UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
IMAGIS TECHNOLOGIES INC.
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(Name of Small Business Issuer in its charter)
British Columbia, Canada Not Applicable
- -------------------------------- ------------------------------------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1300 1075 West Georgia Street
Vancouver, British Columbia V6E 3C9
- -------------------------------- ------------------------------------
(Address of principal executive
offices) (Zip Code)
Issuer's telephone number: (604) 684-4691
Securities to be registered under Section 12(b) of the Act:
None Not Applicable
- --------------------------------- ------------------------------------
Title of each class to be so Name of each exchange on which each
registered class is to be registered
Securities to be registered under Section 12(g) of the Act:
Common Shares
----------------
(Title of Class)
Not Applicable
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(Title of Class)
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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-SB. Certain of the forward looking statements contained in this
registration statement 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 periods, and the average exchange rates (based on the
average of the 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,
1998 1997 1996 1995 1994
End of period 0.6504 0.6999 0.7301 0.7323 0.7128
High for the period 0.7105 0.7487 0.7513 0.7527 0.7632
Low for the period 0.6341 0.6945 0.7235 0.7023 0.7103
Average for the period 0.6714 0.7197 0.7329 0.7305 0.7300
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 30,
1999 as reported by the United States Federal Reserve Bank of New York for the
conversion of Canadian dollars into United States dollars was US$1.4533
(US$1.00 = Cdn$0.6881). Unless otherwise indicated, in this registration
statement on Form 10-SB (the "Registration Statement" or "Form 10-SB") all
references herein are to Canadian Dollars.
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TABLE OF CONTENTS
Page
NOTE REGARDING FORWARD LOOKING STATEMENTS. . . . . . . . . . . . . . . . .1
CURRENCY AND EXCHANGE RATES. . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 3 DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . 17
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . 18
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. . . 19
ITEM 6 EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 22
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 23
ITEM 8 DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . 23
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 25
ITEM 2 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES . . . . . . . . . . . . . 33
ITEM 5 INDEMNIFICATION OF OFFICERS AND DIRECTORS . . . . . . . . . . . . 34
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 1 INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . 35
<PAGE>
ITEM 1 DESCRIPTION OF BUSINESS
History of the Registrant
Incorporation/Name Changes/Initial Business
Imagis Technologies Inc. (the "Registrant"), a British Columbia corporation,
and its wholly-owned subsidiary, Imagis Cascade Technologies Inc. ("Imagis"),
a British Columbia corporation, is in the business of developing, marketing,
implementing and supporting computer software applications for the law
enforcement and security industries.
The Registrant 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, the Registrant's
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 the Registrant changed its name
from 561648 B.C. Ltd. to Colloquium Capital Corp.
On February 23, 1999, the Registrant acquired all of the outstanding shares of
Imagis, thereby completing a Qualifying Transaction and becoming classified as
a venture company by the VSE. As a result of the acquisition, the Registrant
changed its name from Colloquium Capital Corp. to Imagis Technologies Inc. on
February 25, 1999.
Acquisition of Imagis
On February 23, 1999, the Registrant acquired one hundred percent (100%) of
the shares in the capital of Imagis pursuant to a Share Purchase Agreement
among the Registrant, Imagis and the former shareholders of Imagis (the
"Former Imagis Shareholders") dated December 14, 1998 (the "Imagis
Acquisition"). The Registrant 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 the Registrant, and
Andrew Amanovich, the current Chief Technology Officer of the Registrant.
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 the Registrant other than as a former shareholder of Imagis.
Under the terms of the Share Purchase Agreement, the parties thereto agreed to
the following:
(a) the Registrant 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:
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(i) $100,000 to Pacific, by application of the sum of $100,000
paid by the Registrant to Imagis on behalf of the Former Imagis
Shareholders pursuant to a Confidentiality and Standstill
Agreement among the Registrant, Imagis 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 by
FCIC) of 3,400,000 shares of common stock of the Registrant (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 up
to $400,000 payable to Pacific if, as and when, certain warrants
issued by the Registrant are exercised to raise up to $400,000 net
to the Registrant's treasury.
(b) In consideration for renouncing his right to acquire up to a 6%
equity interest in Imagis, the Registrant 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, the Registrant 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
The Registrant's wholly owned subsidiary, Imagis, acquired substantially all
of its current assets pursuant to two technology purchase agreements, dated
March 6, 1998, between Imagis, 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. Pacific received 3,000,000 common shares of
Imagis and B.C. Ltd. received 400,000 common shares of Imagis. Pacific
subsequently transferred 600,000 Imagis common shares to Sonora.
Pacific was established in 1989 by Andrew Amanovich, the Registrant's Chief
Technology Officer and Frederick Clarke, a director of the Registrant.
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 technology and the Registrant's 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
<PAGE>
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 all rights to the business that is now carried on
by the Registrant and the intellectual property. Under these agreements,
Pacific and B.C. Ltd. became the holders of all of the issued and outstanding
shares of Imagis. The terms of these technology purchase agreements were as
follows:
- - Agreement between B.C. Ltd. and Imagis: B.C. Ltd. sold its business and
technology to Imagis for a purchase price of $600,000 which paid by issuance
of 400,000 shares of Imagis at a price of $1.50 per share.
- - Agreement between Pacific and Imagis: Pacific sold its business and
technology to Imagis for a purchase price of $1.5 million which paid by
issuance of 3,000,000 shares of Imagis 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, 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 the Registrant of all the issued and outstanding
shares of Imagis, 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, 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.
The Registrant's Chief Technology Officer, Andrew Amanovich and its Chief
Engineer, David Lutes, who was instrumental in developing the original Imagis
product line, continue their work in the research, development, applications
of all software and the core technology within the Registrant's subsidiary,
Imagis.
Securities Exchange Act of 1934 Registration
The Registrant's registration under Section 12 of the Securities Exchange Act
of 1934 is voluntary. The Registrant is seeking this registration in order to
make the Registrant's common shares eligible for quotation on the Nasdaq
Over-the-Counter Bulletin Board.
Business of the Registrant
General Overview
The Registrant develops, markets, implements and supports computer software
applications for digital identification and image management to clients in the
law enforcement and security industries. The Registrant's 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, the Registrant has developed, markets, implements and supports
other computer software applications for the law enforcement industry,
including FRAUD-ID, a video imaging photo identification system, and
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. The
Registrant is also currently developing a facial recognition system for the
law enforcement and security industries called POSITIVE-ID.
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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, the Registrant 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
The Registrant's current products are designed to run on PCs under Windows
3.11 or Windows 95 and on Windows 98. The software's graphical user interface
is based on Microsoft ACCESS and the underlying database is built on ORACLE
RDBMS. The software is modular in design, permitting specific functions to be
added to meet individual client preferences.
The Registrant has recently released CABS 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. The Registrant plans to
integrate its POSITIVE-ID proprietary facial recognition software (a product
currently under development), 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. The Registrant has recently implemented its first
regional data sharing system. The recently installed system allows two RCMP
detachments (located in Richmond and Delta, British Columbia) to share live
<PAGE>
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.
FRAUD-ID Fraud Detection & Tracking System
FRAUD-ID is an integrated information and video imaging system developed
specifically for fraud detection and tracking within welfare agencies.
FRAUD-ID is a variant of CABS developed to manage records in welfare agencies.
FRAUD-ID currently has separate modules for the enrollment of persons into the
welfare system and for staff records. The enrollment module is designed to
collect the same information that would be recorded manually during a
traditional enrollment situation, providing image capture of the enrollee's
face and other physical features. 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
a photo gallery.
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.
Products under Development
POSITIVE-ID Facial Recognition System
The Registrant is currently developing POSITIVE-ID, a facial recognition
software system designed for the law enforcement and security industries.
POSITIVE-ID captures an offender's image via a video camera and then creates a
biometric code that can be compared to other encoded images in an agency
database. POSITIVE-ID allows for the identification of an offender when only
a picture of the offender is available. This biometric facial recognition
technology reduces the risk of mistaken identities and enhances searches for
criminal suspects.
POSITIVE-ID is currently in preliminary field testing in a division of the
RCMP in British Columbia. Upon completion of the testing period in October,
the Registrant will be gathering the feedback of the test users and making
changes to the software as required. The Registrant expects to commence
marketing POSITIVE-ID by December 31, 1999. However, there can be no
assurance that marketing will commence by that time.
Markets
The Registrant markets and sells its products to the law enforcement and
security industries. The law enforcement industry targeted by the Registrant
consists of government agencies that provide police services, operate
corrections facilities and administer welfare agencies. The Registrant
currently markets its CABS, ID-INMATE and FRAUD-ID products to the law
enforcement industry.
<PAGE>
At present, CABS has been installed in more than 25 sites in Canada and one
site in the United States. As part of its customer support activities, the
Registrant 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 the Registrant 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.
Plan of Operation and Business Strategy
The Registrant's objective is to be a leading provider of automated arrest and
booking systems in Canada, the United States and globally. The Registrant's
strategy encompasses the following key elements:
Leverage core capabilities to develop configurable products. The
Registrant 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. The Registrant 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 systems. The
Registrant designed CABS to the specifications of the RCMP and installed the
system in over 30 RCMP detachments, including the two largest detachments
in Canada. In June and July of 1999, the Registrant reached agreements with
five new RCMP detachments to install the CABS system. The Registrant 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 POSITIVE-ID, 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, the Registrant has developed key
relationships with a select number of companies in Canada, the United States
and Mexico to resell or market the Registrant's products directly or as a part
of an integrated solution and to provide consulting, integration and
after-sales product support. The Registrant plans to add additional business
partner relationships to enhance the distribution of its products world-wide.
Business Partners
The Registrant has several business partners in Canada and the United States
that resell and market the Registrant's products and that provide consulting,
integration and after-sales product support to the Registrant's clients. The
Registrant 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. The
Registrant 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, the
Registrant intends to leverage its position in Canada to secure key
installations in the United States. See "Note Regarding Forward Looking
Statements."
The Registrant currently has business partner agreements with the following
companies: Maritime Information Technology Inc. ("MITI"); Impact Solutions
Corporation; West Covina Service Group; Radian Inc.; Vilsa; and Orion
Scientific Systems Inc. The major terms of the business partner agreements
are similar.
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All agreements are non-exclusive; typically have a three-year term; define a
relationship in which the business partner is responsible for selling the
Registrant's products to end-users, and subsequently providing first-line
customer support, while the Registrant provides technical support to the
business partner. The business partner earns a discount on list price of the
Registrant's products, typically 40%. The Registrant 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 the Registrant, MITI is authorized to sell all of the
Registrant's 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 the
Registrant believes is complimentary to the Registrant's products. Under its
agreement with the Registrant, Impact is authorized to sell all of the
Registrant's 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 the
Registrant 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 the
Registrant, Vilsa is authorized to sell all the Registrant's 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.
Under the business partner agreements, the Business Partners have agreed to
sell the Registrant's products as part of their standard product line. While
they typically have designated territories (as described above), the Business
Partners may sell the Registrant's products anywhere they have opportunities,
including Canada, the United States and other countries. The Registrant
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.
The Registrant is seeking to add several additional business partners in the
United States, Mexico and overseas during 1999. To build the business partner
network, the Registrant plans to establish a number of sales offices in key
geographic markets. The Registrant intends to staff these sales offices with
regional sales directors. See "Note Regarding Forward Looking Statements."
Research & Development
The integrated information and video imaging systems is characterized by rapid
technological change and increasing user requirements. Accordingly, the
Registrant 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, the Registrant's strategy is to utilize proven
technology to further enhance its existing products and to create new
products. Where appropriate, the Registrant may acquire complementary
technology developed by third parties for integration into the Registrant's
products.
<PAGE>
The Registrant's 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. The Registrant's chief
technology personnel were initial developers of the Registrant's imaging
products and have been involved in the development of each of the eight
versions of the CABS product. The Registrant's 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 the Registrant's product line
and a major differentiator to CABS and other Registrant products, the
Registrant plans to release POSITIVE-ID commercially during 1999. The
Registrant plans further enhancements to POSITIVE-ID to increase its
acceptability in the law enforcement industry. In addition, the Registrant
plans to further enhance the product for introduction into the security
industry, particularly in the area of access control.
As of May 1, 1999, the Registrant's research and development staff consisted
of seven employees.
During the fiscal year ended December 31, 1998, the Registrant's total
expenditures for research and development was $149,000, 27% of the
Registrant's total revenue. Management believes that timely and continuing
product development is critical to the Registrant's success and plans to
continue to allocate significant resources to product development.
Sales & Marketing
Other than in western Canada, the Registrant sells its products exclusively
through its business partner relationships discussed above. Sales within
western Canada are conducted principally by the Registrant's direct sales
force. The Registrant's 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, the Registrant believes it
satisfies its customers' preferences, while increasing the sales resources
promoting the product.
The Registrant 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 the Registrant 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 $200,000. 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.
The Registrant focuses its marketing efforts primarily on the CABS product.
The Registrant 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. The Registrant
also relies on its business partners to market CABS directly to police
detachments in their local sales region.
The Registrant plans to recruit additional sales directors in 1999 to expand
its sales and marketing efforts in the U.S. The Registrant hired a director
of sales for the southwestern U.S. in May of 1999. The Registrant intends to
recruit additional sales directors in 1999. See "Note Regarding Forward
Looking Statements."
<PAGE>
Customer Support
The Registrant's customers are offered an annual support agreement at the time
of purchase of the Registrant's products. The annual maintenance fee price is
15% of the installed software value for support between 8 a.m. and 5 p.m.
(Monday through Friday) and 20% of the installed software value for 24 hour
support (7 days a week). In addition to software support, customers
subscribing to the annual maintenance program receive free upgrades for the
installed software. Outside of western Canada, the Registrant's business
partners provide the first line of customer support. If the business partner
is unable to resolve the problem, then the Registrant provides direct support
to the customer. In western Canada, the Registrant's technicians provide
direct support to the customer. The Business Partner then splits half of the
annual maintenance fee with the Registrant providing first-line customer
support. The Registrant currently employs three full-time technicians.
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 the Registrant's
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 the Registrant's
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:
Epic Solutions (BOOK'em and HOLD'em)
IWS (ImageWare Software)
Smith & Wesson EBS (Electronic Booking System)
Spillman BookMate and Jail Management
The Company believes that Epic Solutions' installations are primarily in
California, Texas and Pacific Rim countries. 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 the Registrant in their
respective geographic areas. The Registrant believes, however, that its
strong reference base in Canada will provide it with a competitive advantage
in expanding into new geographic markets.
In the area of facial recognition, ImageWare (Face-ID), 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 POSITIVE-ID.
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. The Registrant 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, the Registrant 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
<PAGE>
information. In particular, the Registrant 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
the Registrant of employee inventions. In addition, the Registrant's 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 the Registrant.
There can be no assurance that the Registrant's efforts to protect its
intellectual property rights will be successful. Despite the Registrant's
efforts to protect its intellectual property rights, unauthorized third
parties, including competitors, may from time to time copy or reverse engineer
certain portions of the Registrant's technology and use such information to
create competitive products.
Policing the unauthorized use of the Registrant's technology is difficult,
and, while the Registrant is unable to determine the extent to which piracy of
the Registrant's technology exists, such piracy can be expected to be a
persistent problem. In addition, the laws of certain countries in which the
Registrant's 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 the
Registrant's technology in such countries may increase the likelihood that the
Registrant's technology might be infringed upon by unauthorized third parties.
It is possible that the scope, validity and/or enforceability of the
Registrant's intellectual property rights could be challenged by competitors
or other parties. The Registrant 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 the
Registrant's 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 the
Registrant to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Registrant or at all. In the event of a claim of product infringement
against the Registrant and the Registrant's failure or inability to license
the infringed or similar technology, the Registrant's business, operating
results and financial condition could be materially adversely affected.
The Registrant has not registered any trademarks in the Canada, the United
States or elsewhere.
Employees
As of August 31, 1999, the Registrant 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. The Registrant's success
will depend in large part on its ability to attract and retain skilled and
experienced employees. None of the Registrant's employees are covered by a
collective bargaining agreement and the Registrant believes that its relations
with its employees is good. The Registrant does not currently have any key
man life insurance on any of its directors or executive officers.
Risk Factors
The Registrant's 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 The Registrant 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. The Registrant and its
predecessors incurred net losses of $1,320,439 and $217,257 in the years ended
December 31, 1998 and the four months ended December 31, 1997, respectively.
The Registrant has never been profitable and there can be no assurance that,
in the future, the Registrant will be profitable on a quarterly or annual
basis. The Registrant plans to increase its operating expenses to expand its
sales and marketing operations, fund greater levels of research and
development, broaden its
<PAGE>
customer support capabilities and increase its administration resources. In
view of the rapidly evolving nature of the Registrant's business and markets
and limited operating history, the Registrant 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
The Registrant 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." The Registrant's 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 the
Registrant 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 the Registrant 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, the Registrant's business, financial condition,
operating results and cash flows could be materially adversely affected. In
light of the difficulties inherent in software development, the Registrant
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 the Registrant
(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, the Registrant's 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 the Registrant's 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
The Registrant's performance and future operating results are substantially
dependent on the continued service and performance of its senior management
and key technical and sales personnel. The Registrant 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 the Registrant 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 the Registrant's 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 the
Registrant's business, financial condition, operating results and cash flows.
With the exception of Andy Amanovich, Chief Technology Officer, and David
Lutes, Chief Engineer, the Registrant does not currently maintain "key man"
insurance for any senior management or other key employees.
Dependence on Marketing Relationships
The Registrant's products are primarily marketed by the Registrant's business
partners. The Registrant's 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 the Registrant, are not
<PAGE>
obligated to purchase products from the Registrant and may also represent and
sell competing products. There can be no assurance that the Registrant's
existing business partners will continue to provide the level of services and
technical support necessary to provide a complete solution to the Registrant's
customers or that they will not emphasize their own or third-party products to
the detriment of the Registrant's products. The loss of these business
partners, the failure of such parties to perform under agreements with the
Registrant or the inability of the Registrant to attract and retain new
business with the technical, industry and application experience
required to market the Registrant's products successfully could have a
material adverse effect on the Registrant's business, financial condition,
operating results and cash flows.
Dependence on Third Parties
Certain contracts require the Registrant to supply, coordinate and install
third party products and services. The Registrant believes that there are a
number of acceptable vendors and subcontractors for most of its required
products, but in many cases, despite the availability of multiple sources, the
Registrant may select a single source in order to maintain quality control and
to develop a strategic relationship with the supplier or may be directed by a
customer to use a particular product. The failure of a third party supplier
to provide a sufficient supply of parts and components or products and
services in a timely manner could have a material adverse effect on the
Registrant's results of operations. In addition, any increase in the
price of one or more of these products, components or services could have a
material adverse effect on the Registrant's business, financial condition,
operating results and cash flows.
Additionally, with respect to most sales, the Registrant supplies products and
services to a customer through a third party supplier acting as a project
manager or systems integrator. In such circumstances, the Registrant has a
sub-contract to supply its products and services to the customer through the
prime contractor. In these circumstances, the Registrant 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 the Registrant's 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 the Registrant's 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 the Registrant's
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.
The Registrant primarily competes in the arrest and booking systems market
with Epic Solutions, ImageWare Software, Smith & Wesson and Spillman. The
Registrant's 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 the Registrant's competitors have substantially greater financial,
technical, marketing and distribution resources than the Registrant. 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 the Registrant will be able to compete successfully
against current or future competitors or alliances of such competitors, or
that competitive pressures faced by the Registrant will not materially
adversely affect its business, financial condition, operating results and cash
flows.
<PAGE>
Proprietary Technology
The Registrant's success is dependent on its ability to protect its
intellectual property rights. The Registrant 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 the Registrant's products and technology are protected both as trade
secrets and as unpublished copyrighted works. To date, the Registrant has not
applied for any patents or trademarks. As part of its confidentiality
procedures, the Registrant 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 the Registrant's efforts to protect its intellectual property
rights will be successful. Despite the Registrant's efforts to protect its
intellectual property rights, unauthorized third parties, including
competitors, may be able to copy or reverse engineer certain portions of the
Registrant's software products, and use such copies to create competitive
products.
Policing the unauthorized use of the Registrant's products is difficult, and,
while the Registrant 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 the Registrant's 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 the Registrant in such countries may increase
the likelihood that the Registrant's proprietary technology is infringed upon
by unauthorized third parties.
In addition, because third parties may attempt to develop similar technologies
independently, the Registrant expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in the Registrant's industry segments grow and the functionality
of products in different industry segments overlaps. Although the Registrant
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 the Registrant 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 litigation and diversion of
resources, cause product shipment delays or require the Registrant to enter
into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Registrant or at
all. A claim of product infringement against the Registrant and failure or
inability of the Registrant to license the infringed or similar technology
could have a material adverse effect on the Registrant's business, financial
condition, operating results and cash flows.
Exchange Rate Fluctuations
Because the Registrant's 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 the Registrant has limited operations outside
Canada, but it intends to begin marketing its products in the United States,
Europe and Mexico later this year. The Registrant does not currently engage
in hedging activities or enter into foreign currency contracts in an attempt
to reduce the Registrant's exposure to foreign exchange risks. In addition,
to the extent the Registrant has operations outside Canada, the Registrant is
subject to the impact of foreign currency fluctuations and exchange rate
charges on the Registrant's 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 the Registrant's operations is not sufficient to finance the cost
of development and marketing of its technology. Accordingly, the Registrant
must raise substantial additional funding. The Registrant expects to be able
to meet its financial obligations for approximately the next 12 months. There
is no assurance that, after such period, the Registrant will be able to secure
financing or that such financing will be obtained on terms favorable to the
<PAGE>
Registrant. 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 the Registrant frequently
contain errors or defects, especially when first introduced or when new
versions or enhancements are released. Despite product testing, the
Registrant 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. The Registrant regularly
introduces new versions of its software. There can be no assurance that,
despite testing by the Registrant 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 the Registrant and its products, harm to the Registrant's
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.
Year 2000 Compliance
Many currently installed computer systems, software products and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, during 1999 the
Registrant, its suppliers and customers, and its potential suppliers and
customers, may need to upgrade, repair or replace certain computer systems or
software to minimize the adverse impact of system failures related to "Year
2000" noncompliance.
The Registrant has conducted and completed an internal and external review of
its systems and has contacted its material software and other suppliers to
determine any major areas of exposure of its systems of Year 2000 issues. As
a result of the internal review to date, the Registrant believes that its
products are Year 2000 compliant and that it has completed all necessary
computer hardware and software upgrades and replacements necessary to make the
Registrant's material computing and business systems Year 2000 compliant. As
a result of the external review to date, the Registrant believes that its
material suppliers are Year 2000 compliant. Consequently, the Registrant
anticipates no further costs for its Year 2000 review will be incurred after
July 1, 1999. In addition, the Registrant has developed a contingency plan
for maintaining its operations and technical support for its customers.
The Registrant's contingency plan includes suspension of key staff holiday and
vacation time immediately prior to and following the calendar year end to meet
any increased demand for support, continuous testing of 1-800 and pager
communication links for customer support queries throughout the risk period
and provide emergency stand-alone computing equipment to customers to maintain
their operational capability apart from mainframe or network systems which may
be debilitated by the Year 2000 problem. The Registrant plans to back-up
internal systems (including financial systems) and to create hard-copy
versions of electronically stored information shortly before the year change
to ensure the availability of such information in the event of electronic
failure.
Directors' and Officers' Involvement in Other Projects
Many of the officers and directors of the Registrant serve as directors,
officers and/or employees of companies other than the Registrant. While the
Registrant believes that such officers and directors will be devoting adequate
time to effectively manage the Registrant, there can be no assurance that such
other positions will not negatively impact an officer's or director's duties
for the Registrant.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis relate to the operation of the
Registrant's wholly owned subsidiary, Imagis. Imagis commenced operations on
January 9, 1998 and the following discussion relates to the period of
operations from this date to December 31, 1998. The periods used for
comparative purposes during which Imagis' business was conducted by the
Registrant's predecessors include the four month period ended December 31,
1997 and the year ended August 31, 1997, the fiscal year end for the
predecessor businesses. This discussion and analysis of the results of
operations and financial condition of Imagis should be read in conjunction
with the audited financial statements and the related notes, as well as
statements made elsewhere in this Form 10-SB. The financial statements have
been prepared in accordance with accounting principles generally accepted in
Canada, which conform in all material respect with accounting principles in
the United States, except as described in Note 9 to the Financial Statements
dated December 31, 1998. Unless expressly stated otherwise, all references to
dollar amounts in this section are in Canadian.
Operations
Imagis' sales revenues for the period ended December 31, 1998 were $555,160,
compared to $269,757 for the four months ended December 31, 1997 and
$1,812,553 for the year ended August 31, 1997. Revenues for all three periods
include the sale of computer hardware equipment in conjunction with the sale
of the Imagis business software products, and the mix of clients requiring
hardware and purchasing their needs as part of the sale transaction varied
significantly from period to period. In the year ended December 31, 1998,
approximately 29 percent or $158,000 of revenues was recovery of hardware
purchase costs, whereas in the period ended December 31, 1997, revenues
included approximately $110,000 or 41 per cent of hardware cost recovery, and
in the year ended August 31, 1997, the revenue associated with hardware cost
recovery was approximately $960,000 or 53 percent. The Registrant does not
intend to engage in sales of hardware in future periods.
The gross profit (defined as revenues less the cost of materials) earned in
1998 was $396,688, or 71 percent of sales. The gross profit for the four
month period ended December 31, 1997 was $158,742, or 59 percent of sales, and
the gross profit for the year ended August 31, 1997 was $852,486, or 47
percent of sales. The growth in gross profit percentages reflects the
Issuer's withdrawal from providing hardware-inclusive sales from 1997 to the
current period, the costs of which lowered the overall margin percentage. The
decline in the dollar amount of gross margin in 1998 to $396,688 from $852,486
in the year ended August 31, 1997 reflects to some degree the shift in focus
of the Registrant's management away from sales to the restructuring of the
predecessor businesses into the current corporate entity and the raising of
new capital to support the expansion of operations. The decline also reflects
the exclusion of gross profits in 1998 of Imagis Solutions (U.S.) Incorporated
and Imagis Northwest Solutions Inc. which were sold by Imagis' predecessor
early in 1998.
Operating costs (including cost of materials) for Imagis in 1998 totaled
$1,875,599 as compared to $487,014 for the four month period ended December
31, 1997 and $2,585,124 for the year ended August 31, 1997. Excluding costs
of hardware equipment, operating costs in the 1998 fiscal year were 6 percent
higher than for the period ended August 31, 1997. Operating costs in the
period ended December 31, 1998 included salaries and management fees of
$983,432, consulting fees of $42,850, professional fees of $77,363, promotion
costs of $77,287, office and administrative costs of $376,451 and non-cash
amounts of $159,744, representing depreciation of $34,252 and the write off of
deferred financing fees of $125,492. By comparison, for the four month period
ended December 31, 1997, salaries were $207,355, professional fees were
$12,358, advertising and promotion costs were $23,250, and office and
administrative costs were $127,036. For the fiscal year ended August 31,
1997, salaries and management fees were $1,046,692, professional fees were
$3,111, advertising and promotion costs were $17,952, and office and
administrative costs were $552,672.
The decrease in salary costs in 1998 from 1997 represents the inclusion in
1997 of salaried staff for the U.S.-based operations which were sold in early
1998, offset to some degree in the latter part of 1998 by the addition of
<PAGE>
programming staff. The increase in professional fees period to period
represents primarily legal costs associated with Imagis' restructuring.
Similarly, the increase in advertising and promotion costs in 1998 from the
fiscal year ended August 31, 1997 reflects the development of new marketing
efforts to support the launch of the Registrant's new "CABS" product.
Administration costs for the period ended December 31, 1998 of $376,451 were
32 percent lower than the costs in the year ended August 31, 1997 of $552,672
due to lower travel and communications costs primarily again, as a result of
the sale of the U.S. based operations. Travel costs fell from $149,295 in
1997 to $70,292, a reduction of 53 percent and communication costs, at $63,717
in 1998, were 40 percent lower from the 1997 level of $106,771.
Operating Losses
The net operating loss for the period ended December 31, 1998 was $1,320,439,
as compared to the loss in the four month period ended December 31, 1997 of
$217,257 and the loss in the year ended August 31, 1997 of $772,571. The
overall higher loss in 1998 resulted primarily from the significantly lower
sales achieved in 1998 while the Registrant sought financing and the lower
revenues attributable to sales of computer hardware equipment.
Liquidity and Capital Resources
Since inception, the Registrant has financed its operations primarily through
sales of its equity securities. As of December 31, 1998, the Registrant had
cash on hand of $206,027. As of December 31, 1998, the Registrant had raised
approximately $508,425 (net of issuance costs) from the sale of such
securities. On April 29, 1999, the Registrant completed an offering of
2,400,000 Units, each Unit comprised of one Share and one transferable Warrant
which provided net proceeds of $2,730,600.
Based on the Registrant's June 30, 1999 unaudited statements wherein the cash
resources are reported as $844,000, the Registrant believes that its working
capital is inadequate to meet the Registrant's current obligations and its
ongoing costs associated with operations for the ensuing 12 month period. The
Registrant currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide additional
working capital. The Registrant's capital requirements depend on several
factors, including the success and progress of product development programs,
the resources devoted to developing products, the extent to which products
achieve market acceptance, and other factors. The Registrant expects to
devote substantial cash for research and development. The Registrant
currently intends to undertake an offering of equity securities in order to
satisfy its cash requirements for the next 12 month period. The Registrant
cannot adequately predict the amount and timing of its future cash
requirements. In addition to the currently intended equity security offering,
the Registrant will consider additional public or private financing (including
the issuance of additional equity securities) to fund all or a part of a
particular program in the future. There can be no assurance, however, that
the currently intended equity security offering will be successful or that
other additional funding will be available or, if available, that it will be
available on terms acceptable to the Registrant. If adequate funds are not
available, the Registrant may have to reduce substantially or eliminate
expenditures for research and development, testing, production and marketing
of its proposed products, or obtain funds through arrangements with strategic
partners that require the Registrant to relinquish rights to certain of its
technologies or products. There can be no assurance that the Registrant will
be able to raise additional cash if its cash resources are exhausted. The
Registrant's ability to arrange such financing in the future will depend in
part upon the prevailing capital market conditions as well as the Registrant's
business performance.
ITEM 3 DESCRIPTION OF PROPERTY
The Registrant and Imagis' corporate headquarters are located at 1300, 1075
West Georgia Street, Vancouver, British Columbia, V6E 3C9. In addition, the
Registrant has branch offices in Victoria, B.C. and Ottawa, Ontario.
The Registrant's plan of operations is focused on developing, marketing,
implementing and supporting software products for the law enforcement and
security industries as described in Item 1. Accordingly, the Registrant has
no particular policy regarding each of the following types of investments:
<PAGE>
1. Investments in real estate or interests in real estate;
2. Investments in real estate mortgages; or
3. Securities of or interests in persons primarily engaged in real estate
activities.
ITEM 4 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 March 31, 1999 by: (i) each
person known to the Registrant to own more than five percent (5%) of any class
of the Registrant's voting securities; (ii) each director of the Registrant;
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.
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
CLASS 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
West 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, BC
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 3,242,563 44.6%
officers 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.
<PAGE>
(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.
The Registrant is not aware of any arrangement which might result in a
change in control in the future.
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Executive Officers and Directors
The following table sets forth certain information concerning the Registrant's
executive officers and directors as of May 1, 1999:
Name Age Position with the Registrant
Iain Drummond 53 President, Chief Executive Officer and Director
Ross Wilmot 55 Chief Financial Officer
Andy Amanovich 41 Chief Technology Officer
Sandra E. Buschau 47 Secretary and Director
Altaf Nazerali* 45 Director
Rory Godinho* 40 Director
Frederick Clarke* 63 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 the Registrant since
July 7, 1998. Mr. Wilmot was a Director of the Registrant 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
<PAGE>
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 the Registrant
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.
Sandra E. Buschau has served as the Secretary of the Registrant since March
10, 1999. Ms. Buschau has been a Director of the Registrant 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 the Registrant 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 the Registrant 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 the Registrant 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 the Registrant. 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.
<PAGE>
None of the Registrant's 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 the Registrant. No
director or executive officer of the Registrant has any family relationship
with any other officer or director of the Registrant.
Audit Committee
The Audit Committee recommends independent accountants to the Registrant to
audit the Registrant's financial statements, discusses the scope and results
of the audit with the independent accountants, reviews the Registrant's
interim and year-end operating results with the Registrant's executive
officers and the Registrant's independent accountants, considers the
adequacy of the internal accounting controls, considers the audit procedures
of the Registrant and reviews the non-audit services to be performed by the
independent accountants. The members of the Audit Committee are Ross Wilmot,
Altaf Nazerali and Rory Godinho.
Advisory Board
The following table sets forth the members of the Registrant's Advisory Board
as of July 26, 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 the Registrant 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 the Registrant
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 the Registrant
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 the Registrant
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
<PAGE>
positions at IBM, Northern Telecom and Bell Atlantic. Mr. Gordon is a past
chair of the Information Technology Association of Canada (ITAC).
ITEM 6 EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth compensation information for the fiscal year of
the Registrant ended December 31, 1998:
Summary Compensation Table
Name and Fiscal All
Principal Year Long Term Other
Position Compensation Compensation Compensation
Salary Bonus Other Annual Securities
($) ($) Compensation Under Options
($) (#)
Iain Drummond 1998(1) 41,600 N/A N/A N/A N/A
President and
Chief Executive
Officer
(1) Compensation paid to Mr. Drummond from his commencement of employment on
September 1, 1998 through December 31, 1998.
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 $140,000. 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 the Registrant.
There were no stock options granted to the named executive officer during the
fiscal year ended December 31, 1998.
<PAGE>
Compensation of Directors
During the most recently completed financial year ended December 31, 1998,
there was no compensation paid by the Registrant 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 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 23, 1999, the Registrant acquired one hundred percent of the
shares in the capital of Imagis pursuant to a Share Purchase Agreement among
the Registrant, Imagis and the shareholders of Imagis 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 the Registrant were Altaf Nazerali, Rory Godhino, Sandra
Buschau and Ross Wilmot. The promoters of Imagis (prior to the acquisition by
the Registrant of February 23, 1999) were Pacific Cascade Consulting,
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 the Registrant that has materially affected the Registrant,
or any proposed transaction that would materially affect the Registrant,
except for an interest arising from the ownership of shares of the Registrant
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 the
Registrant.
ITEM 8 DESCRIPTION OF SECURITIES
The Registrant's authorized capital consists of 100,000,000 shares of common
stock, no par value. At May 5, 1999, there were 8,958,214 Shares issued and
outstanding and an additional 2,809,000 Shares have been reserved for issuance
pursuant to outstanding options and warrants to purchase Shares and warrants.
All Shares are of the same class and have the same rights, preferences and
limitations. The holders of the Shares are entitled to dividends in cash,
property or shares as and when declared by the Board of Directors out of funds
legally available therefor, to one vote per Share at meetings of security
holders of the Registrant and, upon liquidation, to receive such assets of the
Registrant as are distributable to the holders of the Shares. Upon any
liquidation, dissolution or winding up of the business of the Registrant, if
any, after payment or provision for payment of all debts, obligations or
liabilities of the Registrant shall be distributed to the holders of Shares.
There are no pre-emptive rights or conversion rights attached to the Shares.
There are also no redemption or purchase for cancellation or surrender
provisions, sinking or purchase fund provisions, or any provisions as to
modification, amendment or variation of any such rights or provisions attached
to the Shares of the Registrant.
There are no restrictions on the purchase or redemption of Shares by the
Registrant while there is any arrearage in the payment of dividends or sinking
fund installments.
Escrow Agreement
Eight hundred thousand (800,000) Shares of the Registrant (the "Escrow
Shares") are held under an escrow agreement (the "Escrow Agreement") dated
July 3, 1998. The Escrow Agreement is in the form required by Listing Policy
30 ("Policy 30") of the Vancouver Stock Exchange (the "VSE") and provides that
the Escrow Shares must remain in escrow until the regulatory authority having
jurisdiction permits them to be released from escrow or requires them to be
cancelled. Policy 30 provides that one third of these Escrow shares will be
released on each of the first, second and third anniversaries of the closing
date of the acquisition of Imagis, on February 23, 1999.
<PAGE>
The Escrow Shares are restricted and any dealings with them are subject to the
direction or determination of the VSE (the "Exchange") while the Shares of the
Registrant are listed for trading on the VSE, or if they are not so listed,
the executive director (the "Executive Director") appointed under the
Securities Act (British Columbia). The escrow restrictions prohibit all
trading or dealing in any manner with, or release of, the Escrow Shares
without consent of the Executive Director, as the case may be, and further
prohibit the recording of trading or any transfer of the Escrow Shares prior
to release from escrow without such consent. The Escrow Shares may be
released from escrow, on a pro rata basis, in accordance with the Policy
30 and the Escrow Agreement.
A holder of Escrow Shares has the right to vote such shares, except on a
resolution to cancel such shares, but has waived the right to receive
dividends and to participate in the assets and property of the Registrant on a
winding-up or dissolution of the Registrant. A holder of Escrow Shares who
ceases to be a principal, as that term is defined in the Policy, dies or
becomes bankrupt, is entitled to retain any Escrow Shares then held by him.
Shareholders Agreement
The Registrant, each of Sandra E. Buschau, Altaf Nazerali, Shafiq
Nazerali-Walji, Rory Godinho and Ross Wilmot (the "Original Shareholders") and
each of Pacific, Sonora and B.C. Ltd. (the "Former Imagis Shareholders")
entered into a Shareholders Agreement dated February 23, 1999. Shares held by
the Former Imagis Shareholders cease to be subject to the terms of the
Shareholders Agreement as such shares are released from escrow under the
Escrow Agreement. The shareholders' agreement governs the respective rights
and obligations with respect to their ownership of the Registrant's shares.
The material terms of the shareholders' agreement are as follows:
1) Each of the parties has agreed that until the third annual general
meeting following the completion of the Qualifying Transaction (the
"Closing Date"), the board of the Registrant will be comprised of three
nominees of the Original Shareholders and two nominees of the Imagis
Shareholders, one of whom will be an independent director (i.e. a
director of the Registrant who is not an officer or employee of the
Registrant or Imagis) (the "Independent Director"). The quorum for
meetings of the board of the Registrant will be determined in accordance
with the Registrant's Articles, being a simple majority of the
directors then in office, provided that there will be no quorum for
a meeting of directors unless one nominee of the Original Shareholders
and one nominee of the Imagis Shareholders are present at such
meeting. In addition to its audit committee, the shareholders'
agreement provides that the Registrant's board will establish separate
executive and compensation committees, and a nominee of the Original
Shareholders to the Board will be a member of each of the audit,
compensation and executive committee.
2) The Original Shareholders and the Imagis Shareholders agreed to
remain the registered and beneficial owner of the respective shares held
by them as of the date of the shareholders' agreement and not sell,
transfer, mortgage or otherwise dispose of or offer to sell, directly or
indirectly, their shares except as follows:
(i) up to one-third of the shares held by a shareholder may be
sold at any time after the first anniversary of the Closing Date,
(ii) up to an additional third of the shares held may be sold at
any time after the second anniversary of the Closing Date;
(iii) up to an additional third of the shares held may be sold
after the third anniversary of the Closing Date.
On the third anniversary of the Closing Date, the parties to the
shareholders' agreement are free to dispose of any and all of
their remaining shares in the Registrant.
<PAGE>
PART II
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Registrant's Shares have traded on the VSE in Canada since September 29,
1998 under the symbol CAP. On February 1999, in conjunction with the
completion of the Imagis Acquisition, the Registrant changed its name to
Imagis Technologies Inc. and its trading symbol was concurrently changed to
NAB. The Registrant's Shares do not trade on a U.S. market. The following is
a summary of trading, on a calendar quarter basis, in the Shares on the VSE
during 1998 and 1999 (stated in Canadian dollars):
The Vancouver Stock Exchange (1)(2)
1998 High (Cdn$) Low (Cdn$) Volume
4th Quarter(1) $0.90 $0.50 2,696,100
1999 High (Cdn$) Low (Cdn$) Volume
1st Quarter $1.45 $0.65 219,800
(1) Source of trading information: Vancouver Stock Exchange website
(www.vse.com)
(2) Trading commenced on the VSE on September 29, 1998.
The price for the Registrant's Shares on the VSE on May 17, 1999, was
Cdn.$0.98 (High) and Cdn.$0.93 (Low), and the close price was Cdn.$0.95.
(Source: VSE website)
Other than described above, the Registrant's Shares are not and have not been
listed or quoted on any other exchange or quotation system.
Shareholders
As of May 11, 1999, the Registrant had approximately 300 shareholders of
record (including nominees and brokers holding street accounts) of the
Registrant's Shares.
Dividends
The Registrant has never paid dividends on its Shares. The Registrant
currently intends to retain earnings for use in its business and does not
anticipate paying any dividends in the foreseeable future.
Exchange Controls and Other Limitations Affecting Holders of Common Shares
Canada has no system of exchange controls. There is no law, government decree
or regulation in Canada restricting the export or import of capital or
affecting the remittance of dividends, interest or other payments to a
non-resident holder of Common Shares, other than withholding tax requirements.
Other Limitations on the Rights of Nonresident or Foreign Shareholders
Investment Canada Act
Other than as provided in the Investment Canada Act (Canada) (the "Investment
Act"), there are currently no limitations imposed by Canadian laws, decrees or
regulations that restrict the import or export of capital, including foreign
<PAGE>
exchange controls, or that affect the remittance of dividends to nonresident
holders of the Registrant's securities. However, any such remittances of
dividends paid to United States residents are subject to withholding tax at a
rate equal to a maximum of 15% of the amount paid. See "Item 7 Taxation."
The following discussion summarizes the material features of the Investment
Act, in its present form, for a nonresident of Canada who proposes to acquire
Shares of the Registrant.
The Investment Act regulates the acquisition of control of a Canadian business
by a "non-Canadian" as defined under the Investment Act. With respect to the
Registrant, an acquisition of control is considered to be the acquisition of
the majority of its Shares. However, if a non-Canadian acquires more than
one-third of the voting shares of the Registrant, but less than a majority,
there is a presumed acquisition of control unless it can be established that
the Registrant is not controlled in fact by the acquirer. All acquisitions of
control of a Canadian business are notifiable (which requires that a
notification form be submitted to Investment Canada within thirty days after
the implementation of the investment) unless the investment is reviewable. If
the investment is reviewable, the Investment may not be implemented until the
Minister responsible for the Investment Act is, or has been deemed to be,
satisfied that the investment is likely to be of net benefit to Canada.
Where either the acquirer or, or the Registrant is presently controlled by, a
WTO investor (as that term is defined in the Investment Act), a direct
acquisition of control of the Registrant will only be reviewable if the value
of the Registrant's assets, as shown on its audited financial statements for
the most recently completed fiscal year, is equal to or greater than $184
million. This amount varies each year based on the rate of growth in Canadian
gross domestic product. Other direct acquisitions of control are reviewable
if the value of the assets of the Registrant, as calculated above, is equal to
or greater than Cdn $5 million. The Cdn $5 million threshold for review also
applies with respect to the acquisition of control of any Canadian business
that provides any financial services or transportation services, is a cultural
business, or is engaged in the production of uranium and owns an interest in
or producing uranium property in Canada.
Indirect acquisitions of control (acquisitions of control of an entity which
in turn controls the Registrant) are not reviewable under the Investment Act
if the acquirer is a WTO investor or if the Registrant is controlled by a WTO
investor. Otherwise, an indirect acquisition will be reviewable if the value
of the Registrant's assets is $50 million or more, or if the value of the
Registrant's assets acquired in the total transaction are in Canada or the
acquisition is not effected through the acquisition of control of a foreign
corporation.
Certain types of transactions are exemption from application of the Investment
Act including acquisitions of control of the Registrant:
a) by the acquisition of voting shares or the voting interests by any person
in the ordinary course of that person's business as a trader or dealer in
securities;
b) in connection with the realization of security granted for a loan or
other financial assistance and for any purpose related to the Investment Act;
c) for facilitating its financing and not for any purpose related to the
Investment Act on the condition that the acquirer divest control within two
years after control was acquired; and
d) by reason of an amalgamation, merger, consolidation or corporate
reorganization following which the ultimate or indirect control in fact of the
Registrant through the ownership of voting interests remains unchanged.
There are currently no limitations on the right of foreign or non-resident
owners of Common Shares to hold or vote such securities imposed by Canadian
law or the Registrant's charter or other constituent documents.
<PAGE>
Enforcement Of Civil Liabilities
The Registrant is a corporation incorporated under the laws of British
Columbia, Canada. Certain of the directors and the Registrant's professional
advisors are residents of Canada or otherwise reside outside of the U.S. All
or a substantial portion of the assets of such persons are or may be located
outside of the U.S. It may be difficult to effect service of process within
the United States upon the Registrant or upon such directors or professional
advisors or to realize in the U.S. upon judgments of U.S. courts predicated
upon civil liability of the Registrant or such persons under U.S. federal
securities laws. The Registrant has been advised that there is doubt as to
whether Canadian courts would (I) enforce judgments of U.S. courts obtained
against the Registrant or such directors or professional advisors predicated
solely upon the civil liabilities provisions of U.S. federal securities laws,
or (ii) impose liabilities in original actions against the Registrant or such
directors and professional advisors predicated solely upon such U.S. laws.
However, a judgment against the Registrant predicated solely upon civil
liabilities provisions of such U.S. federal securities laws may be enforceable
in Canada if the U.S. court in which such judgment was obtained has a basis
for jurisdiction in that matter that would be recognized by a Canadian court.
Income Tax Considerations
Canadian Federal Income Tax Considerations
The following summarizes the principal Canadian federal income tax
considerations applicable to the investment in and disposition of Shares in
the capital of the Registrant by a holder of the Registrant's Shares who is
resident in the United States of America and not in Canada, and who holds
Shares solely as capital property (a "U.S. Holder"). This summary is based on
the current provisions of the Income Tax Act (Canada) (the "Tax Act"), the
regulations thereunder, all amendments thereto publicly proposed by the
government of Canada to the date hereof, the published administrative
practices of Canada Customs and Revenue Agency, and on the current provisions
of the Canada-United States Income Tax Convention, 1980, as amended (the
"Treaty"). Except as otherwise expressly provided, this summary does not take
into account any provincial, territorial or foreign (including, without
limitation, any U.S.) tax law or treaty. It has been assumed that all
currently proposed amendments will be enacted substantially as proposed and
that there is no other relevant change in any governing law or practice,
although no assurance can be given in these respects.
Each U.S. Holder is advised to obtain tax and legal advice applicable to the
U.S. Holder's particular circumstances, as tax consequences will in all
likelihood differ from one holder to the next.
Every U.S. Holder is liable to pay a Canadian withholding tax on every
dividend that is or is deemed to be paid or credited to the U.S. Holder on the
U.S. Holder's Shares. The statutory rate of withholding tax is 25% of the
gross amount of the dividend paid. The Treaty reduces the statutory rate with
respect to dividends paid to a U.S. Holder who is a resident of the United
States for the purposes of the Treaty. Where applicable, the general rate of
withholding tax under the Treaty is 15% of the gross amount of the dividend,
but if the U.S. Holder is a company that owns at least 10% of the voting stock
of the Registrant and beneficially owns the dividend, the rate of withholding
tax is 5%. The Registrant is required to withhold the applicable tax from the
dividend payable to the U.S. Holder, and to remit the tax to the Receiver
General of Canada for the account of the U.S. Holder.
Pursuant to the Tax Treaty, a U.S. Holder will not be subject to Canadian
capital gains tax on any capital gain realized on an actual or deemed
disposition of a Shares, including a deemed disposition on death, provided
that the U.S. Holder did not hold the Share as capital property used in
carrying on a business in Canada.
United States Federal Income Taxation
The following discussion summarizes certain U.S. federal income tax
consequences relevant to an investment in and disposition of the Shares and
the Warrants by individuals and corporations who, for income tax purposes, are
resident in the U.S. and not in Canada, hold Shares and Warrants as capital
assets, do not use or hold the Shares or Warrants in carrying on a business
through a permanent establishment or in connection with a fixed base in Canada
and, in the case of individual investors, are also U.S. citizens
(collectively, "U.S. Holders"). The tax consequences of an investment in the
<PAGE>
Shares and the Warrants by investors who are not U.S. Holders may be expected
to differ substantially from the tax consequences discussed herein. The
discussion is based upon the provisions of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), existing and proposed Treasury Regulations,
published Internal Revenue Service (the "IRS") rulings, the Canada United
States Tax Convention (1980), as amended (the "Convention"), the
administrative practices and procedures published by the IRS, and judicial
decisions, all of which are subject to change, possibly on a retroactive
basis. The discussion does not take into account any state, local, estate or
foreign tax consequences (See "Taxation - Canadian Tax Consequences" above).
This discussion does not discuss all the tax consequences that may be relevant
to particular holders in light of their circumstances or to holders subject to
special rules, such as, but not limited to, tax-exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
persons subject to the alternative minimum tax, persons who hold Shares as
part of a straddle, hedging or conversion transaction, foreign corporations
whose ownership of Shares or Warrants of the Registrant is not effectively
connected with the conduct of a trade or business in the U.S., or holders who
acquired their Shares or Warrants through the exercise of employee stock
options or otherwise as compensation for services. Holders and prospective
holders of Shares and Warrants should consult their own tax advisors as to the
various tax consequences applicable to such holders or prospective holders,
as tax consequences will in all likelihood differ from one holder to the next.
Distributions on Shares of the Registrant
U.S. Holders generally will treat the gross amount of distributions paid by
the Registrant (including constructive distributions), without reduction for
any Canadian withholding tax, as dividend income for U.S. federal income tax
purposes to the extent of the Registrant's current and accumulated earnings
and profits. To the extent that a distribution to a U.S. Holder exceeds the
Registrant's current and accumulated earnings and profits, it will be applied
against and will reduce the adjusted basis of the U.S. Holder's Shares.
Thereafter, the distribution, to the extent that it exceeds the adjusted basis
of the U.S. Holder's Shares, will be treated as gain from the sale or exchange
of property.
The amount of Canadian tax withheld from dividends paid (and, in the case of
certain U.S. Holders that are corporations, other than Subchapter S
corporations, owning 10% or more of the voting power of the Registrant, a
portion of the Canadian income tax paid by the Registrant) generally will give
rise to a foreign tax credit or deduction for U.S. federal income tax purposes
by U.S. Holders. The deduction by U.S. Holders who are individuals is limited
to those who itemize deductions. (See more detailed discussion at Foreign Tax
Credit below).
Dividends paid on the Shares will not generally be eligible for the "dividends
received" deduction. A U.S. Holder which is a corporation may, under certain
circumstances, be entitled to a 70% deduction of the U.S. source portion, if
any, of dividends received from the Registrant (unless the Registrant
qualifies as a "foreign personal holding company" or a "passive foreign
investment company" as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Registrant.
The availability of this deduction is subject to several complex limitations,
the description of which is beyond the scope of this discussion.
Dividends will be taxed to U.S. Holders as ordinary income, with current top
marginal U.S. federal income tax rates of 39.6% for individual U.S. Holders
and 35% for corporate U.S. Holders.
Disposition of Shares and Warrants of the Registrant
The sale of the Shares or the Warrants generally will result in the
recognition of gain or loss to a U.S. Holder in an amount equal to the
difference, if any, between the amount realized and the U.S. Holder's adjusted
basis in the Shares or the Warrants, as the case may be. In order to
determine the adjusted basis of the Shares or the Warrants, the total
acquisition price paid by the U.S. Holder must be allocated between the Shares
and the Warrants acquired in proportion to their relative fair market values
as of the date of purchase.
<PAGE>
Gain or loss upon the sale of the Shares or the Warrants will be long-term or
short-term capital gain or loss, depending on whether the Shares or Warrants
have been held for more than one year. Preferential tax rates (currently 20%)
for net long term capital gains are applicable to U.S. Holders that are
individuals. There are currently no preferential tax rates for long-term
capital gains for U.S. Holders that are corporations. Short-term capital
gains are taxed at ordinary income rates.
Should a Warrant expire without being exercised, a U.S. Holder will have a
capital loss equal to its adjusted basis in the expired Warrant. The loss
will be a short-term or long-term loss under the rules discussed above.
Capital gains and losses are netted and combined according to special rules in
arriving at the net capital gain or loss for a particular tax year. Corporate
capital losses (other than capital losses of corporations electing under
Subchapter S of the Code) are deductible to the extent of capital gains.
Non-corporate taxpayers may deduct net capital losses, whether short-term or
long-term, up to US$3,000 a year (US$1,500 in the case of a married individual
filing separately). Non-corporate taxpayers may carry forward unused net
capital losses indefinitely. Unused net capital losses of a corporation
(other than a Subchapter S corporation) may be carried back three years and
carried forward five years.
Foreign Tax Credit
Canadian income taxes withheld on dividends may be taken as a credit against a
U.S. Holder's U.S. federal income tax liability, subject to significant and
complex restrictions and limitations which are beyond the scope of the this
discussion. In general, foreign taxes are creditable against U.S. federal
income taxes payable with respect to the U.S. Holder's foreign source income.
In addition, this limitation is calculated separately with respect to specific
classes of income. Dividends distributed by the Registrant will generally
constitute "passive income" or, in the case of certain U.S. Holders,
"financial services income" for these purposes. The availability of the
foreign tax credit and the application of the limitations on the credit will
depend on the facts and circumstances of each U.S. Holder.
Alternatively, a U.S. Holder may elect to deduct the foreign taxes withheld on
dividends. This election is made on an annual basis and applies to all
foreign taxes paid by or withheld from the U.S. Holder during the tax year.
Foreign Exchange
To the extent a U.S. Holder purchases or sells Shares or Warrants of the
Registrant in Canadian dollars or receives dividends in Canadian dollars, the
U.S. Holder, in computing U.S. taxable income, gain or loss, will be required
to determine the adjusted basis of Shares or Warrants sold, the amount
realized on the sale of Shares or Warrants or the amount of dividends, as the
case may be, by translating the Canadian dollars into U.S. dollars at the
exchange rate prevailing at the date of purchase, sale, or receipt of
dividends.
Generally, any gain or loss recognized upon a subsequent sale or other
disposition of the foreign currency, including the exchange for U.S. dollars,
will be ordinary income or loss. An individual whose realized foreign
exchange gain does not exceed U.S. $200 will not recognize that gain, to the
extent that there are not expenses associated with the transaction that
meet the requirements for deductibility as a trade or business expense (other
than travel expenses in connection with a business trip) or as an expense for
the production of income.
Exercise of Warrants and Disposition of Shares so Acquired
In general, the exercise of the Warrants should not represent a taxable event
for U.S. income tax purposes, to the U.S. Holders. The shares received by
U.S. Holders upon the exercise of the Warrants will have an adjusted basis
equal to the portion of the original acquisition price ascribed to the
Warrants (as discussed above) plus the cash paid upon the exercise of such
Warrants. A U.S. Holder's holding period with respect to a Share received
upon exercise of a Warrant should include such U.S. Holder's holding period
for the Warrant so exercised. The tax consequences of the disposition of
shares acquired through exercise of the Warrants generally should be the same
<PAGE>
as that for the Shares acquired directly. (See discussion regarding
Disposition of Shares and Warrants of the Registrant).
Other Considerations
Generally, income earned by a foreign corporation, the stock of which is owned
in whole or in part by a U.S. Holder, is not taxed by the U.S. until the
foreign corporation distributes those earnings to its U.S. shareholders. The
Code does provide exceptions to this general rule for controlled foreign
corporations, personal holding companies, passive foreign investment companies
and foreign personal holding companies. In addition, gains on the disposition
of foreign investment company, controlled foreign corporation, and passive
foreign investment company shares can be taxed as ordinary income at rates
exceeding the capital gains tax rates. These exceptions are discussed briefly
below.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of stock entitled to vote
or the total value of the stock of the Registrant is owned, directly, or
constructively, by citizens or residents of the U.S., U.S. domestic
partnerships or corporations, or estates or trusts other than foreign estates
or trusts, each of whom owns, directly or constructively, 10% or more of the
total combined voting power of all classes of stock of the Registrant entitled
to vote ("U.S. Shareholders"), the Registrant will be treated as a controlled
foreign corporation under Subpart F of the Code (a "CFC"). This
classification would have many complex results, including the required
inclusion by such U.S. Shareholders in income of their pro rata shares of the
"Subpart F income" (as specifically defined by the Code) of the Registrant.
Further, if the Registrant is deemed to be a CFC, a U.S. Shareholder may be
subject to U.S. income tax on its pro rata share of the increase in the
average amounts of U.S. property held by the company as of the close of each
quarter of the taxable year, provided there is non-previously taxed earnings
and profits to support the inclusion.
In addition, under Section 1248 of the Code, gain from the sale or exchange of
Shares by a U.S. Holder who is or was a U.S. Shareholder at any time during
the five-year period ending with such sale or exchange would be treated as
dividend income to the extent of earnings and profits of the Registrant
attributable to the Shares sold or exchanged.
If the Registrant is both a passive foreign investment company (as defined
below) and a CFC, the Registrant generally will not be treated as a passive
foreign investment company with respect to U.S. Shareholders of the CFC. This
rule generally will be effective for taxable years of the U.S. Shareholders
beginning after 1997 and for taxable years of the Registrant ending within
such taxable years of the U.S. Shareholders.
The Registrant does not believe that it is a CFC and it is not anticipated
that the Registrant will become a CFC. However, there can be no assurances
that the Registrant will not qualify as a CFC in the future.
Personal Holding Company
A corporation, whether a U.S. corporation or non-U.S. corporation, may be
classified as a personal holding company (a "PHC") for U.S. federal income tax
purposes if both of the following tests are satisfied: (i) at any time during
the last half of the corporation's taxable year, five or fewer individuals
(without regard to their citizenship or residency) own or are deemed to own
(under certain attribution rules) more than 50% of the stock of the
corporation by value (the "PHC Ownership Test") and (ii) in the case of a
non-U.S. corporation, such non-U.S. corporation receives 60% or more of its
U.S. related gross income, as specifically adjusted, from certain passive
sources such as interest, dividends, rents or certain royalty payments (the
"PHC Income Test"). Such a corporation is taxed (currently at a rate of
39.6%) on certain of its undistributed U.S. source income (including certain
types of foreign source income which are effectively connected with the
conduct of a U.S. trade or business).
<PAGE>
Five or fewer individuals may own or be deemed to own more than 50% of the
Shares of the Registrant. As a result, the PHC Ownership Test may be
satisfied. However, the Registrant does not believe that it currently
satisfies the PHC Income Test and intends to manage its affairs so as to avoid
becoming a PHC, to the extent consistent with its business goals. However,
there can be no assurances that the Registrant will not qualify as a PHC in
the future.
Passive Foreign Investment Company
A non-U.S. corporation will be classified as a passive foreign investment
company (a "PFIC") for U.S. federal income tax purposes if it satisfies either
of the following two tests: (I) 75% or more of its gross income for the
taxable year is passive income or (ii) on average for the taxable year (by
value or, if the corporation is not publicly traded and either makes an
election or is a CFC, by adjusted basis), 50% or more of its assets produce or
are held for the production of passive income.
Passive income generally includes income such as dividends, interest, rents,
royalties, certain capital gains, and other income not derived in the active
conduct of a trade or business. If the Registrant qualifies as a PFIC at any
time during the period a U.S. Holder owns Shares of the Registrant, it will
always be treated as such in regards to that U.S. Holder, unless specific
actions are taken to avoid the rule.
U.S. Holders owning shares of a PFIC are subject to an interest charge based
on the value of deferral of tax for the period during which the shares of the
PFIC are owned. In addition, any gain realized on the disposition of shares
of a PFIC are subject to U.S. federal income tax as ordinary income taxed at
top marginal rates, rather than as capital gain. Tax at ordinary income rates
and interest would also be payable on receipt of an excess distribution (any
distributions received in the current year that are in excess of 125% of the
average distributions received during the 3 preceding years or, if shorter,
the shareholder's holding period). However, if a U.S. Holder makes a timely
election to treat a PFIC as a qualified electing fund ("QEF") with respect to
such shareholder's interest therein, the above-described rules generally will
not apply. Instead, the electing U.S. Holder would include annually in its
gross income its pro rata share of the PFIC's ordinary earnings and net
capital gain, regardless of whether such income or gain was actually
distributed. A U.S. Holder of a QEF can, however, elect to defer the payment
of U.S. federal income tax on such income inclusions. Special rules apply to
U.S. Holders who own their interest in a PFIC through intermediate entities or
persons.
Temporary regulations provide that a holder of an option to acquire stock of a
PFIC may not make a QEF election that will apply to the option or to the stock
subject to the option. Under proposed regulations, if a U.S. Holder has an
option to acquire stock of a PFIC, the holding period with respect to shares
of stock of the PFIC acquired upon exercise of such option shall include the
period that the option was held. The effect of these rules is that (I) under
the special taxation rules for PFICs discussed above, excess distributions and
gains realized on the disposition of Shares received on exercise of the
Warrants will be spread over the entire holding period for the Warrants and
the Shares and (ii) if a U.S. Holder makes a QEF election upon exercise of the
Warrants and receipt of the Shares, that election generally will not be a
timely QEF election and thus the special taxation rules with respect to PFICs
discussed above will continue to apply. However, although the matter is not
free from doubt, it appears that if the QEF election is made with respect to
Shares received upon exercise of a Warrant for the same tax year the Warrant
was granted and the first year that the Registrant was a PFIC during a U.S.
Holder's holding period, then the QEF election may be treated as a timely QEF
election. It is possible that the Warrant would have to be exercised on the
day it was received in order for the QEF election with respect to such Shares
to be treated as timely. In addition, under the proposed regulations, a
disposition, other than by exercise, of the Warrants will be subject to the
special taxation rules for PFICs discussed above. U.S. Holders of Warrants
should consult with their own tax advisor regarding the application of the
PFIC rules.
U.S. Holders who hold, actually or constructively, marketable stock of a
foreign corporation that qualifies as a PFIC may elect to mark such stock to
the market (a "mark-to-market election"). If such an election is made, such
U.S. Holder will not be subject to the special taxation rules of a PFIC
described above for the taxable years for which the mark-to-market election
is made. A U.S. Holder who makes such an election will include in income for
the taxable year an amount equal to the excess, if any, of the fair market
<PAGE>
value of the Shares of the Registrant as of the close of such tax year over
such U.S. Holder's adjusted basis in such Shares. In addition, the U.S.
Holder is allowed a deduction for the lesser of (i) the excess, if any, of
such U.S. Holder's adjusted basis in the Shares over the fair market value of
such Shares as of the close of the tax year, or (ii) the excess, if any, of
(A) the mark-to-market gains for the Shares in the Registrant included by such
U.S. Holder for prior tax years, including any amount which would have been
included for any prior year but for the Section 1291 interest on tax deferral
rules discussed above with respect to a U.S. Holder who has not made a timely
QEF election during the year in which he holds (or is deemed to have held)
Shares in the Registrant and the Registrant is a PFIC ("Non-Electing U.S.
Holder"), over (B) the mark-to-market losses for Shares that were allowed as
deductions for prior tax years. A U.S. Holder's adjusted tax basis in the
Shares of the Registrant will be increased or decreased to reflect the amount
included or deducted as a result of a mark-to-market election. A
mark-to-market election will apply to the tax year for which the election is
made and to all later tax years, unless the PFIC stock ceases to be marketable
or the IRS consents to the revocation of the election.
The IRS has issued proposed regulations that, subject to certain exceptions,
would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S.
Holder that are generally not otherwise taxed, such as gifts, exchanges
pursuant to corporate reorganizations, and transfers at death. Generally, in
such cases, the basis of the Registrant's Shares in the hands of the
transferee and the basis of any property received in the exchange for those
shares would be increased by the amount of gain recognized. A U.S. Holder who
has made a timely QEF election (as discussed above) will not be taxed on
certain transfers of PFIC stock, such as gifts, exchanges pursuant to
corporate organizations, and transfers at death. The transferee's basis
in this case will depend on the manner of the transfer. The specific tax
effect to the U.S. Holder and the transferee may vary based on the manner in
which the shares of the Corporation are transferred.
The implementation of certain aspects of the PFIC rules requires the issuance
of regulations which in many instances have not been promulgated (or have been
promulgated only in proposed form) and which may have retroactive effect.
There can be no assurance that any of these proposals will be enacted or
promulgated, and if so, the form they will take or the effect that they may
have on this discussion. Accordingly, and due to the complexity of the PFIC
rules, U.S. Holders should consult with their own tax advisors with respect to
how the PFIC rules affect their individual tax situation, including the
advisability of making a QEF election or mark to market election with respect
to Shares of the Registrant and the impact of the PFIC rules on holding,
exercising, and disposing of the Warrants.
The Registrant believes that it may have qualified as a PFIC for its taxable
year ended December 31, 1998. The Registrant does not believe that it will
satisfy either of the tests for PFIC status for its taxable year ending
December 31, 1999 and intends to manage its affairs so as to avoid meeting
either test in future years, to the extent it is consistent with its business
goals. However, there can be no assurances that the Registrant will not
qualify as a PFIC in the future. Also, there can be no assurances that the
Registrant's determination regarding its PFIC status will not be challenged by
the IRS, or that it will be able to provide information necessary for its U.S.
Holders to comply with the income inclusion required by the QEF election.
Foreign Personal Holding Company
A non-U.S. corporation may be classified as a foreign personal holding company
(a "FPHC") for U.S. federal income tax purposes if both of the following tests
are satisfied: (i) at any time during the corporation's taxable year, five or
fewer individuals who are U.S. citizens or residents own or are deemed to own
(under certain attribution rules) more than 50% of all classes of the
corporation's stock measured by voting power or value (the "FPHC Ownership
Test") and (ii) the corporation receives at least 60% (50% in subsequent
years) of its gross income (regardless of source), as specifically
adjusted, from certain passive sources (the "FPHC Income Test").
The Registrant does not believe that it satisfies either the FPHC Ownership
Test or the FPHC Income Test. However, there can be no assurances that the
Registrant will not qualify as a FPHC in the future. If the Registrant were
to be classified as an FPHC, a portion of its "undistributed foreign personal
holding company income" (as defined for U.S. federal income tax purposes)
would be allocated to all of its shareholders who are U.S. Holders of Shares
on the last day of the Registrant's taxable year, or, if earlier, the last day
<PAGE>
on which it is classified as an FPHC. Such income would be includable in the
U.S. Holder's gross income as dividends for U.S. federal income tax purposes.
U.S. Holders who dispose of their Shares prior to such date would not be
subject to tax under these rules.
Foreign Investment Company
If 50% or more of the combined voting power or total value of the Registrant's
outstanding shares are held, directly or indirectly, by citizens or residents
of the U.S., U.S. domestic partnerships or corporations, or estates or trusts
other than foreign estates or trusts (as defined by Code Section 7701(a)(31)),
and the Registrant is found to be engaged primarily in the business of
investing, reinvesting, or trading in securities, commodities or any interest
therein, it is possible that the Registrant may be treated as a foreign
investment company ("FIC") as defined in Section 1246 of the Code.
The Registrant does not believe that it satisfies the tests for foreign
investment company status. If the Registrant were to be a foreign investment
company, all or part of any gain realized by a U.S. Holder selling or
exchanging Shares of the Registrant will be treated as ordinary income rather
than as capital gain income. However, there can be no assurances that the
Registrant will not qualify as a FIC in the future.
ITEM 2 LEGAL PROCEEDINGS
The Registrant is not a party to, and none of the Registrant's property is
subject to, any pending or threatened legal proceeding.
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
At the request of the Registrant, Elliott Tulk Price Anderson ("Elliott
Tulk"), resigned as auditors for the Registrant on December 10, 1998. The
Registrant requested the resignation of Elliott Tulk, as it desired to retain
the services of KPMG LLP, Chartered Accountants. The Registrant retained KPMG
LLP, Chartered Accountants on December 11, 1998 to provide auditing services.
There were no reportable disagreements with Elliott Tulk prior to their
resignation.
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES
On July 7, 1998, the Registrant issued for cash 800,000 Shares to Sandra E.
Buschau, Altaf Nazerali, Rory Godinho, Shafiq Nazerali-Walji and Ross Wilmot
(the "Investors") at a price of $0.15 per Share. These Shares were issued in
connection with the initial seed capital investment by the Investors in the
Registrant. The aggregate offering price was $120,000.
On September 29, 1998, the Registrant issued for cash 1,500,000 Shares at a
price of $0.30 per Share. The aggregate offering price was $450,000. The
purchasers were residents of British Columbia, Canada, through an initial
public offering in British Columbia. Goepel McDermid Inc. acted as agent in
connection with the transaction.
On January 13, 1999, the Registrant issued for cash 150,000 Shares at a price
of $0.30 per Share to Goepel McDermid Inc. The aggregate offering price was
$45,000.
On February 23, 1999, pursuant to the terms of a Share Purchase Agreement
dated December 14, 1998, the Registrant issued 2,500,000 Shares to Pacific,
Sonora and B.C. Ltd. at a price of $0.48 per Share in exchange for common
shares of Imagis. See "ITEM 1 Description of Business". The aggregate
offering price was $1,200,000. In addition, the Registrant issued 100,000
Shares to Canaccord Capital Corporation ("Canaccord") at a price of $0.48
(aggregate offering price of $48,000) in exchange for finders' services
<PAGE>
provided by Canaccord in connection with the acquisition of Imagis shares by
the Registrant. The Registrant also issued 72,500 Shares at a price of $0.55
per Share (aggregate offering price of $39,875) to Valor Invest Limited as
partial consideration for a loan provided by Valor Invest Limited. On March
19, 1999, pursuant to the terms of the Share Purchase Agreement, the
Registrant issued the following Shares:
(a) 535,714 Shares at a price of $0.56 per Share (aggregate offering price of
$300,000), 267,857 Shares to Pacific to pay down the Registrant's obligations
to Pacific under the terms of the Share Purchase Agreement and 267,857 Shares
to FCIC, a creditor of the Registrant, to pay down a bridge financing loan to
Imagis; and
(b) 900,000 Shares at a price of $0.48 per Share (aggregate offering price of
$432,000) to FCIC, as compensation for certain services performed by FCIC on
behalf of the Former Imagis Shareholders.
In addition to the Shares issued by the Registrant in connection with the
Share Purchase Agreement, the Registrant issued a warrant (the "Drummond
Warrant") to purchase 400,000 Shares at an exercise price of $1.25 per share
to Iain Drummond. The Registrant issued the Drummond Warrant in consideration
of Mr. Drummond having renounced his right to acquire up to a 6% equity
interest in Imagis. Additionally, the Registrant issued a warrant (the
"Armitage Warrant") to purchase 24,000 Shares at an exercise price of $1.25
per Share to Armitage Associates Ltd. ("Armitage"). The Registrant issued the
Armitage Warrant in consideration of Armitage having located and negotiated an
employment agreement between Imagis and Mr. Drummond.
On May 4th, 1999, the Registrant issued 2,400,000 Units, each Unit comprised
of one Share and one transferable Warrant for an aggregate gross proceeds of
$2,952,000. Goepel McDermid Inc. and Canaccord Capital Corporation acted as
agents in connection with this offering. The agents received a commission in
the amount of 7.5% of the price of each Unit sold in the offering for an
aggregate commission of $221,400. In addition, the Registrant issued Warrants
entitling the agents to purchase at any time, for a period of six months from
the offering, up to 360,000 Shares at the offering price.
In connection with each of the above issuances of securities, the Registrant
relied on the exclusion from registration provided by Rule 903(b)(1) of
Regulation S under the Securities Act of 1933, as amended. In each case, the
securities were issued by the Registrant, a "foreign issuer," as defined by
Regulation S, to persons outside the United States.
ITEM 5 INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant does not provide for indemnification of any kind for officers
and directors.
<PAGE>
PART F/S
The following financial statements and related schedules are included in this
Item:
1. Financial Statements of Imagis Technologies Inc. (formerly Colloquium
Capital Corp.)
Auditors' Report.
Balance Sheet as at December 31, 1998.
Statement of Operations and Deficit for the period from incorporation on
March 23, 1998 to December 31, 1998.
Statement of Cash Flows for the period from incorporation on March 23,
1998 to December 31, 1998.
Notes to Financial Statements.
2. Financial Statements of Imagis Cascade Technologies Inc.
Auditors' Report.
Balance Sheet as of December 31, 1998.
Combined Statements of Operations and Deficit for the year ended December
31, 1998, (unaudited) four months ended December 31, 1997 and the year
ended August 31, 1997.
Combined Statements of Cash Flow for the year ended December 31, 1998,
(unaudited) four months ended December 31, 1997 and the year ended
August 31, 1997.
Notes to Financial Statements.
3. Unaudited Pro Forma Combined Financial Statements for the six months
ended June 30, 1999 and the year ended December 31, 1999 of Imagis
Technologies Inc. (formerly Colloquium Capital Corp.).
Unaudited Pro Forma Combined Statements of Operations.
Notes to Unaudited Pro Forma Combined Financial Statements.
<PAGE>
Financial Statements of
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
For the period from incorporation on March 23, 1998
to December 31, 1998
<PAGE>
AUDITORS' REPORT
To the Board of Directors
Imagis Technologies Inc.
(formerly Colloquium Capital Corp.)
We have audited the balance sheet of Imagis Technologies Inc. (formerly
Colloquium Capital Corp.) as at December 31, 1998 and the statements of
operations and deficit and cash flows for the period from incorporation on
March 23, 1998 to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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, 1998 and
the results of its operations and its cash flows for the period from
incorporation on March 23, 1998 to December 31, 1998 in accordance with
generally accepted accounting principles in Canada.
signed "KPMG LLP"
Chartered Accountants
Vancouver, Canada
January 27, 1999, except as to
notes 8(b) and (c) which are as
of February 25, 1999 and note 8(d)
which is as of March 19, 1999
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Balance Sheet
(expressed in Canadian dollars)
December 31, 1998
Assets
Current assets:
Cash 206,027
Accounts receivable 6,957
--------
212,984
Advances receivable (notes 1 and 3) 220,000
Deferred acquisition costs 86,800
--------
519,784
========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities 60,875
Shareholders' equity:
Share capital (note 4) 508,425
Deficit (49,516)
--------
458,909
Operations (note 1)
Subsequent events (note 8)
519,784
========
See accompanying notes to financial statements.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Statement of Operations and Deficit
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
Revenue:
Interest income 3,988
Expenses:
Bank charges and interest 250
Agent's fees 7,000
Office 16,836
Professional fees 15,658
Foreign exchange recovery (2,295)
Shareholder relations 3,952
Transfer agent and regulatory fees 8,063
Travel and promotion 4,040
--------
53,504
--------
Net loss, being deficit, end of period 49,516
========
Loss per share $0.05
========
Weighted average number of common shares outstanding 925,000
========
See accompanying notes to financial statements.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Statement of Cash Flows
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
Cash provided by (used in):
Operating activities:
Net loss (49,516)
Changes in non-cash operating working capital:
Accounts receivable (6,957)
Accounts payable and accrued liabilities 60,875
--------
Investing activities:
Advances to Imagis Cascade Technologies Inc. (220,000)
Deferred acquisition costs (86,800)
--------
(306,800)
Financing activities:
Shares issued for cash 508,425
Deferred finance costs --
--------
508,425
--------
Increase in cash, being cash, end of period 206,027
========
Supplementary information:
Interest paid 250
Income taxes paid --
========
See accompanying notes to financial statements.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Financial Statements
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
1. Operations:
Imagis Technologies Inc. (formerly Colloquium Capital Corp.) ("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 ("VSE") on September 9, 1998.
The Company is a venture capital pool corporation ("VCP") as defined by the
policies of the VSE. Under the terms of the VSE policies, the Company has 18
months from the date of VSE listing to complete a Qualifying Transaction,
failing which the Company's common shares may be suspended or delisted.
On October 6, 1998 the Company, Imagis Cascade Technologies Inc. ("Imagis"),
a private Canadian company which develops and markets law enforcement software
products, and the Imagis shareholders entered into a Confidentiality and
Standstill Agreement pursuant to which the Company was able to complete due
diligence respecting the business and affairs of Imagis. On October 16, 1998,
the Company gave notice to the Imagis shareholders of its intention to acquire
all of the issued and outstanding shares of Imagis. The notice of intent was
accompanied by a refundable deposit of $100,000 paid to the Imagis
shareholders. Subsequently, the Company advanced an additional $120,000 to
Imagis.
On October 23, 1998, the Company, Imagis and the Imagis shareholders entered
into a Letter of Intent. On December 14, 1998, Imagis, the Company and the
Imagis Shareholders entered into a Share Purchase Agreement which supersedes
the Letter of Intent.
As set out in the Share Purchase Agreement, consideration for the
acquisition of all of the shares of Imagis will be $2,632,000, plus contingent
additional consideration of up to $400,000, payable as follows:
(a) as to $100,000 by application of the deposit on the closing date;
(b) as to $1,632,000 by allotment and issue to the Imagis shareholders of
3,400,000 common shares of the Company at a deemed value of $0.48 per
share;
(c) as to $900,000 by certified cheque on or before April 30, 1999; and
(d) up to $400,000 payable to a Imagis 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, the Company will on the Closing Date issue to the
president of Imagis, 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, the Company has agreed to issue 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.
<PAGE>
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Financial Statements, page 2
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
1. Operations (continued):
Upon completion of the acquisition of Imagis, the Company will carry on
through Imagis, as its wholly-owned subsidiary, the business of marketing
state of the art computer applications for digital identification and
administrative functions.
To December 31, 1998, the Company has principally been funded by cash
received from the issuance of common shares. The recoverability of advances
receivable and the Company's ability to continue to operate as a going concern
which will allow it to discharge its liabilities in the normal course of
business is dependent upon the completion of the transactions described above
and the generation of profitable operations in the future.
2. Significant accounting policies:
These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada. The measurement principles applied
in these financial statements do not differ materially from those in generally
accepted accounting principles ("GAAP") in the United States, except as
disclosed in note 2(b).
(a) Deferred acquisition costs:
Costs incurred to date with respect to the transactions described in note
1 have been deferred and will be accounted for as part of the related
transaction upon its completion or charged against income if the transaction
does not complete during the period.
(b) Loss per share:
Loss per share is calculated based on the weighted average number of
shares outstanding including the 800,000 shares held in escrow (note 4(c)).
Under U.S. GAAP such shares would be excluded from the calculation. As a
result, loss per share under U.S. GAAP would be as follows:
Loss per share $ 0.11
Weighted average number of shares outstanding 443,182
=========
(c) Measurement uncertainty:
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
reasonable assumptions that impact the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the recognized amounts of revenues and
expenses during the reporting period. The most significant area where
management has applied its judgment to these financial statements is in the
assessment of the recoverability of advances receivable (notes 1 and 3).
Actual results may differ from these estimates.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Financial Statements, page 3
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
3. Advances receivable:
The Company has advanced interim financing of $120,000 to Imagis in
addition to the $100,000 deposit referred to in note 1. This interim
financing is secured by 200,000 shares of Imagis' pledged to the Company by
Pacific Cascade Consultants Ltd., the controlling shareholder of Imagis.
4. Share capital:
(a) Authorized:
100,000,000 common shares without par value
(b) Issued:
Number
of shares Amount
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
========= ========
(c) Escrow shares:
As at December 31, 1998, 800,000 shares of the Company are held in
escrow, the release of which is subject to the approval of regulatory
authorities.
(d) Warrants:
As part of the consideration for their services in connection with the
initial public offering, the Company issued a warrant to Goepel McDermot
Securities Inc. to purchase up to 150,000 common shares at an exercise price
of $0.30 each. The warrant expires March 1, 1999. The warrant was exercised
subsequent to year end.
(e) Options:
The Company has issued 230,000 incentive stock options exercisable on or
before July 6, 2003 to purchase common shares each at a price of $0.30 each.
5. Related party transactions:
Office expense includes $16,836 for accounting, rent and administrative
expenses charged by a company with directors in common. The Company has
entered into an agreement to rent office space from this company on a
month-to-month basis for $1,000 per month.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Financial Statements, page 4
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
6. Financial instruments:
The fair value of the Company's financial instruments, represented by
cash, accounts receivable and accounts payable and accrued liabilities,
approximates their carrying value due to their ability to be promptly
liquidated or their immediate or short-term to maturity.
7. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year
2000 Issue affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
8. Subsequent events:
(a) Subsequent issuances:
On January 26, 1999, the Company announced that it has arranged, subject
to regulatory approval, a private placement of 535,714 common shares of the
Company. The private placement is conditional upon the Company completing the
acquisition of all the issued and outstanding common shares of Imagis pursuant
to the terms of the Share Purchase Agreement entered into among the Company,
Imagis and the shareholders of Imagis dated December 14, 1998.
On January 12, 1999, 150,000 common shares were issued for $0.30 each upon
exercise of the warrants described in note 4(d).
(b) Acquisition of Imagis:
The acquisition of Imagis described in note 1 completed on February 23,
1999. As the former shareholders of Imagis gained voting control of the
Company on the acquisition, this business combination was accounted for as a
reverse take-over transaction under which Imagis is deemed for accounting
purposes to be the acquirer and the Company the acquired entity. Under
these accounting principles, the consolidated financial statements present
Imagis on a historical basis consolidated with the results of operations of
the Company from the date of acquisition. The consideration issued was
applied to the assets acquired and liabilities assumed of the Company based on
their relative fair values at the date of acquisition.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Financial Statements, page 5
(expressed in Canadian dollars)
For the period from incorporation on March 23, 1998 to December 31, 1998
8. Subsequent events (continued):
(b) Acquisition of Imagis (continued):
For purposes of these pro forma combined financial statements only this
allocation was as follows:
Cash 239,522
Other current assets --
Current liabilities (33,012)
--------
Working capital acquired 206,510
Acquisition loan (900,000)
--------
Net deficiency recognized as a charge to deficit
on acquisition in accordance with accounting
principles for reverse take-overs (693,490)
========
The acquisition loan was subsequently paid.
(c) Name change:
On February 25, 1999, the Company changed its name to Imagis Technologies
Inc.
(d) Public offering:
Pursuant to an agency agreement dated March 19, 1999, the Company has
committed to offer for sale 2,400,000 units, each unit comprised of one common
share and one share purchase warrant. Two such warrants are exercisable into
one additional common share at a price of $1.25 per share for a six month
period subsequent to the completion of the offering. The agents have agreed
to purchase any unsubscribed units on closing.
For services provided, the agents will receive a commission of 7.5% of
the aggregate gross proceeds of the offering. In addition, the Company has
agreed to grant to the agents non-transferable warrants to purchase up to
360,000 common shares at a price of $1.25 per share for a six month period
subsequent to the completion of the offering.
<PAGE>
Financial Statements of
IMAGIS CASCADE TECHNOLOGIES INC.
<PAGE>
AUDITORS' REPORT
To the Board of Directors
Imagis Cascade Technologies Inc.
We have audited the balance sheet of Imagis Cascade Technologies Inc. as at
December 31, 1998 and the combined statements of operations and deficit and
cash flows for the year 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 audit.
We conducted our audit 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, 1998 and
the results of its operations and its cash flows for the year then ended in
accordance with generally accepted accounting principles in Canada.
Significant measurement differences between Canadian and United States
accounting principles are explained and quantified in note 9 to the financial
statements.
signed "KPMG LLP"
Chartered Accountants
Vancouver, Canada
April 5, 1999
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
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 April 5, 1999, 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.
signed "KPMG LLP"
Chartered Accountants
Vancouver, Canada
April 5, 1999
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Balance Sheet
(expressed in Canadian dollars)
December 31, 1998
Assets
Current assets:
Cash 38,804
Accounts receivable 126,163
Inventories 111,836
---------
276,803
Computer equipment,
net of accumulated depreciation of $34,252 70,124
---------
346,927
=========
Liabilities and Deficiency in Net Assets
Current liabilities:
Accounts payable and accrued liabilities 644,681
Due to director 10,000
Notes payable (notes 1 and 3) 580,000
Current portion of obligation under capital lease 6,667
---------
1,241,348
Obligation under capital lease (note 4) 9,445
Payable to Pacific Cascade Consultants Ltd. (note 5) 416,572
---------
1,667,365
Deficiency in net assets:
Share capital (note 6) 1
Deficit (1,320,439)
---------
(1,320,438)
Operations (note 1)
Uncertainty due to Year 2000 Issue (note 8)
---------
346,927
=========
See accompanying notes to financial statements.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Combined Statements of Operations and Deficit
(expressed in Canadian dollars)
Year Year Year
ended ended ended
December 31, December 31, August 31,
1998 1997 1997
(unaudited) (unaudited)
Revenues 555,160 269,757 1,812,553
Operating expenses:
Materials 158,472 111,015 960,067
Salaries and benefits 745,332 207,355 874,192
Administration (schedule) 573,951 162,644 549,735
Depreciation 34,252 -- 4,630
Management fees (note 7(b)) 238,100 -- 172,500
Intercompany finance fees (note 7(c)) -- 6,000 24,000
Write-off of deferred finance fees 125,492 -- --
--------- --------- ---------
1,875,599 487,014 2,585,124
--------- --------- ---------
Loss for the period 1,320,439 217,257 772,571
Deficit, beginning of period 2,072,141 1,854,884 1,082,313
Elimination of deficit against share capital
on incorporation of the Company (2,072,141) -- --
--------- --------- ---------
Deficit, end of period 1,320,439 2,072,141 1,854,884
========= ========= =========
See accompanying notes to combined financial statements.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Combined Statements of Cash Flows
(expressed in Canadian dollars)
Year Year Year
ended ended ended
December 31, December 31, August 31,
1998 1997 1997
(unaudited) (unaudited)
Operating activities:
Loss for the period (1,320,439) (217,257) (772,571)
Items not involving the use of cash:
Depreciation 34,252 -- 4,630
Write-off of deferred finance fees 125,492 -- --
Changes in non-cash operating working capital:
Accounts receivable (65,613) 312,192 (262,183)
Inventories (38,402) (39,118) (34,316)
Prepaid expenses 139,511 (14,180) (125,331)
Accounts payable and accrued
liabilities 400,010 (7,918) 236,365
--------- --------- ---------
Cash flows from operations (725,189) 33,719 (953,406)
Investing activities:
Acquisition of computer equipment (24,442) (7,300) (52,150)
--------- --------- ---------
Cash flows from investing (24,442) (7,300) (52,150)
Financing activities:
Issue of share capital 1 -- --
Advances from director 10,000 -- --
Notes payable 580,000 -- --
Repayments on obligation under
capital lease (3,922) -- --
Net advances from Pacific Cascade
Technologies Ltd. 202,356 (26,419) 1,005,556
--------- --------- ---------
Cash flows from financing
Increase in cash, being cash,
end of period 38,804 -- --
========= ========= =========
Supplementary information:
Interest paid 9,851 -- --
Income taxes paid -- -- --
Non-cash transactions not reported above:
Acquisition of computer
equipment by capital lease 20,034 -- --
========= ========= =========
See accompanying notes to financial statements.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements
(expressed in Canadian dollars)
1. Operations:
Imagis Cascade Technologies Inc. (the "Company") was incorporated on
January 9, 1998 under the Company Act (British Columbia) as the successor for
the development, manufacture and sale of computer applications for digital
identification and image management systems business previously carried on by
Pacific Cascade Consultants Ltd. ("Pacific Cascade"). This business was, to
the date of commencement of the Company's operations, operated within a
division of Pacific Cascade and by two of Pacific Cascade's wholly-owned
subsidiaries, Imagis Northwest Solutions Inc. and Imagis Solutions (U.S.) Inc.
(a) Acquisition of business and basis of presentation:
The acquisition of the predecessor Pacific Cascade business by the Company was
a common control related party transaction for accounting purposes as the
controlling shareholders of the Company and Pacific Cascade are the same.
Accordingly, the assets acquired and liabilities assumed by the Company have
been recorded in the accounts of the Company at the net book values reported
by Pacific Cascade in a manner consistent with a pooling of interests
accounting. No adjustments have been recorded to reflect any underlying value
in the business acquired in excess of such net book value. As a result, a net
nominal value has been assigned to the share capital issued on the business
acquisition.
The net assets transferred by Pacific Cascade to the Company were as follows:
Accounts receivable 60,550
Inventories 73,434
Prepaid expenses 139,511
Computer equipment 59,900
Less accounts payable and accrued liabilities (244,671)
Less payable to Pacific Cascade (88,724)
---------
--
=========
In addition, these financial statements present the operations carried on by
the Pacific Cascade business for its most recent fiscal year ended August 31,
1997 and for the four months ended December 31, 1997. The operations carried
on by the Pacific Cascade business during the period January 1, 1998 to the
incorporation of the Company on January 9, 1998, which were not material, are
included in the results of operations and cash flows for the year ended
December 31, 1998. These financial statements have been prepared in accordance
with the requirements of and solely for the purposes of an initial
registration statements filing on Form 10SB by Imagis Technologies Inc. with
the Securities and Exchange Commission in the United States and may not be
appropriate for other purposes.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 2
(expressed in Canadian dollars)
1. Operations (continued):
(b) On October 6, 1998 the Company and its shareholders entered into a
Confidentiality and Standstill Agreement with Imagis Technologies Inc.
(formerly "Colloquium Capital Corp.") ("Colloquium"), an unrelated venture
capital pool corporation ("VCP") as defined by the policies of the Vancouver
Stock Exchange ("VSE"). Colloquium was incorporated in 1998 and had no other
operations. The Confidentiality and Standstill Agreement allowed Colloquium
to complete due diligence respecting the business and affairs of the Company.
On October 16, 1998, Colloquium gave notice to the Company's shareholders of
its intention to acquire all of the issued and outstanding shares of the
Company. The notice of intent was accompanied by a refundable deposit of
$100,000 paid to the Company's shareholders. Subsequently, Colloquium
advanced an additional $120,000 to the Company (note 3).
On October 23, 1998, the Company and its shareholders entered into a Letter of
Intent with Colloquium. On December 14, 1998, the Company and its
shareholders entered into a Share Purchase Agreement with Colloquium which
supersedes the Letter of Intent.
As set out in the Share Purchase Agreement, consideration for the acquisition
of all of the shares of the Company will be $2,632,000, plus contingent
additional consideration of up to $400,000, payable as follows:
(a) as to $100,000 by application of the deposit on the closing date;
(b) as to $1,632,000 by allotment and issue to the Company's shareholders of
3,400,000 common shares of Colloquium at a deemed value of $0.48 per
share;
(c) as to $900,000 by certified cheque 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 Colloquium's treasury.
In consideration for renouncing his right to acquire up to a 6% equity
interest in the Company, Colloquium will on the Closing Date issue to the
president of the Company, a warrant to purchase 400,000 common shares of
Colloquium 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, Colloquium has agreed to issue 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.
(Unaudited)
On February 23, 1999, the acquisition of the Company by Colloquium was
completed and all consideration was exchanged in accordance with the terms set
out above.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 3
(expressed in Canadian dollars)
1. Operations (continued):
(c) Future operations:
In each of the periods presented, the Company has incurred an operating loss
and at December 31, 1998 has a working capital deficiency of $964,545. The
Company requires additional capital to fund its existing obligations and its
ongoing operations. These financial statements have been prepared on the
going concern basis which assumes the realization of assets and settlement of
liabilities in the normal course. Failure to obtain ongoing support of its
creditors and shareholders 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
adjustments 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 (which except as set out in note 9 do
not materially differ from accounting principles generally accepted in the
United States) and reflect the following significant accounting policies:
(a) Basis of combination:
The combined financial statements of operations and deficit and cash flows for
the four months ended December 31, 1997 and the year ended August 31, 1997
reflect the historical operating results of the acquired Pacific Cascade
business, including its interest in transactions carried on through its 60%
owned subsidiaries Imagis Northwest Solutions Inc. and Imagis Solutions (U.S.)
Inc. (the "Subsidiaries"). The combined statements of operations and deficit
and cash flows for the year ended December 31, 1998 reflect the operations and
cash flows of the Pacific Cascade business to the cessation of their
operations with those of the Company thereafter. All inter-entity
transactions have been eliminated.
(b) Non-corporate statements:
The combined statements of operations and deficit for the four months ended
December 31, 1997 and the year ended August 31, 1997 include only the revenues
and expenses of the information technology businesses of the predecessor to
the Company and do not reflect all revenues and expenses of the corporate
entities in which the information technology business was a part, nor charges
on invested equity.
(c) Inventories:
Inventories are recorded at the lower of cost, calculated on a weighted
average basis, and estimated net realizable value.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 4
(expressed in Canadian dollars)
2. Significant accounting policies (continued):
(d) Computer equipment:
Computer equipment is stated at cost. Depreciation is provided on a
straight-line basis over a three year period.
(e) Revenue recognition:
Revenue is recognized on the later of title passing to the customer or the
customer's acceptance of the product. The Company provides for estimated
return and warranty costs on recognition of revenue.
(f) Research and development:
Research costs are expensed as incurred. Development costs have been expensed
to date as they do not meet certain stringent criteria under generally
accepted accounting principles for capitalization and amortization.
(g) 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 (see
note 1). Actual amounts may differ from these estimates.
(h) Income taxes:
The Company accounts for income taxes on the allocation basis by the deferral
method. Deferred income taxes are recognized at current rates at the time of
the underlying transaction for differences in the timing of recognition of
transactions for accounting and income tax purposes. No adjustment is made to
deferred income taxes for subsequent changes in income tax rates. The benefit
of loss carryforwards and deductions available for tax purposes in excess of
accounting purposes are recognized to the extent there is virtual certainty of
their realization.
(i) Financial instruments:
The Company carries financial instruments at cost which is not estimated by
management to differ materially from fair value at the balance sheet date.
(j) Unaudited financial information:
The financial information for the four months ended December 31, 1997 and
the year ended August 31, 1997 is unaudited; however, such information
reflects all adjustments, which consist solely of normal recurring
adjustments, necessary for a fair presentation of the results of operations
and cash flows for the periods presented.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 5
(expressed in Canadian dollars)
3. Notes payable:
First Capital Investment Corp. ("FCIC") 350,000
Colloquium (note 1) 220,000
International Portfolio Management ("IPM") 10,000
---------
580,000
==========
Notes payable are non-interest bearing, unsecured and repayable on demand.
4. Obligation under capital lease:
Minimum lease payments:
1999 7,393
2000 7,393
2001 3,080
---------
17,866
Less implicit interest portion at 9.8% (1,754)
---------
16,112
Less current portion of capital lease obligations 6,667
---------
9,445
=========
5. Payable to Pacific Cascade Consultants Ltd.:
The payable to Pacific Cascade, the Company's parent, is non-interest bearing,
unsecured and has no specific terms of repayment. Pacific Cascade has
confirmed that it does not intend to demand repayment in the next twelve
months.
6. Share capital:
Authorized:
100,000,000 common shares without par value
Number Assigned
of shares value
Issued:
Issued in connection with acquisition of
businesses from Pacific Cascade, net of deficit
eliminated on incorporation of the Company
(note 1) 3,400,000 $1
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 6
(expressed in Canadian dollars)
7. Related party transactions:
(a) Included in accounts payable and accrued liabilities is $141,594 due to
Pacific Cascade.
(b) Management fees are charged by parties related to the controlling
shareholders and the expense for the year ended August 31, 1997 includes
$150,000 charged to the predecessor businesses by Pacific Cascade to
recover overhead costs otherwise incurred.
(c) Fees for the four months ended December 31, 1997 of $6,000 (year ended
August 31, 1997 - $24,000) were charged by Pacific Cascade to recover
interest expenses incurred at the Pacific Cascade level which management
considers to be attributable to the predecessor business operations.
8. Uncertainty due to Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year
2000 Issue affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
9. Differences between Canadian and United States generally accepted
accounting principles:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in Canada. The measurement principles
applied in these financial statements do not differ from those that would have
been applied if accounting principles generally accepted in the United States
had been applied. However, if the principles adopted in the disclosure in
were in accordance with those in the United States and the rules and
regulations promulgated by the Securities and Exchange Commission ("SEC") the
following additional information would have been disclosed.
(a) Income taxes:
For US GAAP purposes, income taxes are accounted for in accordance with
Statement ofFinancial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year.
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Notes to Financial Statements, page 7
(expressed in Canadian dollars)
9. Differences between Canadian and United States generally accepted
accounting principles (continued):
(a) Income taxes (continued):
in which those temporary differences are expected to be recovered or
settled. A valuation allowance is provided on deferred tax assets to the
extent it cannot be considered at the balance sheet date to be more likely
than not that such deferred tax assets will be realized. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
As at December 31, 1998, the following sets forth the tax effect of temporary
differences that give rise to significant portions of the deferred taxes:
Deferred tax assets:
Loss carry forwards 433
Valuation allowance (433)
---------
Net deferred tax assets --
=========
<PAGE>
IMAGIS CASCADE TECHNOLOGIES INC.
Combined Schedule of Administrative Expenses
(expressed in Canadian dollars)
Year Year Year
ended ended ended
December 31, December 31, August 31,
1998 1997 1997
(unaudited) (unaudited)
Advertising and promotion 77,287 23,250 17,952
Bad debts 1,262 -- 5,605
Bank charges and interest, net 14,646 610 1,495
Computer supplies and software 23,776 12,162 67,902
Consulting 42,850 -- --
Courier and delivery 16,286 5,619 24,979
Licenses and dues 1,939 1,669 7,919
Office supplies, stationery and sundry 100,326 14,510 68,229
Professional fees 77,353 12,358 3,111
Premises 84,217 28,455 96,477
Telephone 63,717 31,920 106,771
Travel, meals, entertainment and
accommodation 70,292 32,091 149,295
--------- --------- ---------
573,951 162,644 549,735
========= ========= =========
<PAGE>
Unaudited Pro Forma
Combined Financial Statements
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Six months ended June 30, 1999
Year ended December 31, 1998
(Unaudited - Prepared by Management)
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Pro Forma Combined Statement of Operations (note 3)
(Unaudited - Prepared by Management)
(Expressed in Canadian dollars)
Six month period ended June 30, 1999
Colloquium Company Adjustments Proforma
Sales -- 364,238 -- 364,238
Operating expenses 80,115 1,301,063 -- 1,381,178
Depreciation and amortization -- 14,432 -- 14,432
Gain on settlement of debt -- (34,937) -- (34,937)
--------- --------- --------- ---------
Loss for the year 80,115 916,320 -- 996,435
========= ========= ========= =========
Loss per share (note 4) 0.14
=========
Weighted average number of shares outstanding 7,271,307
=========
See accompanying notes to pro forma combined financial statements.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Pro Forma Combined Statement of Operations (note 3)
(Unaudited - Prepared by Management)
(Expressed in Canadian dollars)
Period from January 9, 1998 to December 31, 1998
Colloquium Company Adjustments Proforma
Sales -- 555,160 -- 555,160
Operating expenses 49,516 1,715,855 2(b) 4,000 1,769,371
Depreciation and amortization -- 34,252 -- 34,252
Write-off of deferred
financing fees -- 125,492 -- 125,492
--------- --------- --------- ---------
Loss for the year 49,516 1,320,439 4,000 1,373,955
========= ========= ========= =========
Loss per share (note 4) 0.28
=========
Weighted average number of shares outstanding 4,960,714
=========
See accompanying notes to pro forma combined financial statements.
<PAGE>
IMAGIS TECHNOLOGIES INC.
(formerly Colloquium Capital Corp.)
Notes to Pro Forma Combined Financial Statements
(Unaudited - Prepared by Management)
(Expressed in Canadian dollars)
1. Basis of presentation:
The pro forma combined financial statements of Imagis Technologies Inc.
(formerly Colloquium Capital Corp.) (the "Company" or, prior and to the
acquisition described in note 2(a), "Colloquium") are based upon the
historical financial statements after giving effect to the transactions and
adjustments described in notes 2 and 3. These pro forma combined financial
statements are not necessarily indicative of the results of operations that
would have been attained had the transactions actually taken place at the
dates indicated and do not purport to be indicative of the effects that may be
expected to occur in the future.
The pro forma combined financial statements have been compiled from financial
information in the:
(a) audited financial statements of Colloquium for the period from
incorporation on March 23, 1998 to December 31, 1998;
(b) audited financial statements of Imagis Cascade Technologies Inc.
("Imagis") for the period from incorporation on January 9, 1998 to
December 31, 1998;
(c) unaudited consolidated financial statements of the Company for the six
months ended June 30, 1999;
(d) the accounting records of the Company, Colloquium and Imagis; and
(e) the additional information set out in note 2.
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada. The pro forma
combined statements of operations exclude non-recurring charges or credits
directly attributable to the transactions set out in note 2.
2. Pro forma transaction:
(a) Acquisition of Imagis:
Pursuant to the terms of the Share Purchase Agreement dated December 14, 1998,
on February 23, 1999 Colloquium acquired all of the issued and outstanding
Imagis shares for cash and common share consideration. As set out in the
Share Purchase Agreement, consideration for the acquisition of the shares of
Imagis was $2,632,000, plus contingent additional consideration of up to
$400,000, payable as follows:
(i) as to $100,000 by application of a previously made deposit;
(ii) as to $1,632,000 by allotment and issue to the Imagis shareholders
of 3,400,000 common shares of the Company at a deemed value of $0.48
per share;
<PAGE>
2. Pro forma transactions (continued):
(a) Acquisition of Imagis (continued):
(iii) as to $900,000 by certified cheque on or before April 30, 1999 of
which $150,000 is to be applied to the subscription for 267,875
common shares pursuant to a private placement (note 2(c)); and
(iv) up to $400,000 payable to one of the Imagis shareholders 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, the Company issued to the president of Imagis 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 occurs equally
on an annual basis over a three year period. In addition, the Company issued
a warrant to purchase 24,000 common shares at a price of $1.25 per share
exercisable to February 23, 2000 to an unrelated party for services provided
and issued 100,000 common shares as a finder's fee respecting the acquisition
of Imagis.
As the former shareholders of Imagis gained voting control of Colloquium
on the acquisition, this business combination was accounted for as a reverse
take-over transaction under which Imagis is deemed for accounting purposes to
be the acquirer and Colloquium the acquired entity. Under these accounting
principles, the consolidated financial statements present Imagis on a
historical basis consolidated with the results of operations of the Company
from the date of acquisition. The consideration issued was applied to the
assets acquired and liabilities assumed of Colloquium based on their relative
fair values at the date of acquisition. For purposes of these pro forma
combined financial statements only this allocation was as follows:
Cash 239,522
Other current assets --
Current liabilities 33,012
---------
Working capital acquired 26,510
Acquisition loan (900,000)
---------
Net deficiency recognized as a charge to deficit
on acquisition in accordance with accounting
principles for reverse take-overs (693,490)
=========
The acquisition loan was subsequently paid as described in (iii) above.
(b) Bridge loan:
Subsequent to December 31, 1998, the Company entered into a bridge loan
of $200,000 with Valorinvest Ltd. This loan bears interest at 12% per annum
and is repayable on or after April 30, 1999.
<PAGE>
2. Pro forma transactions (continued):
(c) Private placement:
Subsequent to December 31, 1998, the Company completed a private placement of
535,714 common shares at a price of $0.56 each for total proceeds of $300,000.
The proceeds of this financing were allocated as follows:
Repayment of notes payable 150,000
Payment on acquisition loan 150,000
---------
300,000
=========
3. Pro forma adjustments:
The pro forma combined statements of operations give effect to the
transactions described in note 2 as if they had occurred commencing January 9,
1998, the date of incorporation of Imagis, and assumes the loan in note 2(b)
would have had the same term as the actual term. The pro forma combined
statement of operations for the six month period ended June 30, 1999 reflects
the operations of Colloquium (in the first column) for the period from January
1, 1999 to the date of acquisition, February 23, 1999, combined with the
operations of the Company (including Colloquium post-acquisition as described
in the next sentence) for the six month period ended June 30, 1999. In
accordance with generally accepted accounting principles for reverse take-over
business combinations, the operations of the Company reflect the revenues and
expenses of Imagis for the six month period consolidated with those of
Colloquium commencing on the acquisition on February 23, 1999. For purposes
of the combined statements of operations, no adjustments have been made for
interest on additional cash balances.
4. Loss per share:
The weighted average number of shares outstanding represents what would have
been the Company's actual weighted average number of shares, including shares
held in escrow, for the periods presented as if the common shares issuable on
the transactions described in note 2 were issued commencing January 9, 1998.
The weighted average number of shares and per share information does not give
effect to the issuance of common shares upon the exercise of any outstanding
dilutive securities.
Under U.S. GAAP, the weighted average number of shares would exclude shares
held in escrow in the per share calculations. Per share amounts under U.S.
GAAP would be as follows:
1999 1998
Weighted average number of shares outstanding 6,471,307 4,478,896
Pro forma loss per share $0.15 $0.31
========= =========
<PAGE>
PART III
ITEM 1 INDEX TO EXHIBITS
Exhibit
Number Description
2.1* Articles of Incorporation
3.1* Shareholder Agreement dated February 23, 1999 among the Original
Shareholders and the Former Imagis Shareholders
3.2* 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
6.1* Incentive Stock Option Agreements dated July 7, 1998 between the
Registrant and each of Sandra E. Buschau, Altaf Nazerali and Ross
Wilmot
6.2* 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
6.3* Revenue Assignment Agreement dated December 15, 1998 among Imagis,
Pacific, Imagis Solutions (US) Incorporated and Imagis North West
Solutions Inc.
6.4* Agency Agreement dated March 29, 1999 among the Registrant and the
Agents
6.5* Subscription Agreement dated January 26, 1999 between the
Registrant and Pacific Cascade Consultants Ltd.
6.6* Subscription Agreement dated January 26, 1999 between the
Registrant and First Capital Invest Corp.
6.7* 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
6.8* Consulting Services Agreement effective February 25, 1999 between
the Registrant and Shafiq Nazerali-Walji
6.9* Drummond Warrant
6.10* Armitage Warrant
6.11* Employment Agreement dated February 23, 1999 between the
Registrant and Iain Drummond
6.12* Technology Purchase Agreement among Imagis Technologies Ltd.,
Imagis Cascade Technologies Inc. and Penelope Walker, Richard
Graham and William Hawkes dated March 6, 1998
<PAGE>
6.13* Technology Purchase Agreement between Pacific Cascade Consultants
Ltd. and Imagis Cascade Technologies Inc. dated March 6, 1998
8.1* Share Purchase Agreement
8.2* Confidentiality and Standstill Agreement
11.1* Statement re: Computation of Per Share Earnings
13.1* Form F-X
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
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
IMAGIS TECHNOLOGIES INC.
Date: January 6, 2000 By: /s/Ross Wilmot
---------------------------
Ross Wilmot,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2.1* Articles of Incorporation
3.1* Shareholder Agreement dated February 23, 1999 among the Original
Shareholders and the Former Imagis Shareholders
3.2* 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
6.1* Incentive Stock Option Agreements dated July 7, 1998 between the
Registrant and each of Sandra E. Buschau, Altaf Nazerali and Ross
Wilmot
6.2* 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
6.3* Revenue Assignment Agreement dated December 15, 1998 among Imagis,
Pacific, Imagis Solutions (US) Incorporated and Imagis North West
Solutions Inc.
6.4* Agency Agreement dated March 29, 1999 among the Registrant and the
Agents
6.5* Subscription Agreement dated January 26, 1999 between the
Registrant and Pacific Cascade Consultants Ltd.
6.6* Subscription Agreement dated January 26, 1999 between the
Registrant and First Capital Invest Corp.
6.7* 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
6.8* Consulting Services Agreement effective February 25, 1999 between
the Registrant and Shafiq Nazerali-Walji
6.9* Drummond Warrant
6.10* Armitage Warrant
6.11* Employment Agreement dated February 23, 1999 between the
Registrant and Iain Drummond
6.12* Technology Purchase Agreement among Imagis Technologies Ltd.,
Imagis Cascade Technologies Inc. and Penelope Walker, Richard
Graham and William Hawkes dated March 6, 1998
6.13* Technology Purchase Agreement between Pacific Cascade Consultants
Ltd. and Imagis Cascade Technologies Inc. dated March 6, 1998
8.1* Share Purchase Agreement
<PAGE>
8.2* Confidentiality and Standstill Agreement
11.1* Statement re: Computation of Per Share Earnings
13.1* Form F-X
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
