<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY __, 2000
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
--------------------------------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to _______________________
Commission file number 333-93131
IMAGEWARE SYSTEMS, INC.
(Name of small business issuer as specified in its charter)
CALIFORNIA 33-0224167
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10883 THORNMINT ROAD
SAN DIEGO, CA 92127
(Address of principal executive officers)
(858) 673-8600
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No X
--- ---
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of
May 12, 2000 the number of outstanding shares of the Registrant's
common stock, par value $.01, was 3,311,348.
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IMAGEWARE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDIDTED) 3
Condensed Consolidated Balance Sheet as of March 31, 2000 3
Condensed Consolidated Statements of Operations for the three 4
months ended March 31, 2000 and 1999
Condensed Consolidated Statement of Cash Flows for the three 5
months ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 9
ITEM 2 CHANGES IN SECURITIES 9
ITEM 3 DEFAULTS ON SENIOR SECURITIES 9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5 OTHER INFORMATION 9
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
(UNAUDITED)
<S> <C>
Current Assets:
Cash 235
Accounts Receivable, net 2,790
Stock Proceeds Receivable 13,538
Inventory 9
Other Assets 233
-----------
Total Current Assets 16,805
Property and Equipment, net 193
Intangible assets - net 1,634
-----------
TOTAL ASSETS 18,632
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 2,174
Deferred Revenue 761
Accrued expenses 2,512
Deferred compensation 300
Accrued interest 515
Notes payable to bank 500
Notes payable to related parties 2,661
----------
Total Current liabilities 9,423
Stockholders' equity (deficit):
Common Stock at par value 30
Preferred Stock 4
Additional paid in capital 29,369
Accumulated Deficit (20,194)
-----------
Total stockholders' equity 9,209
-----------
TOTAL LIABILITIES AND EQUITY 18,632
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Product 1,427 753
Maintenance 272 357
License and other 33 38
-----------------------------
1,732 1,148
Cost of revenue:
Product 556 238
Maintenance 307 207
-----------------------------
Gross profit 869 703
-----------------------------
Operating Expenses:
General and Administrative 639 376
Sales and marketing 400 214
Research & Development 323 304
Depreciation and amortization 244 271
-----------------------------
1,606 1,165
Loss from Operations (737) (462)
Interest expense, net 171 88
-----------------------------
Loss before income taxes (908) (550)
Tax provision - -
-----------------------------
Net Loss (908) (550)
=============================
Net Loss per common share - see note 2 $ (0.79) $ (0.64)
Basic and diluted common shares 1,182 899
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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IMAGEWARE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS; UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (908) $ (550)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 244 271
Deferred revenue (92) (51)
Change in assets and liabilities
Accounts receivable, net 130 (277)
Inventory 103 (55)
Other current assets (51) (203)
Accounts payable 488 241
Accrued expenses 94 177
Accrued interest 139 52
-----------------------------------------
Total adjustments 1,055 155
-----------------------------------------
Net cash provided (used) by
operating activities 147 (395)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (24) (1)
-----------------------------------------
Net cash provided (used) by
investing activities (24) (1)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 56 500
Repayment of loans (100)
-----------------------------------------
Net cash provided by financing activities (44) 500
-----------------------------------------
Net increase in cash 79 104
Cash at beginning of period 156 46
-----------------------------------------
Cash at end of period $ 235 $ 150
-----------------------------------------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 9 $ 36
-----------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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IMAGEWARE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The accompanying condensed consolidated unaudited financial statements of
ImageWare Systems, Inc. (ImageWare or the Company) have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with
consolidated financial statements for the year ended December 31, 1999 and notes
thereto included in the Company's SB-2 registration statement dated March 30,
2000. In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments, consisting of only normal
recurring items, necessary for a fair presentation of the Company's financial
position as of March 31, 2000 and its results of operations for the three months
ended March 31, 2000 and 1999, respectively. These condensed consolidated
unaudited financial statements are not necessarily indicative of the results to
be expected for the entire year.
Note 2. EARNINGS PER COMMON SHARE
Effective November 29, 1999, the Company declared a 5.275-for-1 reverse stock
split of common stock. All references to the number of shares, per share
amounts, conversion amounts and stock option data of the Company's common stock
have been restated to reflect this reverse stock split for all periods
presented.
Basic earnings per common share is calculated by dividing net income (loss)
available to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share is calculated by dividing net income (loss) available to common
shareholders for the period by the weighted-average number of common shares
outstanding during the period, increased to include, if dilutive, the number
of additional common shares that would have been outstanding if the potential
common shares had been issued. The dilutive effect of outstanding stock
options is included in the calculation of diluted earnings per common share
using the treasury stock method. During the period ended March 31, 1999 and
2000, the Company has excluded all convertible preferred stock and
outstanding stock options from the calculation of diluted loss per share, as
their effect would have been antidilutive.
The following table sets forth the computation of basic and diluted loss per
share for the periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Numerator
Net loss $ (908) $ (550)
Less Series B preferred dividends (21) (21)
--------------- ----------------
Loss available to common shareholders $ (929) $ (571)
================ ===============
Denominator
</TABLE>
6
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<TABLE>
<S> <C> <C>
Weighted-average shares outstanding 1,182 899
================ ===============
Basic and diluted earnings per share $ (0.79) $ (0.64)
================ ===============
</TABLE>
NOTE 3. RELATED PARTY TRANSACTIONS.
On March 30, 2000, two officers of the Company loaned ImageWare $58,000
pursuant to short-term promissory notes. This debt was incurred to meet
working capital needs. The entire amount of the notes was due on the date the
Company closed its Initial Public Offering. The loan was paid in full on
April 5, 2000.
NOTE 4. INITIAL PUBLIC OFFERING
On March 31, 2000, the Company completed an IPO of 1,875,000 units, (units
consist of one share of common stock and a warrant to purchase one share of
common stock) at $8.00 per unit. Net proceeds to ImageWare aggregated
approximately $13.5 million. The IPO proceeds were received by the Company on
April 5, 2000. On May 2, 2000 the Company received approximately $2.0 million
in additional net proceeds from the exercise of the over allotment option by
the underwriter to sell an additional 281,250 units. The company utilized
approximately $3.1 million of the proceeds to reduce notes payable in the
second quarter of 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risk and uncertainties.
ImageWare Systems, Inc.'s ("ImageWare" or "the Company") future results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include but are not limited to: fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the digital
imaging industry, uncertainties regarding intellectual property rights and the
other factors referred to herein including, but not limited to, the items
discussed under "Risk Factors" in the Company's SB-2 registration statement
dated March 30, 2000.
The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere within this quarterly report.
Fluctuations in annual and quarterly results may occur as a result of factors
affecting demand for the Company's products such as the timing of the Company's
and competitors' new product introductions and the Company's customers'
political and budgetary constraints. Due to such fluctuations, historical
results and percentage relationships are not necessarily indicative of the
operating results for any future period.
OVERVIEW
ImageWare Systems, Inc. develops, sells and supports a suite of modular
software products used by law enforcement and public safety agencies to
manage criminal history records and to investigate crime. Its software
systems and associated hardware enable its customers to quickly capture,
archive, search, retrieve and share digital photographs and criminal history
records.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES. Product revenues increased 90% from $0.8 million for the three
months ended March 31, 1999 to $1.4 million for the corresponding period in
2000. The increase reflected the further purchases of the Crime Capture
System by new and existing customers, combined with system upgrades by
several of the Company's UNIX -based customers who adopted the Windows-based
Crime Capture System. The backlog of product orders as of March 31, 2000 was
approximately $2.2 million.
Customer service revenues decreased 24% from $0.4 million for the three months
ended March 31, 1999 to $0.3 million for the corresponding period in 2000. In
1999, the Company offered its UNIX-based customers incentives to upgrade to the
Windows-based Crime Capture System. As part of the upgrade incentives, the
customers received reduced maintenance fees in 1999, a portion of which carried
over into 2000 due primarily to the timing of the installations late in 1999
with 90 day warranties. These price reductions were justified based upon the
need to consolidate the number of versions of systems the Company would have to
support and to avoid the cost of bringing the older installations into Y2K
compliance. The Company does not expect to offer similar price reductions in the
future and expects customer service revenues to increase along with its expanded
installed base.
COST OF REVENUES. Cost of products and maintenance increased 94% from $0.4
million, or 39% of revenue, for the three months ended March 31, 1999 to $0.9
million, or 50% of revenue for the corresponding period in 2000. Cost of product
revenues increased from 32% of product revenues for the three months ended March
31, 1999 to 39% of product revenues for the corresponding period in 2000. Costs
of products can vary as a percentage of product revenue from quarter to quarter
depending upon product mix and the hardware content included in systems
7
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installed during a given period. Costs of maintenance revenue increased $0.1
million as the Company increased staffing levels to maintain optimal service to
its expanding installed base.
GROSS MARGINS. Total gross margins increased from $0.7 million, or 61% of
revenues, for the three month period ended March 31, 1999 to $0.9 million, or
50% of revenues for the corresponding period in 2000. Gross margins related
to product sales increased from $0.5 million, or 68% of revenues, to $0.9
million or 61% of revenues for the corresponding period in 2000. Gross
margins related to maintenance revenues decreased from $150,000 for the three
months ended March 31, 1999 to a negative $35,000 for the corresponding
period in 2000 due to increased staffing levels and the impact of the
upgrades of the Company's UNIX based customers on maintenance revenue.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses are comprised primarily of salaries for
administrative personnel, legal and professional services, occupancy and
communication costs. Such expenses increased 70% from $0.4 million for the
three months ended March 31, 1999 to $0.6 million for the corresponding
period in 2000 due primarily to costs related to the Company's initial public
offering of its common stock and bonus compensation paid in April 2000.
SALES AND MARKETING. Sales and marketing expenses consist primarily of the
salaries, commissions, other incentive compensation, employee benefits and
travel expenses of the Company's sales force. Such expenses increased 87% from
$0.2 million for the three months ended March 31, 1999 to $0.4 million for the
corresponding period in 2000 due primarily to increased salaries, higher
commissions and incentive bonuses as the Company enlarged and restructured its
sales force to better capture market opportunities.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily of
salaries, employee benefits and outside contractors for new product development,
product enhancements and custom integration work. Such expenses were $0.3
million in both 1999 and 2000. The Company expects to continue to invest in the
development of products for which it believes there is a need in the market;
however, there can be no assurance that research and development programs
invested in by the Company will be successful or that products resulting from
such programs will achieve market acceptance.
INTEREST EXPENSE. Interest expense increased 93% from approximately $89,000
for the three months ended March 31, 1999 to $171,000 for the same period in
2000. The increase reflects the cost of additional debt that the Company
incurred to fund operations in 1999 and the first three months of 2000.
LIQUIDITY AND CAPITAL RESOURCES. Since inception, the Company has funded
operations primarily from proceeds from the sale of stock and borrowings from
individuals and financial institutions. On March 31, 2000, the Company
completed an IPO of 1,875,000 units, (units consist of one share of common
stock and a warrant to purchase one share of common stock) at $8.00 per unit.
Net proceeds to ImageWare aggregated approximately $13.5 million. The IPO
proceeds were received by the Company on April 5, 2000. On May 2, 2000 the
Company received approximately $2.0 million in additional net proceeds from
the exercise of the over allotment option by the underwriter to sell an
additional 281,250 units.
As of March 31, 2000 ImageWare had total current assets of $16.8 million and
total current liabilities of $9.4 million, or working capital of $7.4 million.
Net cash generated from operating activities was $147,000 for the three
months ending March 31, 2000. The Company used cash to fund the net loss for the
three months ended March 31, 2000 of $908,000. The company generated cash of
$181,000 from reductions in current assets, $629,000 from increases in current
liabilities (excluding debt) and $244,000 from non cash expenses (depreciation
and amortization) during the three months ending March 31, 2000.
The Company's believes that the funds held in cash and cash equivalents and
funds provided by operation will be sufficient to finance its working capital
requirements for at least the next twelve months.
The Company is currently considering strategic transactions and alternatives
with the goal of maximizing stockholder value. These transactions may include
a variety of different business arrangements, including acquisitions,
strategic partnerships, joint ventures and business combinations. Such
transactions create a number of risks for the Company, including the risk
that such transactions may not be consummated on favorable terms or at all,
the risk that such transactions may not enhance stockholder value and may
adversely affect the business or the trading price of the Company's stock and
the risk that any such transaction may require the Company to incur
non-recurring or other charges and may pose significant integration
challenges and/or management and business disruptions.
8
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not a party to any material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES
On March 30, 2000, the Securities and Exchange Commission
declared the Company's Amendment No. 2 of the Registration
Statement on Form SB-2 (333-93131) effective under the
Securities Act of 1933, as amended. The registered securities
were offered to the public on March 31, 2000, and the offering
terminated on the same day, with the sale of all of the
registered securities. The managing underwriters of the
offering were Paulson Investment Company, Inc. and I-Bankers
Securities, Inc.
As of March 31, 2000, the Company sold 1,875,000 of the
2,156,250 units registered for an aggregate offering price for
the amount sold of $15,000,000. The aggregate price of the
offering amount registered was $17,250,000. Each unit consists
of one share of common stock and one public warrant to
purchase an additional share of common stock. The common stock
and public warrants traded only as a unit until May 1, 2000,
when the units separated and the common stock and warrants
began trading separately.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
9
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMAGEWARE SYSTEMS, INC.
By:
------------------------------------------
Wayne Wetherell, Chief Financial Officer
10
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q DATED MAY 15, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 234,579
<SECURITIES> 0
<RECEIVABLES> 1,590,400
<ALLOWANCES> 28,517
<INVENTORY> 9,665
<CURRENT-ASSETS> 16,805,717
<PP&E> 1,223,990
<DEPRECIATION> 1,031,060
<TOTAL-ASSETS> 18,632,286
<CURRENT-LIABILITIES> 9,422,494
<BONDS> 0
0
3,894
<COMMON> 30,368
<OTHER-SE> 10,083,659
<TOTAL-LIABILITY-AND-EQUITY> 18,632,286
<SALES> 1,426,763
<TOTAL-REVENUES> 1,732,201
<CGS> 555,827
<TOTAL-COSTS> 869,042
<OTHER-EXPENSES> 1,605,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,028
<INCOME-PRETAX> (907,931)
<INCOME-TAX> 0
<INCOME-CONTINUING> (907,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (907,931)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
