" mean shares of any class in the capital stock of any
corporation carrying voting rights under all circumstances, provided that, for
the purpose of such definition, shares which only carry the right to vote
conditionally on the happening of an event shall not be considered Voting
Shares, whether or not such event shall have occurred, nor shall any shares be
deemed to cease to be Voting Shares solely by reason of a right to vote accruing
to shares of any class or classes by reason of the happening of such event; and
(r) "written direction of the Corporation" means an instrument in writing
signed by the Chairman of the Board, the President or a Vice-President and by
another of such
<PAGE>
officers, the Secretary, the Treasurer, an Assistant-Secretary or an Assistant-
Treasurer of the Corporation.
Words importing the singular number only shall include the plural and vice
versa and words importing the masculine gender shall include the feminine
gender and words importing persons shall include firms and corporations and
vice versa.
Meaning of "Outstanding"
1.2 Every Note certified and delivered by the Corporation hereunder shall be
deemed to be outstanding until it shall be cancelled or delivered to the
Corporation for cancellation or moneys for the payment or redemption thereof
shall have been set aside under S0, provided that:
(a) Notes which have been partially redeemed, purchased or converted shall be
deemed to be outstanding only to the extent of the unredeemed, unpurchased or
unconverted part of the principal amount thereof; and
(b) When a new Note has been issued in substitution for a Note which has been
lost, stolen or destroyed, only one of such Notes shall be counted for the
purpose of determining the aggregate principal amount of Notes outstanding.
Headings, Etc.
1.3 The division of this agreement into Parts and Sections, the provision of
a Table of Contents and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
agreement or of the Notes.
Applicable Law
1.4 This agreement and the Notes shall be construed in accordance with the
laws of the Province of British Columbia and shall be treated in all respects
as British Columbia contracts, and the parties hereby attorn to the exclusive
jurisdiction of the courts of the Province of British Columbia.
Day Not a Business Day
1.5 In the event that any day on or before which any action is required to
be taken hereunder is not a business day, then such action shall be required
to be taken on or before the requisite time on the next succeeding day that is
a business day.
<PAGE>
Currency
1.6 All reference to currency herein shall be to lawful money of Canada.
PART 2
THE NOTES
Terms of Notes
2.1 The aggregate principal amount of Notes authorized to be issued under
this agreement shall consist of and be limited to $595,200 in lawful money of
Canada.
The Notes shall be designated as "8% Convertible Notes", shall be dated as of
the date hereof, shall mature on the first anniversary of the Closing Date and
shall bear interest (subject to the provisions of S0) from the Closing Date at
a rate of 8% per annum, payable after as well as before maturity and after as
well as before default, demand and judgement, with interest on amounts in
default at the same rate, payable at maturity.
The principal amount of the Notes and interest thereon shall be payable in
lawful money of Canada.
Form and Signature of Notes
2.2 The Notes shall be issued only as fully registered Notes in
denominations of $1000 and integral multiples thereof. The Notes shall bear
such distinguishing letters and numbers as the Corporation may determine.
The Notes may be engraved, printed or lithographed, or partly in one form and
partly in another, as the Corporation may determine.
The Notes may be under the seal of the Corporation (or a reproduction thereof
which shall be deemed to be the seal of the Corporation) and shall be signed
(either manually or by facsimile signature) by the Chairman of the Board, the
President or a Vice-President and by another of such officers, the Secretary
or the Treasurer of the Corporation. A facsimile signature upon any of the
Notes shall for all purposes of this agreement be deemed to be the signature
of the person whose signature it purports to be and to have been signed at the
time such facsimile signature is reproduced and notwithstanding that any
person whose signature, either manual or in facsimile, may appear on the Notes
is not, at the date of this agreement or at the date of the Notes or at the
date of the certifying and delivery thereof, the Chairman of the Board, the
President, a Vice-President, the Secretary or the Treasurer of the
Corporation, as the case may be, any such Notes shall be valid and binding
upon the Corporation an entitled to the benefits of this agreement.
<PAGE>
Notes to Rank Pari Passu
2.3 The Notes may be issued in such amounts, to such persons and on such
terms not inconsistent with the provisions of this agreement, and either at
par or at a discount or at a premium, as the directors may determine. Each
Note as soon as issued or negotiated shall, subject to the terms hereof, be
equally and proportionately entitled to the benefits hereof as if all of the
Notes had been issued and negotiated simultaneously.
Commencement of Interest
2.4 All Notes issued hereunder, whether issued originally or in exchange for
other Notes, shall bear interest from the Closing Date, or from the last
interest payment date on which interest shall have been paid or made available
for payment on the outstanding Notes, whichever shall be the later.
Registration of Notes
2.5 The Corporation shall, at all times while any Notes are outstanding,
cause to be kept by and at the principal office of the Company in Vancouver, a
register of holders in which shall be entered the names and addresses of the
holders of Notes and particulars of the Notes held by them respectively, and
registers of transfers in which shall be entered the particulars of all
transfers of Notes. No transfer of a Note shall be valid unless made by the
holder or his executors or administrators or other legal representatives or
his or their attorney duly appointed by an instrument in writing in form and
execution satisfactory to the Corporation.
The holder of a Note may at any time and from time to time have such Note
transferred pursuant to the provisions of this Section, in accordance with
such reasonable regulations as the Corporation may prescribe. The Corporation
shall not be required
(a) to transfer or exchange any Notes on any interest payment date or during a
period of 15 business days immediately preceding any such date; or
(b) to transfer or exchange any Notes on the day of any selection by the
Corporation of any Notes to be redeemed or purchased or during the 15
preceding business days or thereafter until the mailing of any notice of
redemption or purchase; or
(c) to transfer or exchange any Note selected or called for redemption in
whole or in part unless upon due presentation thereof such Note or part
thereof called for redemption shall be redeemed.
Persons Entitled to Payment
2.6 The person in whose name any Note shall be registered shall be deemed
and regarded as the owner thereof for all purposes of this agreement and
payment of or on account of the principal of such Note shall be made only to
or upon the order in writing of such holder thereof and such payment shall be
a good and sufficient discharge to the Corporation and any paying agent for
the amounts so paid.
The holder for the time being of any Note shall be entitled to the principal
moneys and interest evidenced by such Note, free from all equities or rights
of set-off or counterclaim between the Corporation and the original or any
intermediate holder thereof and all persons may
<PAGE>
act accordingly and a transferee of a Note shall, after an appropriate form of
transfer is lodged with the Corporation and upon compliance with all other
conditions in that behalf required by this agreement or by any conditions
contained in such Note or by law, be entitled to be entered on the register of
holders as the owner of such Note free from all equities or rights of set-off or
counterclaim between the Corporation and his transferor or any previous holder
thereof, save in respect of equities of which the Corporation is required to
take notice by statute or by order of a court of competent jurisdiction.
Delivery to the Corporation by a Noteholder of the receipt of such holder for
the principal moneys and interest evidenced by such Note respectively shall be
a good discharge to the Corporation, which shall not be hound to enquire into
the title of such holder, save as ordered by a court of competent jurisdiction
or as required by statute.
Payment of Interest
2.7 As interest on Notes matures (except interest payable at maturity or on
redemption which may be paid upon presentation and surrender of such Notes for
payment) the Corporation, at least three days prior to each date on which
interest on such Notes becomes due, shall forward or cause to be forwarded by
prepaid post, to the holder for the time being at his address appearing on the
register of holders hereinbefore mentioned, a cheque for such interest (less
any tax required by law to be deducted) payable to the order of such holder or
holders and negotiable at par at each of the places at which interest upon
such Notes is expressed to be payable. The forwarding of such cheque shall
satisfy and discharge the liability for the interest on such Notes to the
extent of the sum or sums represented thereby (plus the amount of any tax
deducted as aforesaid) unless such cheque be not paid on presentation;
provided that in the event of the non-receipt of such cheque by the holder, or
the loss or destruction thereof, the Corporation, upon being furnished with
reasonable evidence of such non-receipt, loss or destruction and an indemnity
reasonably satisfactory to it, shall issue to such holder a replacement cheque
for the amount of such cheque.
Mutilation. Loss. Theft or Destruction
2.8 In case any of the Notes issued hereunder shall become mutilated or be
lost, stolen or destroyed, the Corporation, in its discretion, may issue, and
shall certify and deliver, a new Note upon surrender and cancellation of the
mutilated Note or, in the case of a lost, stolen or destroyed Note, in lieu of
an in substitution for the same, and the substituted Note shall be in a form
approved by the Corporation and shall be entitled to the benefits of this
agreement equally with all other Notes issued or to be issued hereunder
without preference or priority one over another. In case of loss, theft or
destruction the applicant for a substituted Note shall furnish to the
Corporation such evidence of such loss, theft or destruction as shall be
satisfactory to them in their discretion and shall also furnish indemnity
satisfactory to them in their discretion. The applicant shall pay all
reasonable expenses incidental to the issuance of any substituted Note.
Exchanges of Notes
2.9 Notes of any denomination may be exchanged for Notes of any other
authorized denomination or denominations, any such exchange to be for Notes of
an equivalent aggregate principal amount. Any exchange of Notes shall be made
at the office of the Corporation. Any Notes tendered for exchange shall be
surrendered to the Corporation and shall be cancelled.
<PAGE>
Notes issued in exchange for Notes which at the time of such issue have been
selected or called for redemption at a later date shall be deemed to have been
selected or called for redemption in the same manner and shall have noted
thereon a statement to that effect provided that
(a) Notes which have been selected or called for redemption may not be
exchanged for Notes of larger denomination, and
(b) if a Note that has been selected or called for redemption in part is
presented for exchange into Notes of smaller denominations, the Corporation
shall designate, according to such method as the Corporation shall deem
equitable, particular Notes of those issued in exchange, which shall be deemed
to have been selected or called for redemption.
Except as herein otherwise provided, upon any exchange of Notes of any
denomination for other Notes and upon any transfer of Notes, the Corporation
may make a sufficient charge to reimburse it for any stamp or security
transfer taxes or other governmental charge required to be paid and, in
addition, a reasonable charge for its services, and payment of the said charge
shall be made by the party requesting such exchange or transfer as a condition
precedent thereto.
PART 3
REDEMPTION AND PURCHASE FOR CANCELLATION OF NOTES
Redemption of Notes
3.1 The Notes shall be redeemable on or before 4:00 p.m. (Vancouver time) on
the first anniversary of the Closing Date, in whole at any time or in part
from time to time, at the option of the Corporation (in the manner hereinafter
provided and in accordance with and subject to the provisions hereinafter set
forth) at a price equal to the principal amount thereof to be redeemed plus
all accrued and unpaid interest on the principal amount of the Notes or part
thereof so redeemed to the date fixed for redemption (the "Redemption Price").
Partial Redemption of Notes
3.2 Partial redemptions shall be effected pro rata to the principal amount
of the Notes held by each Noteholder.
<PAGE>
Notice of Redemption
3.3 Notice of intention to redeem any Notes ("Notice") shall be given by or
on behalf of the Corporation to the holders of the Notes which are to be
redeemed, not less than 15 days prior to the date fixed for redemption, in the
manner set out herein, and shall specify that part of the principal amount
thereof so to be redeemed, and shall specify the redemption date, the
Redemption Price and places of payment and shall state that all interest
thereon shall cease from and after such redemption date.
Notes Due on Redemption Dates
3.4 Upon Notice having been given as aforesaid, the Notes so called for
redemption shall thereupon be and become due and payable at the Redemption
Price, on the redemption date specified in such notice, in the same manner and
with the same effect as if it were the date of maturity specified in such
Notes, anything therein or herein to the contrary notwithstanding, and from
and after such redemption date, if the moneys necessary to redeem such Notes
shall have been deposited as hereinafter provided and affidavits or other
proof satisfactory to the Noteholders as to the mailing of such Notice shall
have been lodged with it, such Notes shall not be considered as outstanding
hereunder and interest upon such Notes shall cease to accrue after said date.
Failure to Surrender Notes Called for Redemption
3.5 In case the holder of any such Notes so called for redemption shall
within 30 days from the date fixed for redemption fail so to surrender any of
his Notes or shall not within such time accept payment of the redemption
moneys payable in respect thereof or give such receipt therefor, such
redemption moneys shall be set aside in trust for such holder, at such rate of
interest as the depository may allow, in some chartered bank in Canada, and
such setting aside shall for all purposes be deemed a payment to the
Noteholder of the sum so set aside, and to that extent such Notes shall
thereafter not be considered as outstanding hereunder and the Noteholder shall
have no right except to receive payment out of the moneys so paid and
deposited upon surrender and delivery up of the Note or Notes of the
Redemption Price of such Note or Notes, plus such interest thereon, if any, as
the depository may allow.
Cancellation and Destruction of Notes
3.6 All Notes so redeemed under this Part, and all Notes purchased by the
Corporation under this Part, shall forthwith be delivered to the Corporation
and shall be cancelled by it and no Notes shall be issued in substitution
therefor.
Surrender of Notes for Cancellation
3.7 If the principal moneys due upon any Note issued hereunder shall become
payable by redemption or otherwise before the date of maturity thereof, the
person presenting such Note for payment must surrender the same for
cancellation, the Corporation nevertheless paying or causing to be paid the
interest accrued and unpaid thereon (computed on a per diem basis if the date
fixed for payment is not an interest due date).
<PAGE>
Conversion on Receipt of Notice
3.8 Upon receipt of Notice given pursuant to S3.3, the holders of the Notes
in respect of which Notice was given will have the right, but not the
obligation to convert the Notes in respect of which Notice was given into
Shares at the lower of $.64 per Share and the average price of the Common
Shares as traded on the Vancouver Stock Exchange or any successor exchange for
the ten days prior to the date of receipt of the Notice, less the following
discounts:
Average Trading Price Discount
up to $0.50 25%
$0.51 to $2.00 20%
above $2.00 15%
The right to convert as described in this S3.8 shall be exercised in the same
manner as the right of conversion described in Part 4, the provisions of which
shall apply, mutatis mutandis.
PART 4
CONVERSION OF NOTES
Conversion Privilege and Conversion Price
4.1 Upon and subject to the provisions and conditions of this Part, each
Noteholder shall, in addition to its right to convert set out in S3.8, have
the right, at his option, at any time prior to 4:00 p.m. (Vancouver time) on
the first anniversary of the Closing Date (the "Time of Expiry"), to convert
the whole or, in the case of a Note of a denomination in excess of $1,000, any
part which is $1,000 or an integral multiple thereof, of the principal amount
of such Note into fully paid and non-assessable Common Shares at the
Conversion Price. Such right of conversion shall extend only to the maximum
number of whole Common Shares into which the aggregate principal amount of the
Note or Notes surrendered for conversion at any one time by the holder thereof
may be converted in accordance with the foregoing provisions of this Section.
Fractional interests in Common Shares shall be adjusted for in the manner
provided in S0.
Revival of Right to Convert
4.2 If payment of the Redemption Price is not made in the case of a
redemption upon due surrender of such Note, the right to convert such Notes
shall, in addition to all other rights that may then accrue to a Noteholder,
revive and continue as if such Note had not been called for redemption or
tendered in acceptance of the Corporation's offer, respectively.
<PAGE>
Manner of Exercise of Right to Convert
4.3 (a) The holder of a Note desiring to convert such Note in whole or in
part into Common Shares shall surrender such Note to the Corporation at its
principal offices in the City of Vancouver together with the Conversion Form
on the back of such Note or any other written notice in a form satisfactory to
the Corporation, in either case duly executed by the holder or his executors
or administrators or other legal representatives or his or their attorney duly
appointed by an instrument in writing in form and executed in a manner
satisfactory to the Corporation, exercising his right to convert such Note in
accordance with the provisions of this Part. Thereupon such Noteholder or,
subject to payment of all applicable stamp or security transfer taxes or other
governmental charges and compliance with all reasonable requirements of the
Corporation, his nominee(s) or assignee(s) shall be entitled to be entered in
the books of the Corporation as at the Date of Conversion (or such later date
as is specified in S0 as the holder of the number of Common Shares into which
such Note is convertible in accordance with the provisions of this Part and,
as soon as practicable thereafter, the Corporation shall deliver to such
Noteholder or, subject as aforesaid, his nominee(s) or assignee(s), a
certificate or certificates for such Common Shares and, if applicable, a
cheque for any amount payable under S0.
(b) For the purposes of this Part, a Note shall be deemed to be surrendered
for conversion on the date (herein called the "Date of Conversion") on which
it is so surrendered in accordance with the provisions of this Part and, in
the case of a Note so surrendered by post or other means of transmission, on
the date on which it is received by the Corporation at one of its offices
specified in subsection (a) of this Section; provided that if a Note is
surrendered for conversion on a day on which the register of Common Shares is
closed, the person or persons entitled to receive Common Shares shall become
the holder or holders of such Common Shares as at the date on which such
registers are next reopened.
(c) Any part, being $1,000 or an integral multiple thereof, of a Note of a
denomination in excess of $1,000 may be converted as provided in this Part and
all references in this indenture to conversion of Notes shall be deemed to
include conversion of such parts.
(d) The holder of any Note of which part only is converted shall, upon the
exercise of his right of conversion, surrender the said Note to the
Corporation, and the Corporation shall cancel the same and shall without
charge forthwith certify and deliver to the holder a new Note or Notes in an
aggregate principal amount equal to the unconverted part of the principal
amount of the Note so surrendered.
(e) The holder of a Note surrendered for conversion in accordance with this
Part shall be entitled to receive accrued and unpaid interest in respect
thereof up to the interest payment date on or next preceding the Date of
Conversion of such Note, but there shall be no payment or adjustment by the
Corporation on account of any interest accrued or accruing on such Notes from
the date of the latest interest accrued or accruing on such Notes from the
date of the latest interest payment date and that in the event that interest
cheques are mailed in accordance with S0 the Corporation shall be entitled to
the return of such cheque or funds, if such cheque is negotiated, if the Date
of Conversion precedes the interest payment date. The Common Shares issued
upon such conversion shall rank
<PAGE>
only in respect of dividends declared in favour of shareholders of record on and
after the Date of Conversion or such later date as such holder shall become the
holder of record of such Common Shares pursuant to subsection (b) of this S0,
from which applicable date they will for all purposes be and be deemed to be
issued and outstanding as fully paid and non-assessable Common Shares.
Adjustment of Conversion Price
4.4 The Conversion Price in effect at any date whether the right of
conversation is exercised by the Noteholder as contemplated in S0 or by the
Corporation as contemplated in S0 shall be subject to adjustment from time to
time as follows:
(a) If and whenever at any time prior to the Time of Expiry, the Corporation
shall:
(i) subdivide or redivide the outstanding Common Shares into a greater
number of Common Shares;
(ii) reduce, combine or consolidate the outstanding Common Shares into a
smaller number of Common Shares; or
(iii) issue Common Shares (or securities convertible into or exchangeable
for Common Shares) to the holders of all or substantially all of the outstanding
Common Shares by way of stock dividend (other than the issue of Common Shares
(or securities convertible into or exchangeable for Common Shares) to holders
of Common Shares pursuant to their exercise of options to receive dividends in
the form of Common Shares (or securities convertible into or exchangeable for
Common Shares) in lieu of dividends paid in the ordinary course on the Common
Shares), the Conversion Price in effect on the effective date of such
subdivision, redivision, reduction, combination or consolidation or on the
record date for such issue of Common Shares (or securities convertible into or
exchangeable for Common shares) by way of a stock dividend, as the case may
be, shall in the case of the events referred to in clauses (i) and (iii)
above, be decreased so that it shall be equal to the price determined by
multiplying the Conversion Price then in effect by a fraction the numerator of
which shall be the total number of outstanding Common Shares on such effective
or record date and the denominator shall be the total of the total number of
outstanding Common Shares on such date plus the number of outstanding Common
Shares resulting from such subdivision, redivision or dividend (including, in
the case where securities convertible into or exchangeable for Common Shares
are issued, the number of Common Shares that would have been outstanding had
such securities been converted into or exchanged for Common Shares on such
effective or record date) or shall, in the case of the events referred to in
clause (ii) above, be increased so that it shall be equal to the price
determined by multiplying the Conversion Price then in effect by a fraction the
numerator of which shall be the total number of outstanding Common Shares on
such effective or record date and the denominator shall be the total number of
outstanding Common Shares resulting from such reduction, combination or
consolidation on such effective or record date. Such adjustment shall be made
successively whenever any event referred to in this S0 shall occur; any such
issue of Common Shares (or securities convertible into or exchangeable for
Common Shares) by way of a stock dividend
<PAGE>
for the purpose of calculating the number of outstanding Common
Shares under S0 and 0 of this S0; to the extent that any such securities
convertible into or exchangeable for Common Shares are not converted into or
exchanged for Common Shares prior to the expiration of the conversion or
exchange right, the Conversion Price shall be readjusted effective as at the
date of such expiration to the Conversion Price which would then be in effect
based upon the number of Common Shares actually issued on the exercise of such
conversion or exchange right.
(b) If and whenever at any time prior to the Time of Expiry the Corporation
shall fix a record date for the issuance of rights, options or warrants to all
or substantially all the holders of its outstanding Common Shares entitling
them, for a period expiring not more than 45 days after such record date, to
subscribe for or purchase Common Shares (or securities convertible into or
exchangeable for Common Shares) at a price per Common Shares (or having a
conversion or exchange price per Common Share) less than 95% of the Current
Market price of a Common Share on such record date, the Conversion Price shall
be adjusted immediately after such record date so that it shall equal the
price determined by multiplying the Conversion Price in effect on such record
date by a fraction, of which the numerator shall be the total number of Common
Shares outstanding on such record date plus a number of Common Shares equal to
the number arrived at by dividing the aggregate price of the total number of
additional Common Shares offered for subscription or purchase (or the
aggregate conversion or exchange price of the securities convertible into or
exchangeable for Common Shares so offered) by such Current Market Price per
Common Share, and of which the denominator shall be the total number of Common
Shares outstanding on such record date plus the total number of additional
Common Shares offered for subscription or purchase (or into which the
securities convertible into or exchangeable for Common Shares so offered are
convertible or exchangeable); any Common Shares owned by or held for the
account of the Corporation shall be deemed not to be outstanding for the
purpose of any such computation; such adjustment shall be made successively
whenever such a record date is fixed; to the extent that any such rights,
options or warrants are not so issued or any such rights, options or warrants
are not exercised prior to the expiration thereof, the Conversion Price shall
be readjusted to the Conversion Price which would then be in effect if such
record date had not been fixed or, effective as at the date of such
expiration, to the Conversion Price which would then be in effect based upon
the number of Common Shares (or securities convertible into or exchangeable
for Common Shares) actually issued upon the exercise of such rights, options
or warrants, as the case may be.
(c) If and whenever at any time prior to the Time of Expiry the Corporation
shall fix a record date for the making of a distribution to all or
substantially all the holders of its outstanding Common Shares of
(i) shares of any class other than Common Shares (or other than securities
convertible into or exchangeable for Common Shares) and other than shares
distributed to holders of Common Shares pursuant to their exercise of options
to receive dividends in the form of such shares in lieu of dividends paid in
the ordinary course on the Common Shares, or
(ii) rights, options or warrants (other than rights, options or warrants
referred to in S0 and rights, options or warrants to subscribe for or purchase
Common Shares (or having a conversion or exchange price per Common Share) not
<PAGE>
less than 95% of the Current Market Price of a Common Share on such record
date), or
(iii) evidences or its indebtedness, or
(iv) assets (excluding dividends paid in the ordinary course) then, in each
such case, the Conversion Price shall be adjusted immediately after such
record date so that it shall equal the price determined by multiplying the
Conversion Price in effect on such record date by a fraction, of which the
numerator shall be the total number of Common Shares outstanding on such
record date multiplied by the Current Market price per Common Share on such
record date, less the fair market value (as determined by the hoard of
directors, which determination shall be conclusive) of such shares, rights,
options, warrants, evidences of indebtedness or assets so distributed, and of
which the denominator shall be the total number of Common Shares outstanding
on such record date multiplied by such Current Market Price per Common Share;
any Common Shares owned by or held for the account of the Corporation shall be
deemed not to be outstanding for the purpose of any such computation; such
adjustment shall be made successively whenever such a record date is fixed; to
the extent that such distribution is not so made, the Conversion Price shall
be readjusted to the Conversion price which would then be in effect if such
record date had not been fixed or to the Conversion Price which would then be
in effect based upon such shares or rights, options or warrants or evidences
of indebtedness or assets actually distributed, as the case may be; in clause
(iv) of this S0 the term "dividends paid in the ordinary course" shall include
the value of any securities or other property or assets distributed in lieu of
cash dividends paid in the ordinary course at the option of shareholders.
(d) For the purpose of any computation under subsections (b) or (c) of this
Section, the "Current Market Price" per Common Share at any date shall be the
weighted average price per share at which Common Shares have traded for 20
consecutive trading days commencing not more than 30 trading days before such
date on the Vancouver Stock Exchange, or, if the Common Shares are not listed
thereon, on such stock exchange on which the Common Shares are listed as may
be selected for such purpose by the directors or, if the Common Shares are not
listed on any stock exchange, then on the over-the-counter market. The weighted
average price shall be determined by dividing the aggregate sale price of all
Common Shares sold on the said exchange or market, as the case may be, during
the said 20 consecutive trading days by the total number of Common Shares so
sold.
(e) In the case of any reclassification of, or other change in, the
outstanding Common Shares of the Corporation other than a subdivision,
reduction, combination or consolidation, the Conversion Price shall be
adjusted in such manner, if any, and at such time, as the directors determine
to be appropriate on a basis consistent with this S0.
(f) In any case in which this S0 shall require that an adjustment shall
become effective immediately after a record date for an event referred to
herein, the Corporation may defer, until the occurrence of such event, issuing
to the holder of any Note converted after such record date and before the
occurrence of such event the additional Common Shares issuable upon such
conversion by reason of the adjustment required by such event before giving
effect to such adjustment; provided, however, that the Corporation shall
<PAGE>
deliver to such holder an appropriate instrument evidencing such holder's
right to receive such additional Common Shares upon the occurrence of the
event requiring such adjustment and the right to receive any distributions
made on such additional Common Shares declared in favour of holders of record
of Common Shares on and after the Date of Conversion or such later date as
such holder would, but for the provisions of this S0, have become the holder
of record of such additional Common Shares pursuant to S0.
(g) The adjustments provided for in this S0 are cumulative and shall apply
to successive subdivisions, redivisions, reductions, combinations,
consolidations, distributions, issues or other events resulting in any
adjustment under the provisions of this Section, provided that,
notwithstanding any other provision of this Section, no adjustment of the
Conversion Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Conversion Price then in effect;
provided however, that any adjustments which by reason of this S0 are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
(h) In the event of any question arising with respect to the adjustments
provided in this S0, such question shall be conclusively determined by a firm
of chartered accountants appointed by the Corporation (who may be the Auditors
of the Corporation); such accountants shall have access to all necessary
records of the Corporation and such determination shall be binding upon the
Corporation and the Noteholders.
(i) No adjustment in the Conversion Price shall be made in respect of any
event described in S0, 0 or 0 if the holders of the Notes are entitled to
participate in such event on the same terms mutatis mutandis as if they had
converted their Notes prior to the effective date or record date, as the case
may be, of such event.
No Requirement To Issue Fractional Common Shares
4.5 The Corporation shall not be required to issue fractional Common Shares
upon the conversion of Notes pursuant to this Part. If more than one Note
shall be surrendered for conversion at one time by the same holder, the number
of whole Common Shares issuable upon conversion thereof shall be computed on
the basis of the aggregate principal amount of such Notes to be converted. If
any fractional interest in a Common Share would, except for the provisions of
this Section, be deliverable upon the conversion of any principal amount of
Notes, the Corporation shall, in lieu of delivering any certificate of such
fractional interest, satisfy such fractional interest by paying to the holder
of such surrendered Note an amount in lawful money of Canada equal (computed
to the nearest cent) to the appropriate fraction of the value (being the last
reported sale price or, if none, the mean between the closing bid and ask
quotations on the Vancouver Stock Exchange or if the Common Shares are not
then listed on the Vancouver Stock Exchange, on such stock exchange on which
the Common Shares are listed as may be selected for such purpose by the
directors or, if the Common Shares are not listed on any stock exchange, a
value determined by the directors) of a Common Share on the business day next
preceding the Date of Conversion.
Corporation To Reserve Shares
4.6 The Corporation covenants that it will at all times reserve and keep
available out of its authorized Common Shares, solely for the purpose of issue
upon conversion of Notes as in this Part provided, and conditionally allot to
Noteholders who may exercise their conversion rights
<PAGE>
hereunder, such number of Common Shares as shall then be issuable upon the
conversion of all outstanding Notes The Corporation covenants that all Common
Shares which shall be so issuable shall be duly and validly issued as fully paid
and non-assessable.
Taxes and Charges on Conversion
4.7 The Corporation will from time to time promptly pay for the payment of
any and all taxes and charges which may be imposed by the laws of Canada or
any province thereof (except income tax or security transfer tax, if any)
which shall be payable with respect to the issuance or delivery to the holders
of Notes, upon the exercise of their right of conversion, of Common Shares
pursuant to the terms of the Notes and of this indenture.
Cancellation of Converted Notes
4.8 All Notes converted in whole or in part under the provisions of this
Part shall be forthwith delivered to and cancelled by the Corporation and,
subject to the provisions of S0 of S0, no Note shall be issued in substitution
therefor.
Notice of Special Matters
4.9 The Corporation covenants that, so long as any Note remains outstanding,
it will give notice to the Noteholders in the manner provided in S0, of its
intention to fix a record date or an effective date for any event referred to
in S0, 0, 0 or 0 of S0 (other than the subdivision, redivision, reduction,
combination or consolidation of its Common Shares) which may give rise to an
adjustment in the Conversion Price, and, in each case, such notice shall
specify the particulars of such event and the record date and the effective date
for such event; provided that the Corporation shall only be required to specify
in such notice such particulars of such event as shall have been fixed and
determined on the date on which such notice is given. Such notice shall be
given not less than 14 days in each case prior to such applicable record date or
effective date.
Conversion by Corporation
4.10 Upon and subject to the provisions and conditions of this Part and
provided that it shall not be unlawful to do so, the Corporation shall have
the right, at its option, on or prior to the Time of Expiry, to convert the
whole or, in the case of a Note in a denomination in excess of $1,000, any
part which is $1,000 or an integral multiple thereof, of the principal amount
of any Note which may be outstanding at the Time of Expiry into fully paid and
non-assessable Common Shares at the lowest price permissible by the Vancouver
Stock Exchange or any successor exchange, but in any event, not less than $.15
per Common Share.
<PAGE>
PART 5
COVENANTS OF THE CORPORATION
The Corporation hereby covenants and agrees with the Noteholders as follows:
To Pay Principal, Premium and Interest
5.1 That the Corporation will duly and punctually pay or cause to be paid to
every Noteholder the principal of and interest accrued on the Notes of which
he is the holder, and premium, if any, thereon, on the dates, at the places,
in the moneys, and in the manner mentioned herein and in the Notes.
To Carry on Business
5.2 That, subject to the express provisions hereof, the Corporation will
carry on and conduct its business in a proper and efficient manner; and at all
reasonable times it will furnish or cause to be furnished to the Noteholders
or its duly authorized agent or attorney such information relating to the
business of the Corporation and the Subsidiaries as the Noteholder may
reasonably require; and, subject to the express provisions hereof, it will do
or cause to be done all things necessary to preserve and keep in full force
and effect is corporation existence and rights.
To Provide Financial Statements
5.3 That the Corporation will furnish to the Noteholders a copy of all
financial statements, and the report, if any, of the Corporation's Auditors
thereon, which are furnished to the holders of Common Shares.
Not to Extend Time for Payment of Interest
5.4 That, in order to prevent any accumulation after maturity of unpaid
interest, the Corporation will not directly or indirectly be or become a party
to or approve any such arrangement by purchasing or funding any interest on
Notes or in any other manner. In case the time for the payment of any such
interest shall be so extended, whether or not such extension be by or with the
consent of the Corporation, notwithstanding anything herein or in the Notes
contained, such interest shall not be entitled in case of default hereunder to
the benefits of this agreement except subject to the prior payment in full of
all interest on Notes the payment of which has not been so extended.
Continued Listing
5.5 That the Corporation shall take all such steps and actions and do all
such things that may be required to maintain the listing and posting for
trading of the Common Shares of the Corporation on the Vancouver Stock
Exchange, or any successor exchange and to maintain its status as a "reporting
issuer" not in default of the requirements of the Securities Act and
Securities Rules in effect from time to time in the Province of British
Columbia.
Securities Qualification Requirements
5.6 (a) That if, in the opinion of Counsel, any instrument (not including
a prospectus) is required to be filed with or any permission is required to be
obtained from any securities
<PAGE>
regulatory authority or any other step is required any federal or provincial law
before any securities or property which a Noteholder is entitled to receive upon
the conversion of a Note may properly and legally be delivered upon the due
exercise thereof, the Corporation covenants that it will take all such action,
at its expense, as is required or appropriate in the circumstances.
(b) That the Corporation, will give written notice of the issue of Common
Shares upon the conversion of Notes, in such detail as may be required, to
each securities commission or similar regulatory authority in each
jurisdiction in Canada in which there is legislation requiring the giving of
any such notice in order that the subsequent disposition of the Common Shares
so issued will not be subject to the prospectus requirements of such
legislation.
PART 6
DEFAULT
Acceleration of Maturity
6.1 Upon the happening of any one or more of the following events, namely:
(a) if the Corporation makes default in payment of the principal of any Note
when the same becomes due and payable under any provision hereof or of the
Notes;
<PAGE>
(b) if the Corporation makes default in payment of any interest due on any
Note and any such default continues for a period of 30 days;
(c) if a decree or order of a court having jurisdiction in the premises is
entered adjudging the Corporation or any Subsidiary, the assets of which are
material having regard to the consolidated assets of the Corporation and its
Subsidiaries (herein called a "Substantial Subsidiary"), a bankrupt or
insolvency or analogous laws, or issuing sequestration or process of execution
against, or against any substantial part of, the property of the Corporation
or any Substantial Subsidiary, or appointing a receiver of, or of any
substantial part of, the property of the Corporation or any Substantial
Subsidiary, or ordering the winding up or liquidation of its affairs, and any
such decree or order continues unstayed and in effect for a period of 60 days;
(d) if a resolution is passed for the winding up or liquidation of the
Corporation or a Substantial Subsidiary except in the course of carrying Out
or pursuant to a transaction in respect of which the conditions of S0 are duly
observed and performed or if the Corporation or a Substantial Subsidiary
institutes proceedings to be adjudicated a bankrupt or insolvent, or consents
to the institution of bankruptcy or insolvency proceedings against it under
the Bankruptcy and Insolvency Act (Canada) or any other bankruptcy, insolvency
or analogous laws, or consents to the filing of any such petition or to the
appointment of a receiver of, or of any substantial part of, the property of
the Corporation or any Substantial Subsidiary, or makes a general assignment
for the benefit of creditors, or admits in writing its inability to pay its
debts generally as they become due or takes corporate action in furtherance of
any of the aforesaid purposes; or
<PAGE>
(e) if the Corporation shall neglect to observe or perform any other
covenant or condition herein contained on its part to be observed or performed
and, after notice in writing has been given by the Noteholders to the
Corporation specifying such default and requiring the Corporation to put an
end to the same, the Corporation shall fail to make good such default within a
period of 60 days.
then in each and every such event Noteholders may in their discretion, by
notice in writing to the Corporation declare the principal of and interest on
all Notes then outstanding and all other moneys outstanding hereunder to be
due and payable and the same shall forthwith become immediately due and
payable, anything therein or herein to the contrary notwithstanding, and the
Corporation shall forthwith pay to the Noteholders the principal amount of,
and accrued and unpaid interest, together with interest at the rate borne by
the Notes on such principal, interest and such other moneys from the date of
the said declaration until payment is received by the Noteholders. Such
payment when made shall be deemed to have been made in discharge of the
Corporation's obligations hereunder.
Waiver of Default
6.2 Upon the happening of any Event of Default hereunder:
(a) the holders of not less than 51% of the principal amount of the Notes
then outstanding shall have power (in addition to the powers exercisable by
extraordinary resolution as hereinafter provided) by requisition in writing to
waive any Event of Default and/or to cancel any declaration made pursuant to
S0 shall thereupon waive the Event of Default and/or cancel such declaration
upon such terms and conditions as shall be prescribed in such requisition;
provided that no act or omission of the Noteholders in the premises shall
extend to or be taken in any manner whatsoever to affect any subsequent Event
of Default or the rights resulting therefrom.
Remedies Cumulative
6.3 No remedy herein conferred upon or reserved to the holders of Notes, is
intended to be exclusive of any other remedy, but each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now existing or thereafter to exist by law or by statute.
Judgement Against the Corporation
6.4 The Corporation covenants and agrees that, in case of any judicial or
other proceedings to enforce the rights of the Noteholders, judgement may be
rendered against it in favour of the Noteholders, for any amount which may
remain due in respect of the Notes and the interest thereon and any other
moneys owing hereunder.
Immunity of Shareholders and Others
6.5 The Noteholders hereby waive and release any right, cause of action or
remedy now or hereafter existing in any jurisdiction against any past, present
or future incorporator, shareholder, director or officer of the Corporation or
of any successor company for the payment of
<PAGE>
the principal of or interest on any of the Notes or on any covenant, agreement,
representation or warranty by the Corporation herein or in the Notes contained.
PART 7
SATISFACTION AND DISCHARGE
Cancellation and Destruction
7.1 All Notes shall forthwith after payment thereof be delivered to the
Corporation and cancelled by it. All Notes cancelled or required to be
cancelled under this or any other provision of this agreement shall be
destroyed and the Corporation shall furnish a destruction certificate setting
out the designating numbers of the Notes so destroyed.
<PAGE>
Discharge
7.2 The Corporation shall release and discharge this agreement and execute
and deliver such instruments as it shall be advised by Counsel are requisite
for that purpose and to release the Corporation from its covenants herein
contained, upon proof being that the principal of and interest (including
interest on amounts in default, if any), on all the Notes and all other moneys
payable hereunder have been paid or satisfied or that, all the Notes having
matured or having been duly called for redemption, payment of the principal of
and interest (including interest on amounts in default, if any) on such Notes
and of all other moneys payable hereunder has been duly and effectually
provided for in accordance with the provisions hereof.
PART 8
SUCCESSOR CORPORATIONS
Certain Requirements
8.1 The Corporation shall not, directly or indirectly, sell, lease, transfer
or otherwise dispose of all or substantially all of its property and assets as
an entirety to any other corporation, and shall not amalgamate or merge with
or into any other corporation (any such other corporation being herein
referred to as a "successor corporation") unless:
(a) the successor corporation shall execute, prior to or contemporaneously
with the consummation of any such transaction, an indenture supplemental
hereto together with such other instruments as are satisfactory to the
Noteholders and in the opinion of Counsel are necessary or advisable to
evidence the assumption by the successor corporation of the due and punctual
payment of all the Notes and the interest thereon and all other moneys payable
hereunder and the covenant of the successor corporation to pay the same and
its agreement to observe and perform all the covenants and obligations of the
Corporation under this indenture;
(b) such transaction shall, to the satisfaction of the Noteholders, be upon
such terms as substantially to preserve and not to impair any of the rights or
powers of the Noteholders hereunder and upon such terms as are in no way
prejudicial to the interests of the Noteholders; and
<PAGE>
(c) no condition or event shall exist as to the Corporation or the successor
corporation either at the time of or immediately after the consummation of any
such transaction and after giving full effect thereto or immediately after the
successor corporation complying with the provisions of clause (a) above which
constitutes or would constitute, after notice or lapse of time or both, an
Event of Default
Vesting of Powers in Successor
8.2 Whenever the conditions of S0 have been duly observed and performed the
successor corporation shall possess and from time to time may exercise each
and every right and power of the Corporation under this agreement in the name
of the Corporation or otherwise and any act or proceeding by any provision
of this agreement required to be done or performed by any directors or officers
of the Corporation may be done and performed with like force and effect by the
directors or officers of such successor corporation and thereupon the
Corporation may be released and discharged from liability under this agreement
and the Corporation may execute any document or documents which it may be
advised is or are necessary or advisable for effecting or evidencing such
release and discharge.
PART 9
MEETINGS OF NOTEHOLDERS
Right to Convene Meeting
9.1 The Corporation may at any time and from time to time, on receipt of a
written request of the Corporation or a written request signed by the holders
of not less than 25% in principal amount of the Notes then outstanding and
upon being indemnified to its reasonable satisfaction by the Corporation or by
the Noteholders signing such request against the costs which may be incurred
in connection with the calling and holding of such meeting, convene a meeting
of the Noteholders. After receipt of any such request and such indemnity to
give notice convening a meeting, the Corporation or such Noteholders, as the
case may be, may convene such meeting. Every such meeting shall be held in
the City of Vancouver.
Notice of Meetings
9.2 At least 21 days' notice of any meeting shall be given to the
Noteholders in the manner provided in S0 and a copy thereof shall be sent by
post to the Corporation, unless the meeting has been called by it. Such
notice shall state the time when and the place where the meeting is to be held
and shall state briefly the general nature of the business to be transacted
thereat and it shall not be necessary for any such notice to set out the terms
of any resolution to be proposed or any of the provisions of this Part. The
accidental omission to give notice of a meeting to any holder of Notes shall
not invalidate any resolution passed at any such meeting.
Chairman
9.3 Some person, who need not be a Noteholder, nominated in writing by the
Corporation shall be chairman of the meeting and if no person is so nominated,
or if the person so nominated is not present within 15 minutes from the time
fixed for the holding of the meeting, the Noteholders present in person or by
proxy shall choose some person present to be chairman.
<PAGE>
Quorum
9.4 Subject to the provisions of S0, at any meeting of the Noteholders a
quorum shall consist of Noteholders present in person or by proxy and
representing at least 25% in principal amount of the outstanding Notes. If a
quorum of the Noteholders shall not be present within 30 minutes from the time
fixed for holding any meeting, the meeting, if summoned by the Noteholders or
pursuant to a request of the Noteholders, shall be dissolved; but in any other
case the meeting
<PAGE>
shall be adjourned to the same day in the next week (unless such day is a
non-business day in which case it shall be adjourned to the next week (unless
such day is a non-business day in which case it shall be adjourned to the next
following business day thereafter) at the same time and place and no notice
shall be required to be given in respect of such adjourned meeting. At the
adjourned meeting the Noteholders present in person or by proxy shall form a
quorum and may transact the business for which the meeting was originally
convened notwithstanding that they may not represent 25% of the principal
amount of the outstanding Notes. Any business may be brought or dealt with at
an adjourned meeting which might have been brought before or dealt with at the
original meeting in accordance with the notice calling the same. No business
shall be transacted at any meeting unless the required quorum be present at
the commencement of business.
Power To Adjourn
9.5 The chairman of any meeting at which a quorum of the Noteholders is
present may, with the consent of the holders of a majority in principal amount
of the Notes represented thereat, adjourn any such meeting and no notice of
such adjournment need be given except such notice, if any, as the meeting may
prescribe.
Show of Hands
9.6 Every question submitted to a meeting shall, subject to S0, be decided
in the first place by a majority of the votes given on a show of hands. At
any such meeting, unless a poll is duly demanded as herein provided, a
declaration by the chairman that a resolution has been carried unanimously or
by a particular majority or lost or not carried by a particular majority shall
be conclusive evidence of the fact. The chairman of any meeting shall be
entitled, both on a show of hands and a poll, to vote in respect of the Notes,
if any, held by him.
Poll
9.7 On every extraordinary resolution, and on any other question submitted
to a meeting, when demanded by the chairman or by one or more Noteholders or
proxies for Noteholders holding in the aggregate at least $5,000 principal
amount of Notes, a poll shall be taken in such manner and either at once or
after an adjournment as the chairman shall direct. Questions other than
extraordinary resolutions shall, if a poll be taken, be decided by the votes
of the holders of a majority in principal amount of the Noteholders
represented at the meeting and voted on the poll.
Voting
9.8 On a show of hands every person who is present and entitled to vote,
whether as a Noteholder or as proxy for one or more Noteholders or both, shall
have one vote. On a poll each Noteholder present in person or represented by
a proxy duly appointed by an instrument in writing
<PAGE>
shall be entitled to one vote in respect of each $1,000 principal amount Notes
of which he shall then be the holder. A proxy need not be a Noteholder. In the
case of joint registered holders of a Note, any one of them present in person or
by proxy at the meeting may vote in the absence of the other or others; but in
case more than one of them be present in person or by proxy, they shall vote
together in respect of the Notes of which they are joint registered holders.
Regulations
9.9 The Corporation with the approval of the Noteholders, may from time to
time make and from time to time vary or revoke such regulations as it shall
from time to time think fit providing for and governing:
(a) the form of the instrument appointing a proxy, which shall be in
writing, and the manner in which the same shall be executed and for the
production of the authority of any person signing on behalf of a Noteholder;
(b) the deposit of instruments appointing proxies at such place as the
Corporation or the Noteholders convening the meeting, as the case may be, may,
in the notice convening the meeting, direct and the time, if any, before the
holding of the meeting or any adjournment thereof by which the same shall be
deposited; and
(c) the deposit of instruments appointing proxies at some approved place or
places other than the place at which the meeting is to be held and enabling
particulars of such instruments appointing proxies to be electronically mailed
before the meeting to the Corporation at the place where the same is to be
held and for the voting of proxies so deposited as though the instruments
themselves were produced at the meeting.
Any regulations so made shall be binding and effective and the votes given in
accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only persons who will he recognized at any
meeting as the holders of any Notes, or as entitled to vote or be present at
the meeting in respect thereof, shall be Noteholders and person whom
Noteholders have by instrument in writing duly appointed as their proxies.
Corporation May Be Represented
9.10 The Corporation, by its respective officers and directors, and the legal
advisers of the Corporation, and the Noteholders, may attend any meeting of
the Noteholders, but shall have no vote as such.
Powers Exercisable By Extraordinary Resolution
9.11 In addition to the powers conferred upon them by any other provisions of
this agreement or by law, a meeting of the Noteholders shall have the
following powers exercisable from time to time by extraordinary resolution:
(a) power to sanction any modification, abrogation, alteration, compromise
or arrangement of the rights of the Noteholders against the Corporation, or
against its property, whether such rights arise under this agreement or the
Notes or otherwise;
<PAGE>
(b) power to assent to any modification of or change in or addition to or
omission from the provisions contained in this agreement or in any Note which
shall be agreed to by the Corporation and execute any agreement supplemental
hereto embodying any modification, change, addition or omission;
(c) power to sanction any scheme for the reconstruction or reorganization of
the Corporation or for the consolidation, amalgamation or merger of the
Corporation with any other corporation or for the sale, leasing, transfer or
other disposition of the undertaking, property and assets of the Corporation
or any part thereof, provided that no such sanction shall be necessary in
respect of any such transaction if the provisions of S0 shall have been
complied with;
(d) power to waive any default hereunder or cancel any declaration made to
S0 either conditionally or upon any condition specified in such extraordinary
resolution;
(e) power to restrain any Noteholder from taking or instituting any suit,
action or proceeding for the purpose of enforcing payment of the principal of
or interest or premium on the Notes, or for the execution of any trust or
power hereunder;
(f) power to direct any Noteholder who, as such, has brought any action,
suit or proceeding to stay or discontinue or otherwise deal with the same upon
payment, if the taking of such suit, action or proceeding shall have been
permitted by S0, of the costs, charges and expenses reasonably and properly
incurred by such Noteholder in connection therewith;
(g) power to assent to any compromise or arrangement with any creditor or
creditors or any class or classes of creditors, whether secured or otherwise,
and with holders of any shares of other securities of the Corporation;
(h) power to appoint a committee with power and authority (subject to such
limitations, if any, as may be prescribed in the resolution) to exercise, on
behalf of the Noteholders, such of the powers of the Noteholders as are
exercisable by extraordinary or other resolution as shall be included in the
resolution appointing the committee. The resolution making such appointment
may provide for payment of the expenses and disbursements of and compensation
to such committee. Such committee shall consist of such number of persons as
shall be prescribed in the resolution appointing it and the members need not
be themselves Noteholders. Every such committee may elect its chairman and
may make regulations respecting its quorum, the calling of its meetings, the
filling of vacancies occurring in its number and its procedure generally.
Such regulations may provide that the committee may act at a meeting at which
a quorum is present or may act by minutes signed by the number of members
thereof necessary to constitute a quorum. All acts of any such committee
within the committee nor any member thereof shall be liable for any loss
arising from or in connection with any action taken or omitted to be taken by
them in good faith;
(i) power to authorize the distribution in specie of any shares, bonds,
notes or other securities or obligations or cash or other consideration
received hereunder or the use or disposal of the whole or any part of such
shares, bonds, notes or other securities or obligations or cash or other
consideration in such manner and for such purpose as may be deemed advisable
and specified in such extraordinary resolution;
<PAGE>
(j) power to bid at any sale of the Corporation's properties or assets or
any part thereof and to borrow the moneys required to make any deposit at
said sale or pay the balance of the purchase price and to hypothecate,
mortgage, pledge, charge, cede and transfer the property or assets so
purchased as security for the repayment of the moneys so borrowed and interest
thereon, or itself, himself or themselves, as the case may be, to advance such
moneys (in which event it, he or they shall have a lien upon the property or
assets so purchased for the amount so advanced and interest thereon) and to
hold any property or assets so purchased (subject to any hypothec, mortgage,
pledge, charge or lien to secure any moneys so borrowed or advanced) in trust
for all the holders of the Notes outstanding at the time of such sale pro rata
in proportion to the amounts due to them thereon respectively for principal
and interest before such sale, and to sell, transfer and convey the whole or
any part or parts of the property or assets so purchased for such
consideration in cash or in the shares, bonds, notes or other securities or
obligations of any company formed or to be formed, or partly in cash and
partly in such securities or obligations, and upon such terms and conditions
as may be determined by such extraordinary resolution of the Noteholders and,
subject to such terms and conditions, to dispose of such cash, shares, bonds,
notes or other securities or obligations pursuant to the provisions of clause
(i) of this S0, and until the sale, transfer or conveyance of the whole of
such property or assets so purchased to maintain and operate such part of said
property and assets as has not been disposed of, and for such purposes to
borrow moneys and to hypothecate, mortgage, pledge, charge and cede and
transfer the property and assets so purchased or any part thereof, as security
for the repayment of the moneys borrowed with interest thereon, or itself,
himself or themselves, as the case may be, to advance such moneys (in which
event it, he or they shall have a lien or charge upon the property and assets
so purchased for the amounts so advanced and interest thereon) and otherwise
deal with such property and assets and the proceeds of any sale, transfer or
conveyance thereof as the Noteholders may by such extraordinary resolution
direct;
(k) power to sanction the exchange of the Notes for or the conversion
thereof into shares, bonds, notes or other securities or obligations of the
Corporation or of any company formed or to be formed;
(l) power, notwithstanding S0, to authorize the Corporation to grant
extensions of time for payment of interest on any of the Notes, whether or not
the interest, the payment in respect of which is extended, is at the time due
or overdue; and
(m) power to amend, alter or repeal any extraordinary resolution previously
passed or sanctioned by the Noteholders or by any committee appointed pursuant
to S0.
Meaning of "Extraordinary Resolution"
9.12 (a) The expression "extraordinary resolution" when used in this
indenture means, subject as hereinafter in this Part provided, a resolution
proposed to be passed as an extraordinary resolution at a meeting of
Noteholders (including an adjourned meeting) duly convened for the purpose and
held in accordance with the provisions of this Part at which the holders of at
least 51% in principal amount of the Notes then outstanding are present in
person or by proxy and passed by the favourable votes of the holders of not
less than 66-2/3% of the principal amount of Notes represented at the meeting
and voted on a poll upon such resolution.
<PAGE>
(b) If, at any such meeting, the holders of 51% in principal amount of the
Notes outstanding are not present in person or by proxy within 30 minutes
after the time appointed for the meeting, then the meeting, if convened by or
on the requisition of Noteholders, shall be dissolved; but in any other ease
it shall stand adjourned to such date, being not less than 21 nor more than 60
days later, and to such place and time as may be appointed by the chairman.
Not less than ten days' notice shall be given of the time and place of such
adjourned meeting in the manner provided in S0. Such notice shall state that
at the adjourned meeting the Noteholders present in person or by proxy shall
form a quorum but it shall not be necessary to set forth the purposes for
which the meeting was called or any other particulars. At the adjourned
meeting the Noteholders present in person or by proxy shall form a quorum and
may transact the business for which the meeting was originally convened and a
resolution proposed at such adjourned meeting and passed by the requisite vote
as provided in S0 of this Section shall be an extraordinary resolution within
the meaning of this indenture, notwithstanding that the holders of 51% in
principal amount of the Notes then outstanding are not present in person or by
proxy at such adjourned meeting.
(c) Votes on an extraordinary resolution shall always be given on a poll and
no demand for a poll on an extraordinary resolution shall be necessary.
Powers Cumulative
9.13 It is hereby declared and agreed that any one or more of the powers or
any combination of the powers in this agreement stated to be exercisable by
the Noteholders by extraordinary resolution or otherwise may be exercised from
time to time any the exercised of any one or more of such owners or any
combination of powers from time to time shall not be deemed to exhaust the
rights of the Noteholders to exercise the same or any other such power or
powers or combination of powers thereafter from time to time.
Minutes
9.14 Minutes of all resolutions and proceedings at every meeting as aforesaid
shall be made and duly entered in books to be from time to time provided for
that purpose by the Corporation at the expense of the Corporation, and any
such minutes as aforesaid, if signed by the chairman of the meeting at which
such resolutions were passed or proceedings had, or by the chairman of the
next succeeding meeting of the Noteholders, shall be prima facie evidence of
the matters therein stated and, until the contrary is proved, every such
meeting, in respect of the proceedings of which minutes shall have been made,
shall the deemed to have been duly held and convened, and all resolutions
passed thereat or proceedings taken thereat, to have been duly passed and taken.
Instruments in Writing
9.15 All actions which may be taken and all powers that may be exercised by
the Noteholders at a meeting held as hereinbefore in this Part provided may
also be taken and exercised by the holders of 66-2/3% of the principal amount
of all the outstanding Notes by an instrument in writing signed in one or more
counterparts and the expression "extraordinary resolution" when used in this
agreement shall include and instrument so signed.
<PAGE>
Binding Effect of Resolutions
9.16 Every resolution and every extraordinary resolution passed in accordance
with the provisions of this Part at a meeting of Noteholders shall be binding
upon all the Noteholders, whether present at or absent from such meeting, and
every instrument in writing signed by Noteholders in accordance with S0 shall
be binding upon all the Noteholders, whether signatories thereto or not, and
each and every Noteholder shall be bound to give effect accordingly to every
such resolution, extraordinary resolution and instrument in writing.
Evidence of Rights of Noteholders
9.17 Any request, direction, notice, consent or other instrument which this
agreement may require or permit to be signed or executed by the Noteholders
may be in any number of concurrent instruments of similar tenor and may be
signed or executed by such Noteholders in person or by attorney duly appointed
in writing. Proof of the execution of any such request or other instrument or
of a writing appointing any such attorney or (subject to the provisions of
this Part with regard to voting at meetings of Noteholders) of the holding by
any person of Notes shall be sufficient for any purpose of this indenture if
made in the following manner, namely, the fact and date of execution by any
person of such request or other instrument or writing may be proved by the
certificate of any notary public or other officer authorized to take
acknowledgements of deeds to be recorded at the place where such certificate
is made, that the person signing such request or other instrument in writing
acknowledged to him the execution thereof, or by an affidavit of a witness of
such execution or in nay other manner which be considered adequate.
PART 10
NOTICES
Notice to Corporation
10.1 Any notice to the Corporation under the provisions of this indenture
shall be valid and effective if given by registered letter, postage prepaid,
addressed to the Corporation at Suite 1300 - 1075 West Georgia Street,
Vancouver, British Columbia, V6E 3C9, Attention: the President and shall be
deemed to have been received on the date of delivery or, if mailed, on the
fifth Business Day following the date of the postmark on such notice. The
Corporation may from time to time notify the Noteholders in writing of a
change of address which thereafter, until changed by like notice, shall be the
address of the Corporation for all purposes of this indenture.
If, by reason of a strike, lockout or other work stoppage, actual or
threatened, involving postal employees, any notice to be given to the
Corporation hereunder could reasonably be considered unlikely to reach its
destination, such notice shall be valid and effective only if it is delivered
to the named office of the Corporation to which it is addressed or by cable,
telegram, telefax or by other means of prepaid, transmitted and recorded
communication.
Notice to Noteholders
10.2 Other than in the case of a general disruption or interruption in postal
services provided for below, all notices to be given hereunder with respect to
the Notes shall be deemed to be validly given to the holders thereof if sent
by mail, postage prepaid, by letter or circular addressed to such holders at
their post office addresses appearing in any of the registers hereinbefore
<PAGE>
mentioned and shall be deemed to have been given on the day of mailing.
Accidental error or omission in giving notice or accidental failure to mail
notice to any Noteholder or the inability of the Corporation to give or mail
any notice due to anything beyond the reasonable control of the Corporation
shall not invalidate any action or proceeding founded thereon.
All notices with respect to any Note may be given to whichever one of the
holders thereof (if more than one) is name first in the registers hereinbefore
mentioned, and any notice so given shall be sufficient notice to all holders
of or persons interested in such Note.
If by reason of any general interruption or disruption of postal services in
Canada, actual or threatened, any notice to be given hereunder with respect to
the Notes would reasonably be unlikely to reach its destination within the
usual delivery period if sent by mail as provided above in this S0, such
notice shall be deemed to have been effectively given to the holders of the
Notes if such notice is published
(a) once in each of the City of Vancouver in a daily newspaper in the
English language of general circulation in the designated city provided that
in the case of notice convening a meeting of Noteholders, the Noteholders may
require such additional publication of such notice, in the same or in other
cities or both, as it may deem necessary for the reasonable protection of the
holders. Any notice so given shall be deemed to have been given on the day by
which it has been published in all of the cities in which publication was
required (or first published in all such cities if more than one publication
in any such city is required).
PART 11
EXECUTION AND FORMAL DATE
Execution
11.1 This agreement shall be executed by each Noteholder in the space provided
in Schedule "A" set opposite the name of such Noteholder. This agreement may
be executed in several counterparts, each of which when so executed shall be
deemed to be an original and such counterparts together shall constitute one
and the same instrument.
11.2 This agreement may be executed by facsimile with the same effect as if
all parties to this agreement had signed the same document and when so signed
shall be deemed to be an original and will be valid and binding as such.
IN WITNESS WHEREOF the parties hereto have executed these presents under their
respective corporate seals and the hands of their proper officers in that
behalf.
IMAGIS TECHNOLOGIES INC.
Per:
<PAGE>
SCHEDULE "A"
Name and Address of Noteholder Signature of Noteholder
<PAGE>
SCHEDULE "B"
No. _____
IMAGIS TECHNOLOGIES INC.
Incorporated under the laws of British Columbia
8% CONVERTIBLE NOTE
DUE *, 2000
Imagis Technologies Inc. (hereinafter referred to as the 'Corporation') for
value received hereby promises to pay to the registered holder hereof on *, or
on such earlier date as the principal amount hereof may become due in
accordance with the provisions of the Indenture hereinafter mentioned, on
presentation and surrender of this Note the sum of
*
in lawful money of Canada and to pay interest on the principal amount hereof
at the rate of 8% per annum from * or from the last interest payment date on
which interest has been paid or made available for payment on the outstanding
Notes, whichever is later, in like money at maturity and, should the
Corporation at any time make default in the payment of any principal or
interest, to pay interest on the amount in default at the same rate, in like
money on the same date. As interest on this Note becomes due, the Corporation
(except in case of payment at maturity or on redemption at which time payment
of interest may be made upon surrender of this Note) shall forward or cause to
be forwarded by prepaid post to the registered address of the registered
holder of this Note for the time being, or in the case of joint holders to the
registered address of whichever of such joint holders is named first in the
registers referred to hereafter, a cheque for such interest, less any tax
required by law to be deducted, payable to the order or such holder or
holders. The forwarding of such cheque shall satisfy and discharge the
liability for interest upon this Note to the extent of the sum represented
thereby (plus the amount of any tax deducted as aforesaid) unless such cheque
is not paid on presentation.
This Note is one of the 8% Convertible Notes (herein referred to as the
'Notes') in the aggregate principal amount of $595,200 in lawful money of
Canada issued under a loan agreement (herein referred to as the 'Agreement')
dated as of October _____, 1999 and made between the Corporation and the
Noteholders, to which Agreement and all instruments supplemental thereto
reference is hereby made for a description of the rights and remedies of the
holders of the said Notes, of the Corporation and of the terms and conditions
upon which the Notes are issued and held, all to the same effect as if the
provisions of the Agreement and such instruments supplemental thereto were
herein set forth, to all of which provisions the holder of this Note, by
acceptance hereof, assents.
The Notes are issuable as fully registered Notes in denominations of $1,000
and in integral multiplies of $1,000. The Notes of any authorized
denomination may be exchanged, as provided in the Agreement for Notes of an
equal aggregate principal amount in any other authorized denomination or
denominations. This Note is a direct obligation of the Corporation ranking
equally and rateably with all other notes from time to time issued and
outstanding under the Agreement and is not secured by any mortgage, pledge or
charge. The Agreement does not restrict the Corporation from incurring
additional indebtedness or from mortgaging, pledging or charging its
properties to secure any indebtedness.
This Note is convertible at the option of the holder hereof, upon surrender of
this Note at the principal office of the Corporation in the City of Vancouver
at any time up to close of business on *, 2000, into fully paid and
non-assessable common shares without par value ('Common Shares') in the
capital of the Corporation, at the Conversion Price specified in the
Agreement. The Agreement makes provision for the adjustment for the
Conversion Price in events therein specified. This Note is also convertible
at the option of the Corporation, on the first anniversary of the Closing Date
(as defined in the Agreement) at the lowest price permissible by the Vancouver
Stock Exchange or any successor exchange subject to adjustment in the events
specified in the Agreement.
This Note may be redeemed at the option of the Corporation on the terms and
conditions set out in the Agreement at the Redemption Price therein set out,
provided that the Company gives not less than 15 days prior written notice
("Notice") of its intention to redeem the Convertible Notes and the number and
amount of Convertible Notes it wishes to redeem (the "Convertible Notes to be
Redeemed"). Upon receipt of Notice as aforesaid the undersigned will have the
right, but not the obligation, to convert the Convertible Notes to be Redeemed
into Shares at the lower of $.64 per Common Share and the average price of the
Shares as traded on the Exchange for the ten days prior to the date of receipt
of the Notice, less the following discounts:
Average Trading Price Discount
up to $0.50 25%
$0.51 to $2.00 20%
above $2.00 15%
The principal hereof may also become or be declared due before stated maturing
on the conditions, in the manner, with the effect and at the time set forth in
the Agreement. The Agreement contains provisions for the holding of meetings
of Noteholders and passing resolutions at such meetings which will bind the
Noteholders. Instruments in writing signed by the holders of a specified
majority of the Notes outstanding are binding upon all Noteholders, subject to
the provisions of the Agreement. This Note may only be transferred, upon
compliance with the conditions prescribed in the Agreement, on one of the
registers of transfers to be kept at the offices of the Corporation in the
City of Vancouver and at such other place or places, if any and/or by such
other registrar or registrars, if any, as the Corporation may designate, by
the registered holder hereof of this executors or administrators or other
legal representatives or his or their attorney duly appointed by an instrument
in writing in form and execution satisfactory to the Corporation and upon
compliance with such reasonable requirements as the Corporation and/or other
registrar may prescribe. This Note shall not become obligatory for any
purpose until it shall have been certified by the Corporation under the
Agreement.
IN WITNESS WHEREOF Imagis Technologies Inc. has caused its corporate seal to
be hereunto affixed and this Note to be signed by the President and Secretary
of the Corporation as of *, 1999.
IMAGIS TECHNOLOGIES INC.
By: By:
President Secretary
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.4433
<CASH> 9,682
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<RECEIVABLES> 251,073
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<INVENTORY> 45,834
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<DEPRECIATION> (76,280)
<TOTAL-ASSETS> 390,765
<CURRENT-LIABILITIES> 504,623
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0
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<COMMON> 3,223,995
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<TOTAL-LIABILITY-AND-EQUITY> 390,765
<SALES> 722,193
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<CGS> 222,919
<TOTAL-COSTS> 2,610,060
<OTHER-EXPENSES> 728,676
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