<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2000
REGISTRATION NO. 333-93131
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMAGEWARE SYSTEMS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
CALIFORNIA 7373 33-0224167
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
Incorporation or Organization)
</TABLE>
10883 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(858) 673-8600
(Address and telephone number of principal executive offices and principal place
of business)
S. JAMES MILLER, JR., PRESIDENT
IMAGEWARE SYSTEMS, INC.
10883 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(858) 673-8600
(Name, address and telephone number of agent for service)
COPIES TO:
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<S> <C>
ROBERT G. COPELAND, ESQ. THOMAS P. PALMER, ESQ.
DENNIS J. DOUCETTE, ESQ. Tonkon Torp LLP
Luce, Forward, Hamilton & Scripps LLP 1600 Pioneer Tower
600 West Broadway, Suite 2600 888 SW Fifth Avenue
San Diego, California 92101 Portland, Oregon 97204
(619) 699-2517 (503) 802-2018
(619) 645-5322 (fax) (503) 972-3718 (fax)
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PRELIMINARY PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
DATED FEBRUARY 8, 2000
1,500,000 UNITS
[LOGO]
This is an initial public offering of units by ImageWare Systems, Inc. Each
unit consists of one share of common stock and one redeemable public warrant to
purchase one share of common stock. We expect that the initial public offering
price will be between $8 and $10 per unit. Prior to this offering, there has
been no public market for our securities. We have filed an application to list
the units, the common stock and the public warrants on The Nasdaq SmallCap
Market under the symbols "IWSIU," "IWSI" and "IWSIW."
The common stock and warrants will trade only as a unit for at least
30 days following this offering. The representative of the underwriters will
then determine when the units separate, after which the common stock and the
public warrants will trade separately.
INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
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<CAPTION>
PER UNIT TOTAL
-------- -----------
<S> <C> <C>
Initial public offering price............................... $ . $
Underwriting discounts and commissions...................... $ . $
Proceeds to ImageWare Systems, Inc.......................... $ . $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The underwriters will purchase the units on a firm commitment basis. Paulson
Investment Company, Inc. is the representative of the underwriters. We have
granted the representative the option for a period of 45 days to purchase up to
an additional 225,000 units to cover over-allotments.
PAULSON INVESTMENT COMPANY, INC.
I-BANKERS SECURITIES, INC.
The date of this prospectus is , 2000.
<PAGE>
[artwork]
WE HAVE THE FOLLOWING REGISTERED TRADEMARKS:
IMAGEWARE-REGISTERED TRADEMARK-, C.R.I.M.E.S.-REGISTERED TRADEMARK-, SUSPECT
ID-REGISTERED TRADEMARK-, VEHICLE ID-REGISTERED TRADEMARK-, IMAGE
WIZARD-REGISTERED TRADEMARK-, PEOPLE POSTCARDS-REGISTERED TRADEMARK- AND
MORPHWIZARD-REGISTERED TRADEMARK-. WE ALSO HAVE THE FOLLOWING UNREGISTERED
TRADEMARKS: CRIME CAPTURE SYSTEM-TM-, FACE ID-TM-, CRIME LAB-TM-, CRIME WEB-TM-,
FACE INVESTIGATE-TM- AND FORCE FIELD 2000-TM-.
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
We develop, sell and support a suite of modular software products that is
used by law enforcement and public safety agencies to manage criminal history
records. Our software systems and associated hardware allow our customers to
quickly capture, archive, search, retrieve and share digital photographs and
criminal history records. Our products are currently being used by government
agencies such as the New York City Police Department, the Los Angeles County
Sheriff's Department, the Arizona Department of Public Safety, the Montreal
Police Department and law enforcement agencies in Minneapolis, Portland,
Seattle, Indianapolis and Orlando.
The National Institute of Justice estimated in 1998 that there were
approximately 60 million criminal history records and that this number is
increasing by more than 20 million per year. Police, sheriffs, FBI officials,
airport police and many others all have a need to quickly access criminal
records to identify criminal suspects and offenders by visual descriptions. Many
law enforcement booking systems are still merely an inefficient file of paper
records which cannot be accessed quickly or from a remote location. In many
places, witnesses still flip through books of photographs to try to identify a
suspect. In light of these inefficiencies and the large number of criminal
records, many agencies are turning to new technologies to increase their ability
to quickly access these records to identify, locate and arrest criminal
suspects.
To take advantage of the growing law enforcement market for digital imaging
technology, we have developed a suite of modular software products known as the
Crime Reduction, Image Management and Enhancement System, or "C.R.I.M.E.S." The
C.R.I.M.E.S. system consists of the following software modules, which may also
be purchased individually: The Crime Capture System, Face ID, Suspect ID, Crime
Lab and Vehicle ID. To date, our products have been used by more than 450
customers.
THIS OFFERING
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<S> <C>
Securities offered........................... 1,500,000 units. 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 will
trade only as a unit for at least 30 days
following this offering. The representative
of the underwriters will then determine when
the units separate, after which the common
stock and the public warrants will trade
separately.
Public warrants.............................. The public warrants included in the units
will be exercisable commencing 30 days after
the offering. During the first year after the
offering, the exercise price of a public
warrant will be 120% of the initial public
offering price of the units. Commencing one
year after the offering, the exercise price
will be 150% of the initial public offering
price of the units. The public warrants
expire five years after completion of the
offering.
</TABLE>
1
<PAGE>
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<S> <C>
We have the right, commencing six months
after the closing of the offering, to redeem
the public warrants at a redemption price of
$0.25 per public warrant. If the average
closing bid price of the common stock equals
or exceeds 200% of the initial public
offering price of the units for ten
consecutive trading days, we may give notice
of redemption on the next day and redeem the
public warrants 30 days later.
Common stock outstanding after this 2,655,482 shares
offering...................................
Use of proceeds.............................. Repayment of debt, sales and marketing,
research and development and working capital.
Proposed Nasdaq SmallCap Market symbols
Common stock............................... IWSI
Units offered in this offering............. IWSIU
Public warrants included in the units...... IWSIW
</TABLE>
The number of shares of common stock outstanding after this offering is
based on 1,155,482 shares outstanding as of February 4, 2000. This number
assumes no exercise of the underwriters' over-allotment option and does not
include an aggregate of 2,685,141 shares of common stock that may become
outstanding as follows:
- approximately 87,698 shares of common stock issuable upon voluntary
conversion of all of the outstanding shares of Series B preferred stock
plus accrued but unpaid dividends thereon;
- 281,610 shares of common stock issuable upon exercise of stock options
outstanding as of February 4, 2000, with a weighted average exercise price
of $6.41;
- 328,662 shares of common stock issuable upon exercise of warrants
outstanding as of February 4, 2000, with a weighted average exercise price
of $9.02;
- 37,887 shares of common stock issuable upon conversion of convertible
notes outstanding as of February 4, 2000;
- 1,500,000 shares of common stock issuable upon exercise of the public
warrants; and
- 300,000 shares of common stock issuable upon exercise of the
representative's warrants and the public warrants underlying the
representative's warrants.
HISTORICAL INFORMATION REGARDING OUR SECURITIES HAS BEEN ADJUSTED TO REFLECT
A 5.275-TO-1 REVERSE STOCK SPLIT EFFECTED ON NOVEMBER 29, 1999. EXCEPT AS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE REPRESENTATIVE'S OVER-ALLOTMENT OPTION OR THE REPRESENTATIVE'S WARRANTS.
REFERENCES TO "US," THE "COMPANY" OR "IMAGEWARE" INCLUDE IMAGEWARE
SYSTEMS, INC. AND OUR WHOLLY-OWNED SUBSIDIARY, XIMAGE CORPORATION, UNLESS
OTHERWISE INDICATED.
2
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Product................................... $ 459,358 $ 2,708,856 $ 1,932,813 $ 2,531,144
Maintenance............................... 2,610 1,307,286 1,004,328 954,321
License and other......................... 2,434,108 220,175 150,978 9,319
---------- ----------- ----------- -----------
2,896,076 4,236,317 3,088,119 3,494,784
Cost of Revenues
Product................................... 77,584 1,354,920 764,122 943,004
Maintenance............................... -- 1,065,740 927,680 607,171
---------- ----------- ----------- -----------
Gross margin................................ 2,818,492 1,815,657 1,396,317 1,944,609
---------- ----------- ----------- -----------
Operating, general and administrative
expenses.................................. 1,436,447 2,265,312 1,676,542 1,874,811
Sales and marketing expenses................ 918,557 960,246 714,276 701,183
Research and development expenses........... 482,834 831,034 569,443 836,542
Depreciation and amortization............... 167,402 988,838 723,869 725,234
---------- ----------- ----------- -----------
3,005,240 5,045,430 3,684,130 4,137,770
---------- ----------- ----------- -----------
Loss from operations...................... (186,748) (3,229,773) (2,287,813) (2,193,161)
---------- ----------- ----------- -----------
Interest expense, net....................... 17,629 204,287 155,633 239,939
---------- ----------- ----------- -----------
Loss before income taxes.................. (204,377) (3,434,060) (2,443,446) (2,433,100)
---------- ----------- ----------- -----------
Provision for income taxes.................. 196,104 -- -- --
---------- ----------- ----------- -----------
Net loss.................................. $ (400,481) $(3,434,060) $(2,443,446) $(2,433,100)
========== =========== =========== ===========
Net loss per common share................... $ (.70) $ (4.08) $ (2.91) $ (2.56)
========== =========== =========== ===========
Basic and diluted weighted average shares... 680,273 861,875 860,674 974,283
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
BALANCE SHEET DATA: ----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash........................................................ $ 89,216 $ 6,785,946
Net intangible assets....................................... 2,115,284 2,115,284
Total assets................................................ 3,938,274 10,635,004
Total current liabilities................................... 6,428,765 1,754,731
Notes payable, net of current portion....................... 165,022 165,022
Total liabilities........................................... 6,593,787 1,919,753
Total shareholders' equity (deficit)........................ (2,655,513) 8,715,251
</TABLE>
The as adjusted balance sheet data reflects:
(1) $1,750,000 of debt incurred, $334,000 of loans repaid or converted and
$25,000 of common stock sold since September 30, 1999;
(2) the receipt of $11,180,000 as the estimated net proceeds from the sale of
1,500,000 units offered by us in this offering at an assumed initial public
offering price of $9.00 per unit (the midpoint of the assumed $8-$10 range),
after deducting underwriting discounts and commissions and estimated
offering expenses; and
(3) the planned use of the net proceeds of the offering.
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RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS BEFORE PURCHASING ANY UNITS. THE FOLLOWING RISKS COULD MATERIALLY
HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND COULD RESULT IN
A DECREASE IN THE TRADING PRICE OF OUR UNITS, COMMON STOCK OR PUBLIC WARRANTS OR
IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT RECURRING LOSSES TOTALLING APPROXIMATELY
$18,700,000 AND EXPECT TO INCUR LOSSES IN THE FUTURE.
As of September 30, 1999, we had an accumulated deficit of $18,684,133, and
we expect to incur losses in the future. We expect to continue to incur
significant sales and marketing, research and development, and general and
administrative expenses. As a result, we will need to generate significant
revenues to achieve profitability and may never achieve profitability. Our
independent auditor has emphasized our recurring losses from operations and our
significant negative working capital at December 31, 1998 in its report for
fiscal 1998.
WE SUBSTANTIALLY DEPEND ON SALES OF OUR CRIME CAPTURE SYSTEM.
Through September 30, 1999, we had derived approximately 85% of our product
revenue in 1999 from sales of our booking products. A decrease in the price of
or demand for the Crime Capture System, or its failure to achieve broad market
acceptance, would significantly harm our business, financial condition and
operating results.
WE DEPEND UPON A SMALL NUMBER OF LARGE SYSTEM SALES COSTING FROM $300,000 TO
$600,000 AND MAY FAIL TO ACHIEVE ONE OR MORE LARGE SYSTEM SALES IN THE FUTURE.
In the past two years, we have derived a substantial portion of our revenues
from a small number of sales of large, relatively expensive systems, typically
ranging in price from $300,000 to $600,000. As a result, if we fail to receive
orders for these large systems in a given sales cycle on a consistent basis, our
business, financial condition and operating results could be significantly
harmed. Further, our quarterly results are difficult to predict because we
cannot predict in which quarter, if any, large system sales will occur in a
given year. As a result, we believe that quarter-to-quarter comparisons of our
results of operations are not a good indication of our future performance. In
some future quarters our operating results may be below the expectations of
securities analysts and investors, in which case the market price of our common
stock may decrease significantly.
OUR LENGTHY SALES CYCLE MAY CAUSE US TO EXPEND SIGNIFICANT RESOURCES FOR AS LONG
AS ONE YEAR IN ANTICIPATION OF A SALE, YET WE STILL MAY FAIL TO COMPLETE THE
SALE.
When considering the purchase of a large computerized booking system, a
government agency may take as long as a year to evaluate different systems and
obtain approval for the purchase. If we fail to complete a sale, we will have
expended significant resources and received no revenue in return. Generally,
agencies consider a wide range of issues before committing to purchase our
products, including product benefits, ability to operate with their current
systems, product reliability and their own budget constraints. While potential
customers are evaluating our products and before they place an order with us, we
may incur substantial selling costs and expend significant management effort to
accomplish a sale.
4
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MOST OF OUR CUSTOMERS ARE GOVERNMENT AGENCIES SUBJECT TO UNIQUE POLITICAL AND
BUDGETARY CONSTRAINTS.
Most of our customers are government agencies. These agencies often do not
set their own budgets and therefore have little control over the amount of money
they can spend. In addition, these agencies experience political pressure which
may dictate the manner in which they spend money. As a result, even if an agency
wants to acquire our products, it may be unable to purchase them due to these
political and budgetary constraints. In addition, some government agency orders
may be canceled or substantially delayed, the receipt of revenues or payments
may be substantially delayed due to political and budgetary processes and other
scheduling delays may frequently occur relating to the contract or bidding
process.
WE MAY NOT OBTAIN SOME NEW CUSTOMERS BECAUSE WE MAY BE UNABLE TO MEET GOVERNMENT
AGENCY CONTRACTING REQUIREMENTS.
A substantial majority of our revenues is derived from the sale of products
and services to governmental agencies. Future sales to government agencies will
depend on our ability to meet government contracting requirements, certain of
which may be onerous or impossible to meet, resulting in our inability to obtain
a particular contract. Moreover, if a government agency were to enforce such
requirements against us, our business, financial condition and results of
operations would be materially adversely affected. Common requirements in
government contracts include bonding requirements, provisions permitting the
purchasing agency to modify or terminate at will the contract without penalty,
provisions requiring us to remain liable to the agency for unlimited losses
relating to year 2000 malfunctions, and provisions permitting the agency to
perform investigations or audits of our business practices. Our customers are
subject to these and other government agency contracting requirements which vary
by jurisdiction.
OUR PRODUCTS HAVE NOT YET ACHIEVED BROAD ACCEPTANCE BY THE LAW ENFORCEMENT AND
PUBLIC SAFETY MARKETS AND MAY NOT BE ACCEPTED BY THE SECURITY MARKET.
We intend to offer our products to a broader segment of the law enforcement
and public safety markets as well as the security market. The failure of our
products to achieve broad acceptance among law enforcement officials and
security personnel would have a negative effect on our business, financial
condition and operating results. We have not yet had significant sales in any
markets. The acceptance of our products and systems may be adversely affected by
their relatively high cost and the reluctance of agencies or corporations to
adopt new technology.
WE MAY FAIL TO CREATE NEW APPLICATIONS FOR OUR PRODUCTS AND ENTER NEW MARKETS.
We believe our future success depends in part on our ability to develop and
market our technology for applications other than booking systems for the law
enforcement market. If we fail in these goals, our business strategy and ability
to generate revenues and cash flow would be significantly impaired. We
anticipate our technology may be developed to create digital databases of facial
images and picture identification cards for employees of large corporations. We
also intend to develop software to fully integrate our products with the
Internet. While we intend to expend significant resources to develop new
technology, the development of new technology cannot be predicted and we cannot
guarantee we will succeed in these goals.
WE RELY ON SYSTEMS INTEGRATORS TO MANAGE CERTAIN OF OUR LARGE PROJECTS AND THESE
COMPANIES MAY NOT PERFORM ADEQUATELY.
We are a subcontractor to certain systems integrators who manage large
projects incorporating our systems, particularly in foreign countries. We cannot
control these companies and they may decide not to promote our products or to
price their services in such a way as to make it unprofitable for us to
5
<PAGE>
continue our relationship with them. Further, they may fail to perform under
agreements with their customers, in which case we might lose sales to these
customers. If we lose our relationships with these companies, our business,
financial condition and operating results could be significantly harmed.
OUR CRIME CAPTURE SYSTEM PRODUCT FACES COMPETITION WHICH MAY REDUCE OUR MARKET
SHARE OR MAKE OUR TECHNOLOGY OBSOLETE.
Our products face competition. In particular, the Crime Capture System faces
strong competition from other makers of booking systems. The development of
technologies or products which are competitive with our products or make our
technology obsolete would significantly harm our business, financial condition
and operating results. Our existing competitors may develop technology and
products which are superior to and more successful than our products. In
addition, other companies or individuals may develop superior products and
emerge rapidly as new competitors by investing heavily in product development
and marketing.
WE RELY ON LICENSES OF TECHNOLOGY FROM VISIONICS, INC. AND OTHER COMPANIES AND
THESE LICENSES MAY BE TERMINATED IN THE FUTURE.
We depend on a licensing arrangement with Visionics, Inc. for technology
related to the search engine used in our systems. Our present licensing
arrangement with Visionics expires in July 2001. If Visionics becomes unable or
unwilling to continue to license us this technology or renew the terms of this
license, we will have to identify or develop acceptable alternative sources of
this technology, which could take up to nine months or longer. Any significant
interruption in our ability to identify and contract with alternative providers
of similar technology or develop our own search engine would result in delivery
delays, which could harm our customer relationships and our business and
reputation.
WE DO NOT HAVE U.S. OR FOREIGN PATENT PROTECTION FOR SEVERAL OF OUR PRODUCTS AND
A COMPETITOR MAY BE ABLE TO REPLICATE OUR TECHNOLOGY.
Our business is based in large part on our technology and our success
depends in part on our ability and efforts to protect our intellectual property
rights. If we do not adequately protect our intellectual property, our business,
financial condition and operating results will be seriously harmed. We do not
have patent protection for several of our products, including the Crime Capture
System. Our Crime Capture System is based upon proprietary technology. The
technology used in our Suspect ID, Crime Lab and Vehicle ID products is
protected by patents, copyrights and various trade secret protections afforded
to us by law.
We license certain elements of our trademarks, trade dress, copyright and
other intellectual property to third-parties. We attempt to ensure that our
rights in our trade names and the quality of third party uses of our names are
maintained by these third parties. However, these third parties may take actions
that could significantly impair the value of our intellectual property and our
reputation and goodwill. We also license our technology to Atlus Co., Ltd. Atlus
has the right to sublicense our technology and to use our technology to compete
with us. If Atlus chooses to use our technology to compete with us, our
business, financial condition and operating results could be significantly
harmed.
In addition, international intellectual property laws differ from country to
country. Any foreign rights we have in our technology are limited by what has
been afforded to us under the applicable foreign intellectual property laws.
Also, under the laws of certain foreign jurisdictions, in order to have
recognizable intellectual property rights, we may be required to file
applications with various foreign agencies or officials to register our
intellectual property. Although we do have a patent application pending in
Japan, we do not currently have corresponding foreign registrations pending or
issued for all our technology. Accordingly, our ability to operate and exploit
our technology overseas could be significantly hindered.
6
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UNDETECTED YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR OPERATIONS.
There may be undetected Year 2000 problems with our internal systems, our
products or our customers' computer systems. In the event any of our products
are not Year 2000 compliant, we may be liable to certain customers for breach of
our Year 2000 representations and warranties that appear in many of our customer
agreements, which could have a material adverse effect on our business, results
of operations and financial condition. The Force Field 2000 product, which we
acquired in our acquisition of XImage Corporation, was found not to be Year 2000
compliant. Consequently, we created a Year 2000 compliance update to the Force
Field 2000 software, which has been installed on all of our customers' systems.
As of February 1, 2000, we were not aware of any Year 2000 compliance problems
with our products.
In addition, we acquire off-the-shelf products from third parties, such as
computer hardware. We use these products in the internal operations of our
business and we provide these products to customers in conjunction with our
software products. Further, government agencies and other of our customers may
use computer systems and products that are not Year 2000 compliant and which may
disrupt the performance of our products. The failure of any of these products or
systems to be Year 2000 compliant could significantly disrupt our business and
impair our ability to generate revenues and cash flows. As of February 1, 2000,
only one customer reported to us any problem with its own computer system that
affected the performance of our products. The problem has been corrected.
OUR PLANNED EXPANSION TO INTERNATIONAL MARKETS WILL MAKE IT DIFFICULT FOR US TO
PROTECT OUR INTELLECTUAL PROPERTY, COLLECT PAYMENTS, ENFORCE AGREEMENTS AND
REACT TO ECONOMIC CONDITIONS.
While we have not yet had significant international sales, we plan to
continue to sell internationally in the future. If we cannot overcome the
challenges and risks inherent in international operations, our business strategy
and our ability to generate revenues will be significantly impaired. Some of
these challenges and risks are as follows:
- It may be more difficult for us to protect our intellectual property
rights in some countries.
- It may take longer for us to collect payment from our customers.
- We will have to enforce agreements through foreign legal systems with
which we are less familiar.
- We will face volatility and unpredictability in the political and economic
conditions of foreign countries.
CHANGES IN THE VALUE OF THE JAPANESE YEN COULD RESULT IN CURRENCY TRANSACTION
LOSSES FOR US.
We have agreed to repay a $1,250,000 loan to a Japanese lender based upon
the value of the Japanese yen, regardless of the change in the value of the yen
relative to the U.S. dollar. As a result of this agreement, changes in the value
of the yen relative to the U.S. dollar could cause currency transaction gains or
losses. We cannot predict the effect of the exchange rate fluctuations on this
obligation. We may experience significant currency exchange transaction losses
when it is time to repay such loan. To date, we have not hedged this loan
transaction to protect us from risks associated with foreign currency
fluctuations.
RISKS RELATED TO THIS OFFERING
OUR MANAGEMENT WILL HAVE BROAD DISCRETION AND FLEXIBILITY IN APPLYING THE
PROCEEDS FROM THIS OFFERING AND MAY USE THE PROCEEDS IN WAYS THAT DO NOT IMPROVE
OUR OPERATING RESULTS OR MARKET VALUE.
Our management will retain broad discretion and significant flexibility in
applying the net proceeds from this offering. If our management does not apply
the proceeds effectively, our business would be
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harmed. We intend to use the net proceeds from this offering for increased
marketing efforts, research and development and general corporate purposes. In
addition, a significant portion of the proceeds will be used to pay accrued
liabilities and dividends, and accounts receivable and inventories, in addition
to the repayment of debt. The repayment of debt will not directly result in the
improvement of our operating results.
YOU WILL SUFFER IMMEDIATE AND SIGNIFICANT DILUTION OF YOUR INVESTMENT AND MAY
EXPERIENCE FURTHER DILUTION IN THE FUTURE.
We anticipate that the initial public offering price of the units will be
substantially higher than the net tangible book value per share of our common
stock after this offering. As a result, you will incur immediate dilution of
approximately $6.56, or 73%, in net tangible book value for each share of our
common stock included in the units you purchase. You will be subject to further
dilution upon the exercise of outstanding options and warrants and conversion of
our Series B preferred stock.
THE INITIAL PUBLIC OFFERING PRICE OF THE UNITS IS THE RESULT OF PRIVATE
NEGOTIATIONS BETWEEN US AND THE REPRESENTATIVE AND MAY NOT ACCURATELY REFLECT
FUTURE MARKET PERFORMANCE.
The initial public offering price of the units has been determined based on
negotiations between us and the representative of the underwriters. The initial
public offering price may not be indicative of future market performance and may
bear no relationship to the price at which our units, common stock or public
warrants will trade upon completion of this offering.
OUR STOCK PRICE, LIKE THOSE OF OTHER TECHNOLOGY COMPANIES, MAY BE VOLATILE.
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies have been highly
volatile. Our stock price may fluctuate significantly in response to a number of
factors, including:
- Our quarterly results of operations;
- Changes in earnings estimates by analysts and whether our earnings meet or
exceed such estimates;
- Announcements of technological innovations by us or our competitors;
- Additions or departures of key personnel; and
- Other events or factors which may be beyond our control.
Volatility in the market price of our stock could lead to claims against us.
Defending these claims could result in significant costs and a diversion of our
management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING SHAREHOLDERS COULD DECREASE THE
TRADING PRICE OF OUR COMMON STOCK AND CAUSE US TO EXPEND SIGNIFICANT RESOURCES
TO REGISTER SUCH STOCK.
Sales of a large number of shares of our common stock in the public markets
after this offering, or the potential for such sales, could decrease the trading
price of our common stock and could impair our ability to raise capital through
future sales of our common stock. Upon completion of this offering, there will
be 2,655,482 shares of our common stock outstanding. The 1,500,000 shares of
common stock sold in this offering and the 1,500,000 shares of common stock
reserved for issuance upon exercise of the public warrants sold in this offering
are all freely tradeable without restrictions or further registration under the
Securities Act of 1933, unless such shares are purchased by our "affiliates," as
that term is defined in the Securities Act of 1933.
8
<PAGE>
An additional 2,535,141 shares of common stock are either currently
outstanding or may become outstanding upon exercise or conversion of options,
warrants or convertible securities currently outstanding or sold in this
offering. All of these shares may be sold in the future subject to compliance
with securities laws and various lock-up agreements to which certain of these
shares are subject. The lock-up agreements prohibit the sale in the public
market of certain shares for one year following the completion of this offering.
Moreover, substantially all of the holders of registration rights have not
waived such registration rights. As a result, the holders of an additional
447,314 shares of outstanding and issuable common stock may have rights under
certain circumstances to require us to register the shares within the next 12
months. If such holders exercise such registration rights, we could be required
to expend considerable resources to register such shares.
CERTAIN OF OUR OFFICERS AND AFFILIATES WILL PERSONALLY BENEFIT FROM THE USE OF
THE PROCEEDS OF THIS OFFERING.
Several of our officers have personally guaranteed loans made to us by
Imperial Bank and have also made loans to us directly. We intend to use some of
the proceeds of this offering to pay our debt to Imperial Bank in full, in which
case the guarantees will be released. In addition, we intend to use $1,250,000
to repay a loan in that amount from the president of Atlus Co., Ltd., a Japanese
corporation which owns approximately 31% of our outstanding common stock.
SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS AND
DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO GENERATE
REVENUE, INCOME AND CASH FLOW. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS,"
"ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," "CONTINUE,"
"OUR FUTURE SUCCESS DEPENDS," "SEEK TO CONTINUE" OR THE NEGATIVE OF THESE TERMS
OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU
SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED UNDER
"RISK FACTORS." THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
FROM ANY FORWARD-LOOKING STATEMENT. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE
FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER,
NEITHER WE NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THESE STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS PROSPECTUS TO CONFORM THESE
STATEMENTS TO ACTUAL RESULTS.
9
<PAGE>
USE OF PROCEEDS
We estimate that the gross proceeds from the sale of the 1,500,000 units
that we are selling in this offering will be $13,500,000, or $15,525,000 if the
representative exercises its over-allotment option in full. We estimate that the
net proceeds from the offering will be approximately $11,180,000, or $12,982,000
if the representative exercises its over-allotment option in full. These
estimates are based on an assumed public offering price of $9.00 per unit. The
estimated net proceeds of $11,180,000 represents gross proceeds of $13,500,000
less the following commissions, fees and expenses related to the offering:
- $1,215,000 underwriters' discount;
- $270,000 representative's expense allowance;
- $51,173 in registration fees, NASD fees and listing fees of Nasdaq and the
Pacific Stock Exchange;
- $150,000 in accounting fees and expenses;
- $250,000 in legal fees and expenses;
- $65,000 in legal fees and other expenses related to state securities law
compliance;
- $145,000 in printing fees and expenses;
- $150,000 for directors and officers insurance;
- $1,250 in transfer agent fees and expenses; and
- $22,347 in miscellaneous expenses.
We expect to allocate the net proceeds of the offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT APPROXIMATE PERCENTAGE
OF NET PROCEEDS OF NET PROCEEDS
------------------ ----------------------
<S> <C> <C>
Repayment of Debt...................................... $ 3,183,500 28%
Accrued Liabilities and Dividends...................... 2,450,000 22%
Accounts Receivable and Inventories.................... 1,750,000 16%
Sales and Marketing.................................... 1,500,000 13%
Research and Development............................... 1,500,000 13%
Working Capital and General Corporate Purposes......... 796,500 8%
----------- ---
TOTAL:............................................... $11,180,000 100%
</TABLE>
Repayment of debt includes debt incurred and debt assumed with respect to
the XImage acquisition and the subsequent consolidation of the ImageWare and
XImage operations. Also included is debt incurred to provide working capital to
enable the company to maintain operations and fulfill customer orders over the
last two years.
The debt we intend to repay includes:
- short term notes in the aggregate amount of $600,000 at an interest rate
of prime plus 2%;
- short term notes in the aggregate amount of $398,500 at an interest rate
of 10%;
- a $1,250,000 short term note at an interest rate of 10%, payable to the
president of Atlus Co., Ltd., a Japanese corporation which owns
approximately 31% of our common stock; and
- a $500,000 short term note at a variable interest rate, initially 9%.
10
<PAGE>
Payment of accrued liabilities and dividends includes miscellaneous accrued
expenses and payments of approximately:
- $375,525 in past legal fees incurred in connection with private
placements, litigation, our acquisition of XImage Corporation and
protection of intellectual property;
- $178,725 in deferred compensation assumed in connection with our
acquisition of XImage Corporation;
- $143,366 in past due payroll and sales taxes;
- $213,075 in royalty obligations;
- $343,441 in accumulated interest on debt; and
- $184,468 of accumulated but unpaid dividends on our Series B preferred
stock as of February 1, 2000.
Approximately $1,750,000 of the net proceeds from the offering will be used
to invest in accounts receivable and inventories as a result of our anticipated
sales growth. This amount includes approximately $400,000 that will be used to
ship backlog.
Approximately $1,500,000 will be used for sales and marketing related to the
hiring of additional field personnel and the development and implementation of
strategies to expand into the private security market and international markets
for our products.
Approximately $1,500,000 will be used for research and development related
to the development of the wireless and Internet capabilities of our products,
the development of our "real time" facial recognition applications and the
continuing enhancement of the technical performance of our products.
Pending such uses of the proceeds from the offering, we intend to invest the
net proceeds in interest-bearing, investment grade securities.
The foregoing discussion is merely an estimate based on our current business
plan. Our actual expenditures may vary depending upon circumstances not yet
known, such as the time actually required to reach a positive cash flow, or to
successfully expand the market for our products.
11
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares of common
stock and do not anticipate paying any cash dividends on our shares of common
stock in the foreseeable future. Currently, we intend to retain any future
earnings for use in the operation and expansion of our business. Any future
decision to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other factors our board of directors may
deem relevant.
Pursuant to the terms of our Series B preferred stock, we are obligated to
pay cumulative cash dividends from legally available funds at the annual rate of
$0.2125 per share, payable in two semi-annual installments of $0.10625 each. As
of February 1, 2000, accumulated but unpaid dividends payable on the Series B
preferred stock were approximately $184,468. We intend to use a portion of the
proceeds of this offering to pay these dividends.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- as adjusted to give effect to:
(1) $1,750,000 of debt incurred, $334,000 of loans repaid or converted to
common stock and $25,000 common stock sold since September 30, 1999;
(2) the sale of 1,500,000 units in this offering at an assumed initial
public offering price of $9.00 per unit; and
(3) the planned use of the net proceeds of the offering.
This table should be read in conjunction with our financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities......................................... $ 6,428,765 $ 1,754,731
Notes payable to related parties, net of current portion.... 165,022 165,022
------------ ------------
Total liabilities....................................... $ 6,593,787 $ 1,919,753
------------ ------------
Shareholders' deficit
Preferred stock, $.01 par value, authorized 4,000,000
shares: Series B convertible redeeemable preferred
stock, designated 750,000 shares, 389,400 shares issued
and outstanding, $973,500 liquidation preference........ 3,894 3,894
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,131,404 and 2,655,482 shares issued and
outstanding............................................. 11,314 26,555
Additional paid-in capital................................ 16,013,412 27,368,935
Accumulated deficit....................................... (18,684,133) (18,684,133)
------------ ------------
Total shareholders' equity (deficit).................... $ (2,655,513) $ 8,715,251
------------ ------------
$ 3,938,274 $ 10,635,004
============ ============
</TABLE>
13
<PAGE>
DILUTION
If you invest in our units, your interest will be diluted to the extent of
the difference between the public offering price per share of our common stock
and the as adjusted net tangible book value per share of our common stock after
this offering. For purposes of the dilution computation and the following
tables, we have allocated the full purchase price of a unit to the share of
common stock included in the unit and nothing to the warrant included in the
unit. Net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by the
total number of shares of common stock outstanding. Dilution in net tangible
book value per share represents the difference between the amount per share paid
by the purchasers of our units in this offering and the net tangible book value
per share of our common stock immediately afterwards.
As of September 30, 1999, our net tangible book value was $(4,770,797), or
$(4.22) per share of common stock. Without taking into effect any changes in the
net tangible book value after September 30, 1999, other than to give effect to
the sale of 1,500,000 units in the offering at the assumed initial public
offering price of $9.00 per unit and the application of the net proceeds of the
offering, the net tangible book value of ImageWare as of September 30, 1999
would have been $6,409,433, or $2.44 per share. This represents an immediate
increase of $6.66 per share of common stock to existing shareholders and an
immediate dilution of $6.56, or 73%, per share of common stock to the new
investors who purchase units in the offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $9.00
Net tangible book value per share before the offering..... $(4.22)
Increase in net tangible book value per share attributable
to new investors........................................ 6.66
As adjusted net tangible book value per share after the
offering.................................................. 2.44
Dilution in tangible book value per share to new
shareholders.............................................. $6.56
</TABLE>
If the representative's over-allotment option is exercised in full, dilution
per share to new shareholders would be $6.11 per share of common stock.
The following table summarizes as of September 30, 1999 the differences
between the existing shareholders and the new shareholders with respect to the
number of shares of common stock included in the units purchased, the total
consideration paid, and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- -------- ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 1,131,404 43% $15,055,120 53% $13.31
New shareholders........ 1,500,000 57% 13,500,000 47% 9.00
--------- --- ----------- --- ------
Total............. 2,631,404 100% $28,555,120 100% $10.85
========= === =========== === ======
</TABLE>
The above computations assume no exercise of outstanding options or warrants
to purchase common stock, the representative's over-allotment option, the public
warrants included in units sold in the offering or the representative's
warrants. New investors will be subject to further dilution upon the exercise of
outstanding options and warrants and conversion of our Series B preferred stock.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The statement of operations data for the years ended December 31, 1997 and
1998 and the balance sheet data at December 31, 1998 are derived from financial
statements of the company, which have been audited by PricewaterhouseCoopers
LLP, independent accountants. The statement of operations data for the
nine-month periods ended September 30, 1998 and 1999 and the balance sheet data
at September 30, 1999 are derived from the unaudited financial statements of the
company. Historical results are not necessarily indicative of the results to be
expected in the future, and the results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Product................................... $ 459,358 $ 2,708,856 $ 1,932,813 $ 2,531,144
Maintenance............................... 2,610 1,307,286 1,004,328 954,321
License and other......................... 2,434,108 220,175 150,978 9,319
---------- ----------- ----------- -----------
2,896,076 4,236,317 3,088,119 3,494,784
Cost of Revenues
Product................................... 77,584 1,354,920 764,122 943,004
Maintenance............................... -- 1,065,740 927,680 607,171
---------- ----------- ----------- -----------
Gross margin................................ 2,818,492 1,815,657 1,396,317 1,944,609
---------- ----------- ----------- -----------
Operating, general and administrative
expenses.................................. 1,436,447 2,265,312 1,676,542 1,874,811
Sales and marketing expenses................ 918,557 960,246 714,276 701,183
Research and development expenses........... 482,834 831,034 569,443 836,542
Depreciation and amortization............... 167,402 988,838 723,869 725,234
---------- ----------- ----------- -----------
3,005,240 5,045,430 3,684,130 4,137,770
---------- ----------- ----------- -----------
Loss from operations...................... (186,748) (3,229,773) (2,287,813) (2,193,161)
---------- ----------- ----------- -----------
Interest expense, net....................... 17,629 204,287 155,633 239,939
---------- ----------- ----------- -----------
Loss before income taxes.................. (204,377) (3,434,060) (2,443,446) (2,433,100)
---------- ----------- ----------- -----------
Provision for income taxes.................. 196,104 -- -- --
---------- ----------- ----------- -----------
Net loss.................................. $ (400,481) (3,434,060) $(2,443,446) $(2,433,100)
========== =========== =========== ===========
Net loss per common share................... $ (.70) $ (4.08) $ (2.91) $ (2.56)
========== =========== =========== ===========
Basic and diluted weighted average shares... 680,273 861,875 860,674 974,283
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 45,793 $ 89,216
Net intangible assets....................................... 2,836,740 2,115,284
Total assets................................................ 4,384,005 3,938,274
Total current liabilities................................... 4,356,198 6,428,765
Notes payable, net of current portion....................... 165,022 165,022
Total liabilities........................................... 6,593,787 6,593,787
Total shareholders' deficit................................. (1,445,365) (2,655,513)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS
OR OUR FUTURE FINANCIAL PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR OR OUR INDUSTRY'S ACTUAL
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE
RISKS AND OTHER FACTORS INCLUDE, AMONG OTHER THINGS, THOSE LISTED UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ImageWare Systems, Inc. was founded in February 1987 as a photo novelty
company. From 1987 through 1994, the company's business consisted of building
and operating unmanned photo booths which sold postcards with digitally captured
images of customers combined with various background and foreground scenes. In
November 1994, a group of employees and outside investors acquired a controlling
interest in the company from its founders, discontinued the photo booth business
and redirected the company toward the development of image-based software
products for the law enforcement community. Through the date of the acquisition,
the founders had invested approximately $7.7 million into the company,
represented by stock and paid in capital, and the company had an accumulated
deficit of approximately $8.6 million.
Since the acquisition, we have devoted substantially all of our resources to
designing, developing, producing and marketing image-based software products for
law enforcement agencies. At September 30, 1999, we had raised additional equity
capital of approximately $8.3 million, bringing our total equity capital raised
since inception to approximately $16.0 million. From the date of the acquisition
through September 30, 1999, we accumulated an additional deficit of
approximately $10.1 million, bringing the total accumulated deficit since
inception to approximately $18.7 million.
In 1995 and 1996, we worked with law enforcement agencies to identify their
needs and develop the initial modules for our C.R.I.M.E.S. suite of products and
the integrated system in which they would operate. Our first three modules,
Suspect ID, Crime Lab, and Vehicle ID, were introduced during this period. In
1997, we completed the development of Face ID and the Crime Capture System,
which, when included in our C.R.I.M.E.S. suite, gave us a sufficient breadth of
products to begin marketing entire systems in addition to individual modules.
Cash generated from sales of the initial three modules in 1997 and 1998 was
limited due to their relatively low selling prices which ranged from $600 to
$5,000 per unit. The introduction of the Crime Capture System and Face ID in
late 1997 gave us the ability to sell systems with prices ranging from $25,000
to one million dollars or more per system. With this fully integrated, modular
suite of products, we were able to differentiate ourselves in the market from
competitors offering non-integrated products. Both the Crime Capture System and
Face ID create the potential for significant add-on sales, following the
installation of an initial system, through the sale of additional modules to
both the agency purchasing the system and other agencies that desire to access
that system. In addition, we expect a significant and growing stream of revenue
from the sale of customer support services, which are generally priced at
approximately 12-18% of the price paid for installed hardware and software. As
our installed base grows, we anticipate this revenue stream will grow.
In 1997, recognizing that we would be shifting to sales of systems rather
than individual modules, and recognizing that the sales cycle for sales to
government agencies is relatively long, we established a national sales force
and implemented a top-down sales plan to market our products first to the
largest agencies and then to smaller agencies. We attempted to develop contacts
and relationships at the
16
<PAGE>
federal, state and large county/municipality levels during 1997 to lay the
groundwork for larger systems orders. Our first significant system order was
received from the Arizona Department of Public Safety in January 1998.
In January 1998, we also acquired all of the outstanding stock of XImage
Corporation for a combination of approximately $2.1 million in cash and warrants
to purchase 61,611 shares of our common stock. XImage Corporation, based in San
Jose, California, was founded in 1987 and designed and marketed mug shot systems
to the law enforcement community. This acquisition enabled us to gain a
significant foothold in the digital mug shot market with a customer base which
included the New York City Police Department and law enforcement agencies in
Minneapolis, Portland, Seattle, Indianapolis, Orlando and Montreal. We
consolidated XImage Corporation's operations into our San Diego offices during
the second and third quarters of 1998.
BACKLOG
Although our backlog as of September 30, 1999 was approximately
$4.0 million compared to $775,000 as of September 30, 1998, we believe that such
backlog is the result, in part, of our inability to timely deliver orders due to
lack of working capital. Approximately $2.0 million of backlog was shipped
during the fourth quarter of 1999. Our backlog as of February 1, 2000 was
approximately $3.2 million. After receiving the proceeds of this offering, we
expect to be able to ship most outstanding orders within three to four months
and to ship orders thereafter in a timely and orderly fashion. As a result, our
present backlog may not be indicative of our backlog in future periods.
REVENUE RECOGNITION
We recognize revenue from periodic license and maintenance agreements
ratably over the respective period covered thereunder. Our revenue from software
installation and implementation and from contract services is generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Amounts received under contracts in advance of performance are
recorded as deferred revenue and generally recognized within one year from
receipt. Revenue from contract services for which we cannot reliably estimate
total costs are recognized upon completion.
COST OF REVENUES
Our principal product costs include:
- Hardware costs when a product is purchased as a "turnkey" system. The
majority of our system sales include equipment, which generally equates to
between 15% and 50% of the sales price. As our installed base grows and
add-on retrieval seats and investigative modules are purchased for use on
existing personal computers, we anticipate that hardware sales as a
percentage of revenue may decrease and gross margins may increase as
orders include a greater proportion of software and services.
- Third party software licensing fees for search engine technology
incorporated into our software. The amount of these fees depends on the
number of images in the customer's database.
- Costs of personnel, travel, and overhead associated with custom
integration work, hardware/software configuration, site preparation,
installation, and training.
Our principal maintenance costs to deliver customer support services include
personnel, communications and overhead costs associated with maintaining a
7-day, 24-hour customer support desk and in-house and remote field service
personnel. These costs represent significant fixed costs. These costs are not,
however, anticipated to grow as fast as customer service revenues.
17
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Product revenues increased 32% from $1.9 million for the nine
months ended September 30, 1998 to $2.5 million for the corresponding period in
1999. The increase reflected the further purchases of the Crime Capture System
with purchases by state and local agencies in Arizona to tie into the state-wide
system purchased and implemented by the Arizona Department of Public Safety in
1998. The increase also reflects system upgrades by most of our UNIX-based
customers who adopted our Windows-based Crime Capture System in 1999. Our
backlog of product orders increased significantly from approximately $775,000 at
September 30, 1998 to $4.0 million at September 30, 1999, indicating further
acceptance of our products. As in prior periods, our booking products
represented approximately 85% of our product revenues in the first nine months
of 1999.
Customer service revenues decreased 5% from $1.0 million for the nine months
ended September 30, 1998 to $954,000 for the corresponding period in 1999. In
1999, we offered our UNIX-based customers incentives to upgrade to the
Windows-based Crime Capture System. As part of the incentives, the customers
received reduced maintenance fees in 1999. The price reductions were justified
based upon the need to consolidate the number of versions of systems we would
have to support and to avoid the cost of bringing the older installations into
Y2K compliance. We do not expect to offer similar price reductions in the future
and expect customer service revenues to increase along with our expanded
installed base.
COST OF PRODUCTS AND MAINTENANCE. Cost of products and maintenance
decreased 6% from $1.7 million, or 55% of revenue, for the nine months ended
September 30, 1998 to $1.6 million, or 44% of revenue, for the corresponding
period in 1999. The decrease in the more recent period is primarily due to
higher than normal maintenance costs in the second and third quarters of 1998 as
we merged the maintenance functions of ImageWare and XImage. For a period of
time in 1998, two facilities were fully staffed and operational in order to
provide adequate time for training and to test systems to avoid any lapse in
service to our customers. Maintenance costs were approximately 92% of
maintenance revenues for the nine months ended September 30, 1998 compared to
64% for the corresponding period in 1999. Cost of products can vary as a
percentage of revenue from quarter to quarter depending upon product mix and the
hardware content included in systems installed during a given period.
The royalties received in 1998 and 1999 were from a patent license agreement
with Panasonic for a product which does not compete with any of ImageWare's
current or contemplated products. Panasonic has stopped using the technology and
is not expected to pay further royalties.
GROSS MARGINS Total gross margins increased as a percentage of revenues
from $1,396,317, or 45% of revenues, for the nine months ended September 30,
1998 to $1,944,609, or 55% of revenues, for the corresponding period in 1999.
Gross margins related to product sales increased as a percentage of revenues
from $1,168,691, or 60% of revenues, to $1,588,140, or 62% of revenues, during
the same periods. Gross margins related to maintenance revenues increased as a
percentage of revenues from $76,648, or 8% of revenues, to $347,150, or 36% of
revenues, during the same periods.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased 12% from $1.7 million for the nine months
ended September 30, 1998 to $1.9 million for the corresponding period in 1999.
Approximately $275,000 of the increase was related to an evaluation of our
products for Y2K compliance and the related work performed to bring them into
compliance. An independent company performed the Y2K work under contract.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased 2%
from $714,000 for the nine months ended September 30, 1998 to $701,000 for the
corresponding period in 1999. We were
18
<PAGE>
unable to accelerate our sales effort in the first nine months of 1999 due to a
lack of resources which limited our ability to keep our sales force on the road
and fully utilize trade publication advertising and trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 47%
from $569,000 for the nine months ended September 30, 1998 to $837,000 for the
corresponding period in 1999. The cost increase for research and development
reflects an increase in personnel to accelerate new product development and
respond to customer requests for product enhancements and custom integration
work.
INTEREST EXPENSE. Interest expense increased 54% from $156,000 for the nine
months ended September 30, 1998 to $240,000 for the same period in 1999. The
increase reflects the cost of additional debt that the company issued to fund
the consolidation of XImage and ImageWare and to fund operations in 1999.
NET LOSS. The net loss was approximately $2.4 million for both the nine
months ended September 30, 1998 and the corresponding period in 1999. Gross
profits from the sale of products and maintenance services for the nine-month
period increased $548,000 from 1998 to 1999. Research and development expenses
for the nine-month period increased $542,000 from 1998 to 1999 due to $300,000
in non-recurring expenses related to Year 2000 compliance and increased
personnel costs in the more recent period. Operating, general and administrative
expenses for the nine-month period declined $77,000 from 1998 to 1999, offset by
an $84,000 increase in interest expense for the same period.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Product revenues increased from $459,000 in 1997 to $2.7 million
in 1998. This increase reflects the company's shift from selling individual
modules to selling systems with the introduction of its Crime Capture System and
Face ID product lines. Sales of our Crime Capture System and the XImage
UNIX-based mug shot system accounted for the majority of the increase.
Customer service revenues increased from $3,000 in 1997 to $1.3 million in
1998. The increase was due to the acquisition of the XImage installed base of
mug shot systems and the XImage customer service contracts related to their
customer installations.
License and other revenues decreased 91% from $2.4 million in 1997 to
$220,000 in 1998. In 1997, we received approximately $2 million for a paid-up
license on certain of our patents from Atlus Co., Ltd., a Japanese company and
shareholder, for use in markets unrelated to those in which we operate. There
are no future obligations under this paid-up license. This paid-up license is
pursuant to the license agreement with Atlus Co., Ltd. and is affected by the
settlement with Atlus Co., Ltd., as discussed under "Business--Intellectual
property".
COST OF PRODUCTS AND MAINTENANCE. Cost of products and maintenance
increased from $78,000 in 1997 to $2.4 million in 1998. The increase reflects
the shift in the product mix from primarily software in 1997 to systems and
customer service in 1998, with the introduction of new products and the
acquisition of XImage. The sale of systems generally involves the sale of
hardware as well as software in addition to providing services such as custom
integration, installation and training. The cost of hardware and associated
services can vary depending upon the extent to which the customer will utilize
pre-owned equipment or purchase equipment directly, and the complexity of the
systems into which our product must interconnect.
Cost of sales related to maintenance revenues were approximately
$1.1 million in 1998. Prior to 1998, we had virtually no maintenance revenue or
cost of sales since we had no installed mug shot systems. With the introduction
of the Crime Capture System and the acquisition of XImage in January 1998, we
began to provide 7-day, 24-hour customer service desk and field service to
perform on-site maintenance. In 1998, we had some duplication of costs for
maintenance during a portion of the
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second and third quarters until we combined the operations of XImage and
ImageWare into a single facility.
GROSS MARGINS. Total gross margins decreased as a percentage of revenues
from $2,818,492, or 97% of revenues, in 1997 to $1,815,657, or 43% of revenues,
in 1998. Gross margins related to product sales decreased as a percentage of
revenues from $381,774, or 83% of revenues, to $1,353,930, or 50% of revenues,
for these years. Gross margins related to maintenance revenues decreased as a
percentage of revenues from $2,610, or 100% of revenues, to $241,546, or 18% of
revenues, for these years. Gross margins in 1997 were high as a percentage of
revenues because the company only sold software products in that year and did
not provide support or maintenance. In addition, the company also realized
one-time license revenue of $2.4 million in 1997 with no corresponding cost of
sales. In 1998, the company sold its first booking system and began providing
support and maintenance, both of which caused a reduction in gross margins.
We expect that gross margins will increase in the future due to our plans to
increase sales of software products relative to hardware and because more
prospective customers will already have hardware systems in place and will
therefore seek to purchase our software products with less hardware.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased 64% from $1.4 million in 1997 to $2.3 million
in 1998. XImage was acquired in January 1998 and continued to run independently
until we closed the XImage facility and eliminated redundant overhead in
September 1998. The 1998 general and administrative expenses included the
operation of two facilities and two infrastructures for seven months, as well as
the cost of moving both XImage and ImageWare operations from their respective
facilities into a single facility.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 4.5%
from $919,000 in 1997 to $960,000 in 1998. In 1997, we completed staffing of our
in-house sales force and initiated a campaign to develop our markets and
establish relationships related to the development of future business. In 1997,
prior to our acquisition of XImage Corporation, XImage had virtually no activity
or expense for sales and marketing.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 72% from $482,000 in 1997 to $831,000 in 1998. The increased expense
in 1998 reflects some redundancy in personnel required during the consolidation
of the two companies, combined with some personnel increases in late 1997 and
early 1998 related to the rollout of our new Crime Capture System and Face ID
product lines. We were required to maintain a number of the XImage research and
development staff through 1998 in order to complete several products which were
in development at the time we acquired XImage. As those projects were completed,
redundancies in staff were eliminated.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 492%
from $167,000 in 1997 to $989,000 in 1998. The acquisition of XImage resulted in
ImageWare booking approximately $3.5 million in goodwill which we are amortizing
over four years at approximately $863,000 per year through 2001.
INTEREST EXPENSE. Interest expense increased from $18,000 in 1997 to
$204,000 in 1998. The increase reflects the significant additional debt that the
company incurred and assumed in connection with the acquisition of XImage in
late January 1998 and the funding of the subsequent consolidation of the two
companies.
PROVISION FOR INCOME TAXES. The 1997 provision for income taxes represented
foreign taxes withheld in Japan on the license revenue received from a Japanese
company, as required by Japanese law.
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NET LOSS. The net loss increased from approximately $400,000 in 1997 to
$3.4 million in 1998. Gross profits from the sale of products and maintenance
services increased $1.2 million from 1997 to 1998. This increase in gross profit
was offset by a reduction in non-recurring license fee income of $2.0 million,
an increase of $821,000 in depreciation and amortization, an increase of
$829,000 in operating, general and administrative expenses, an increase of
$348,000 in research and development expenses and an increase of $187,000 in
interest expense. The higher operating, general and administrative expense and
the higher research and development expense in 1998 included the cost of
combining the XImage and ImageWare operations and the cost of eliminating
redundant facilities and resources.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. We had negative working capital of $3.1 million at December 31,
1998 compared to $4.8 million at September 30, 1999. Cash used by operating
activities totaled $1.2 million for the nine months ended September 30, 1998 and
$752,000 for the nine months ended September 30, 1999.
For the nine months ended September 30, 1999, cash was principally used to
fund $2.4 million in losses offset by non-cash charges of $349,000 for
compensation and fees paid with stock and $725,000 in depreciation and
amortization. Cash used to fund losses was also offset by a $608,000 net
increase in current liabilities in excess of the increase in current assets. The
increase in current liabilities included a $399,000 increase in accounts payable
and a $434,000 increase in accrued expenses and interest, due both to our
increased volume of business and to our inability to meet the terms of our
vendor and debt obligations during the period. The offsetting increase in
current assets included an increase in accounts receivable of $206,000 and in
inventories of $126,000 due to increased business activity.
Cash used by operating activities in 1998 totaled $1.9 million and was used
principally to fund $3.4 million in losses offset by non-cash charges of
$989,000 for depreciation and amortization and $522,000 for fees paid with
stock.
During 1998, we used an additional $2.1 million in cash for investing
activities to complete the acquisition of XImage.
CAPITAL RESOURCES. Prior to 1998, our primary sources of funds were
shareholder loans, private placements of stock and, to a lesser extent, cash
provided by operating activities. In 1998, we received $1.2 million in funds
from secured bank loans, in addition to $705,000 in loans from shareholders. In
the first nine months of 1999, we received $730,000 in loans from shareholders
and $300,000 from the sale of stock. During the corresponding period in 1999, we
repaid $200,000 in bank debt and $10,000 in shareholder debt.
Subsequent to September 30, 1999, we received an additional $1.25 million as
a loan from the president of Atlus Co., Ltd., with terms extending to the
earlier of the completion of our initial public offering or February 10, 2001.
We have agreed to assume any exchange rate risk in the repayment of this loan
and have not entered into any hedging transaction with respect to this potential
obligation. In the fourth quarter 1999, we also received an additional $500,000
as a loan from the chairman of Paulson Investment Company, Inc. with terms
extending to the earliest of the demand of our lender, the closing of our
initial public offering, or April 3, 2000. We used $500,000 of the funds
provided by these fourth quarter 1999 financing activities to reduce our bank
debt. We used an additional $125,000 of the loan proceeds to reduce notes
payable to shareholders and pay officers for credit card debt. During the fourth
quarter 1999, we received an extension of the bank loan until March 3, 2000, and
extensions on shareholder debt totaling $803,500, subject to progressive
principal payments on a monthly payment schedule, with the balance due upon the
completion of our initial public offering.
We have not generated sufficient cash from operations to fund continued
operations or our growth plan, and will require significant additional future
funding. We anticipate that, after completion of this
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offering, our operating cash flows will be sufficient to meet our liquidity
needs for the next 12 months, based on our current expense calculations and our
current and anticipated revenue streams, including the proceeds of this
offering. Our operating and financing plans assume certain revenue projections
can be met and our overall cost structure remains stable, as to either of which
there can not be any assurance. There also can be no assurance that our working
capital objectives will be reached in the near future, if ever. In the event
that additional capital is required, we may seek to raise such capital though
private or public equity financing. There can be no assurance that such capital
will be available on favorable terms, if at all.
OTHER COMMITMENTS. In connection with the outstanding Series B preferred
stock, we are obligated to pay cumulative dividends at the rate of $0.2125 per
share per year. At September 30, 1999, dividends due aggregated approximately
$157,000. Dividends due at February 1, 2000 are $184,468 and are to be paid from
the proceeds from this offering.
We are also obligated to pay approximately $1,000,000 over the next three
and one-half years under our employment agreements, an estimated $300,000 over
the next one and one-half years under our license agreements, and approximately
$1,018,000 over the next three and one-half years under our real property lease.
YEAR 2000 COMPLIANCE
With regard to our internal operations, we have relied on written
representations from our software and hardware vendors to confirm that the
versions of their products we are using are Year 2000 compliant. We have spent
between $15,000 and $25,000 on these compliance issues, and any additional costs
are not expected to be more than $15,000. As of February 1, 2000, our compliance
activities are complete and we are not aware of any Year 2000 compliance
problems with our products. As of February 1, 2000, only one customer reported
to us any problem with its own computer system that affected the performance of
our products. The problem has been corrected. There may be undetected Year 2000
problems with our internal systems, our products or our customers' computer
sytems. As part of our contingency plan in case our internal systems are not
entirely Year 2000 compliant, we regularly have all data backed up in a form so
as to ensure no loss of information and to enable a system migration if
necessary.
With regard to software and hardware used in our products, we engaged an
independent firm to evaluate our products, identify areas of non-compliance,
develop a plan to bring the products into compliance and implement the plan to
bring all customers under maintenance contracts compliant by December 31, 1999.
The cost of such compliance activities is estimated to be approximately $400,000
and was funded primarily through borrowings. Approximately $275,000 of such
amount was expended during the nine months ended September 30, 1999. The
implementation of our remediation plan remained on schedule and was completed by
December 31, 1999.
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BUSINESS
INDUSTRY BACKGROUND
Police departments and other law enforcement and public safety agencies rely
on criminal history records to help fight crime. A criminal history record
includes personal information and a history of arrests, convictions and other
events, and may also include fingerprints and photographs. The National
Institute of Justice estimated in 1998 that there were 60 million criminal
history records and that this number is increasing by 20 million per year.
According to a 1989 recidivism study conducted by the U.S. Department of
Justice, of the 108,580 persons released from prisons in 11 states in 1983, an
estimated 62.5% were re-arrested for a felony or serious misdemeanor within
three years. Since many crimes are committed by recidivists, the ability to
quickly search criminal history records to identify a suspect is particularly
important.
Many law enforcement and public safety record-keeping systems are still
merely a file of paper records which cannot be searched quickly or from a remote
location. In many places, victims and witnesses still flip through books of
photographs to try to identify a criminal suspect. Even if paper records contain
pictures of criminals, they cannot be quickly searched based on selected
criteria such as eye color, first name or gang membership. To alleviate the
inadequacies of paper records, many agencies have moved to digital
record-keeping systems. However, many of these systems are merely a database of
criminal records that can be searched by record number only. While they reduce
the need for paper files and are easier to keep secure, they do not allow
officers to search for an unknown suspect in the database based on criteria such
as height, hair color, gang membership or other factors. Even agencies that have
installed searchable databases often do not yet have biometrics-based software
that would allow them to compare a digital facial photograph with photographs in
the database in order to match an unknown suspect with known criminals who have
similar physical characteristics. "Biometrics" refers to the method of
identifying a person by measuring distinctive biological characteristics, such
as facial features or fingerprints.
In view of the inefficiencies in traditional record keeping-systems, many
agencies are turning to new technologies to increase their ability to quickly
identify, locate and arrest criminal suspects. Costs have decreased for computer
hardware, bandwidth and communications infrastructures. The ability to transmit
large quantities of data, such as digital images, has increased, as has the use
of open architecture among systems, allowing agencies to share data more
effectively. The speed and accuracy of facial recognition technology is also
increasing, as are the capabilities for the transmission of digital images. As a
result of these factors, we believe law enforcement agencies will increasingly
seek to replace outdated methods, increase the size of their digital booking
systems and look for investigative products that allow them to effectively
search and share the information captured in their systems.
Further, we believe that, as computer technology becomes more common, law
enforcement agencies will increasingly use laptop computers and wireless data
communication. These technologies will eventually allow investigators and police
officers to access their agency's database and other information from the scene
of a crime or from a patrol car.
MARKETS
THE LAW ENFORCEMENT AND PUBLIC SAFETY MARKETS
The United States law enforcement and public safety markets are composed of
federal, state and local law enforcement agencies. As of 1996, state and local
governments in the United States operated approximately 18,769 law enforcement
agencies consisting of 13,578 local police departments, 3,088 sheriffs'
departments and offices, 49 primary state law enforcement agencies, 1,316
special police agencies, and 738 county constable offices. As of 1996, the
federal market consisted of federal agencies,
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such as the Federal Bureau of Investigation and the Drug Enforcement
Administration, which in total employed about 74,500 full-time employees, not
including military agencies and their personnel.
The federal government has promoted the development and use of nationwide
criminal history record databases called the Interstate Identification Index and
the National Crime Information Center 2000, or NCIC 2000, each consisting of
national and regional databases. The Interstate Identification Index is
maintained by the FBI and includes persons arrested for felonies or serious
misdemeanors. The FBI has indicated that this Index will accept photographs in
the future. NCIC 2000 is an on-line information system dedicated to serving
criminal justice agencies. In July 1999, NCIC 2000 replaced an older system to
allow for the sharing of digital images. We anticipate that the inclusion of
digital images in these databases will increase the value of digital booking
systems and the demand for facial recognition applications.
The Violent Crime Control and Law Enforcement Act of 1994 is expected to
contribute at least $130 million in grants to support technological improvements
for law enforcement agencies and other activities to improve law enforcement
training and information systems, which could include purchases of our products
and services. The Crime Identification Technology Act of 1998 authorized funding
of up to $250 million in each of the next five years to, among other things,
support integration of state and local justice system technology. Agencies are
eligible for grants under this program based on their initiatives to develop,
oversee, plan and implement integrated information technology, including
technology of the type produced by ImageWare. This act merely authorizes this
funding and is contingent on Congress passing legislation to appropriate the
funds each year.
OTHER APPLICATIONS AND MARKETS
We believe there are emerging applications for our products within the
public safety market beyond the needs of agencies to book and identify criminal
suspects. Variations on our system can be used to track inmate populations of
correctional facilities, to monitor the location of persons on parole or
probation without the need for them to visit their parole or probation officer
in person, to monitor gun registrations and allow gun retailers and distributors
to run more accurate background checks on potential buyers, and to help
authorities locate missing children.
Our technology also has emerging applications in markets related to access
control and identification. Organizations concerned with security issues can use
our products to create picture identification cards that can be instantly
checked against a database of facial images to prevent unauthorized access to
secure areas. Potential customers in these markets include large corporations,
hospitals, universities and government agencies.
PRODUCTS AND SERVICES
We believe our integrated suite of software products significantly reduces
the inefficiencies and expands the capabilities of traditional booking systems.
Using our products, an agency can create a digital database of thousands of
criminal history records, each including a full-color facial image, text
information and images of other distinctive physical features. This database can
be quickly searched using text queries or by using our facial recognition
technology to compare the face of an unknown suspect with facial images in the
database. Our investigative software products can also be used to create, edit
and enhance digital images and to search databases of other agencies to which
the customer has access.
We believe our products allow our customers to achieve the following
benefits:
MORE QUICKLY BOOK AND IDENTIFY SUSPECTS. Because many officers can enter
information and images directly into the booking system simultaneously from
multiple locations, an agency can reduce the time required to book a
suspect. In addition, rather than flipping through books of mugshots, an
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officer and witness can use our software to quickly compare the digital
image of a suspect with thousands of facial images in the booking system.
MORE ACCURATELY CAPTURE AND IDENTIFY FACES. Officers and witnesses can
together create and edit full-color, photograph-quality images to match the
facial image as closely as possible to the description of the suspect.
SEARCH THROUGH A GREATER NUMBER OF CRIMINAL RECORDS. As agencies are able
to access not only their own booking system but the databases of other
agencies as well, they will be able to access a far greater number of
criminal records than available through traditional booking systems.
MINIMIZE TRAINING TIME AND EXPENSE. Our products are designed to be used by
persons with minimal technical backgrounds. Our software programs ask simple
questions to create full-color facial images, book a suspect or search a
booking system.
INTEGRATE OUR PRODUCTS INTO A COMPLETE SYSTEM. Our system is made up of a
suite of six fully integratable software modules. A customer may purchase
all of the modules as a complete system or each module individually. Our
booking system can also be integrated with other information systems, such
as an automated fingerprint identification system.
SCALE OUR PRODUCTS FOR USE ON A SINGLE COMPUTER OR A LARGE NETWORK. Our
products are completely scalable, so that they may be used on one computer
terminal or with a client-server network including dozens of terminals or
more.
Our C.R.I.M.E.S. system consists of six software modules, which may also be
purchased individually. The Crime Capture System (including both the Capture
Module and the Retrieval Module) is our booking system and database. Our
investigative modules are Face ID, Suspect ID, Crime Lab and Vehicle ID.
CRIME CAPTURE SYSTEM. The Crime Capture System is a Windows-based digital
booking system made up of two distinct software modules and associated hardware
such as cameras and computer hardware as needed. The Crime Capture System allows
a customer to capture and store images and other information in a database and
search and retrieve records from the database. The Crime Capture System uses
off-the-shelf hardware and is designed to comply with open industry standards so
that it can operate on an array of systems ranging from a stand-alone personal
computer to a wide area network. To avoid duplication of entries, the system can
be integrated easily with several other information storage and retrieval
systems, such as a live scan fingerprint system, a records management system or
an automated fingerprint identification system.
Our first order for the Crime Capture System occurred in January 1998. As of
December 13, 1999, the Crime Capture System is being used by 20 customers,
including the Arizona Department of Public Safety and the Los Angeles County
Sheriff's Department. Each Crime Capture System is scalable to suit each
customer's needs and can be configured to connect with systems which may already
be in place. As a result, the price of the system to the customer varies widely.
Full installations of the Crime Capture System have ranged from $25,000 for a
stand-alone system to over $1 million, and most commonly range from $150,000 to
$400,000. Gross revenues from sales of the Crime Capture System represented 62%
of our year-to-date gross revenues as of September 30, 1999.
CCS CAPTURE. This software module allows a user to capture and store facial
images as well as images of distinguishing features such as scars, tattoos and
other marks. Each entry contains both images and text information in an
easy-to-view format made up of distinct fields. As of February 4, 2000, we had
installed CCS Capture at 59 sites. Current customers of this module range from
agencies that capture a few thousand mugshots per year to those that capture
over 600,000 mugshots per year. CCS Capture will generally replace our
UNIX-based booking system, ForceField 2000, which was originally introduced by
XImage Corporation in 1989 as a mugshot capture system. While a few of our
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customers will continue to use ForceField 2000 for the foreseeable future, we
have upgraded most current customers from the ForceField 2000 to the Crime
Capture System.
CCS RETRIEVAL. This software module allows a user to search the database
created with CCS Capture. Officers can conduct text searches in many fields,
including file number, name, alias, distinctive features like "brown eyes" or
"tattoo," and other information such as gang membership, arrests and
convictions. CCS Retrieval creates a catalogue of possible matches, allowing
officers or witnesses to save time by looking only at mugshots that closely
resemble the description of the suspect. This module can also be used to create
a line-up of similar facial images from which a witness may identify the
suspect. CCS Retrieval can be used by a law enforcement agency's satellite
offices that need to access a database created and maintained at a central
location using CCS Capture. As of February 4, 2000, we had installed CCS
Retrieval at 240 sites. When purchased separately from CCS Capture, the CCS
Retrieval module is typically priced at approximately $6,750.
FACE ID. This software module uses biometric facial recognition and
retrieval technology to help authorities identify possible suspects. Images
taken from surveillance videos, digital sketches or photographs can be searched
against a digital database of facial images to retrieve any desired number of
faces with similar characteristics. This investigative module can also be used
at the time of booking to identify persons using multiple aliases. Using
biometrics-based technology, Face ID can search through thousands of facial
images in a matter of seconds, reducing the time it would otherwise take a
witness to flip through a paper book of photographs that may or may not be
similar to the description of the suspect. Face ID then creates a selection of
possible matches ranked in order of similarity to the suspect, and a percentage
confidence level is attributed to each possible match. Face ID incorporates
search engine technology which we license from Visionics, Inc. We first
introduced Face ID in late 1997. This module is comprised of a server, which is
typically priced at $25,000 or more, and a personal computer client, which is
typically priced at approximately $15,000.
SUSPECT ID. This software module allows officers and witnesses to quickly
create full-color, photo-realistic suspect composites. The digital composites
are constructed from libraries of facial features based upon actual color
photographs of such features. Suspect ID allows officers with minimal computer
training and artistic talent to create a suspect composite by pointing and
clicking with a mouse. This module can be installed on a laptop computer and
taken into the field, allowing officers to conduct interviews and create
composites before witnesses' memories fade. For rapid identification, officers
can distribute completed composites within minutes via fax or e-mail. Suspect ID
incorporates our patented object-layering technology. We first introduced
Suspect ID in 1995. This module is typically priced at approximately $5,000.
CRIME LAB. This software module allows officers to enhance and edit digital
images. Using Crime Lab, an officer can update old images, create
non-prejudicial line-ups, remove distracting backgrounds and enhance the quality
of surveillance videos. Crime Lab incorporates our patented object-layering and
color-masking technologies. We first introduced Crime Lab in 1995. This module
is typically priced at approximately $600.
VEHICLE ID. This software module helps officers identify motor vehicles
which may have been stolen or involved in a crime. Vehicle ID's comprehensive
database includes images and text information for over 1,000 vehicle makes and
models and can be searched using many fields, including physical features and
Vehicle Identification Number. Images of vehicles similar to the suspect vehicle
can be viewed from front, rear, side or three quarter angles and can be depicted
in any color. A color copy of the suspect vehicle can then be produced and
immediately broadcast, printed or faxed to officers in the field. Vehicle ID
incorporates our patented object-layering technology. Vehicle ID also
incorporates Vehicle Identification Number software provided by the National
Insurance Crime Bureau. We first introduced Vehicle ID in 1996. This module is
typically priced at approximately $1,500.
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MAINTENANCE AND CUSTOMER SUPPORT
We work directly with purchasers of our system to ensure that the system
they purchase will meet their unique needs. We configure and test the system
either at our facilities or on-site and conduct any customized programming
necessary to connect the system with any legacy systems already in place, such
as old booking system databases or other records management systems.
As part of our installation of a system, we train our customer's employees
in the effective use of our products. We also provide training on an ongoing
basis both on-site and at our facilities in San Diego, California. We provide
on-site hardware support to our customers, generally within 24 hours of the
customer request. Customers can use a toll free number to speak with our
technical support center, which provides software support and general assistance
24 hours a day, seven days a week. On-site customer support is coordinated by
our field personnel in New York, Minnesota, Washington and Arizona. Providing
customer support services typically provides us with annual revenue of 12% to
18% of the initial sales price of the system purchased by our customer.
SYSTEM CONFIGURATION AND FULFILLMENT
We directly employ computer programmers and also retain independent
programmers to develop our software and perform quality control. We provide
customers software which we specifically configure to operate on their existing
computer system. We can also provide customers with a complete computer hardware
system with our software already installed and configured. In either case, the
customer is provided with a complete "turn-key" system which can be used
immediately. When we provide our customers with a complete computer system
including hardware, we use "off-the-shelf" computers, cameras and other
components purchased from other companies such as IBM or Gateway 2000. Systems
are assembled and configured either at our facilities in San Diego, California,
or at the customer's location.
OUR STRATEGY
Key elements of our strategy for growth include the following:
FULLY EXPLOIT THE EXPANDING LAW ENFORCEMENT AND PUBLIC SAFETY MARKETS
We intend to use our successful installations with customers such as the
Arizona Department of Public Safety as reference accounts and to aggressively
market C.R.I.M.E.S. as a superior technological solution. The majority of our
recent and near term sales has been and will be from sales of the Crime Capture
System. Our sales effort in the near term will be to establish the Crime Capture
System as the mug shot system adopted in as many countries, states and large
county/municipalities as possible. Once we have a system installed in a region,
we intend to then sell additional systems or retrieval seats to other agencies
within the primary customer's region and in neighboring regions. In addition, we
will then market our complementary investigative modules to the customer,
including Face ID, Suspect ID, Crime Lab and Vehicle ID. As customer databases
of digital mug shots grow, we expect that the perceived value of our
investigative modules, and corresponding revenues from sales of those modules,
will also grow.
EXPAND INTO RELATED APPLICATIONS WITHIN THE LAW ENFORCEMENT AND PUBLIC SAFETY
MARKETS
Our products can provide solutions to law enforcement and public safety
agencies beyond our core application of police booking systems and related
investigative products, with minimal adaptation. The technology behind our
C.R.I.M.E.S. product line can be used to create databases of missing children
and compare the facial image of a lost child to the images in the database. Our
system can be used to help correctional facilities track and control inmates.
Gun sellers could use our products to access available criminal databases and
help prevent the sale of guns to ineligible persons. Our technology can
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be used to monitor persons on parole or probation without requiring them to
travel to their parole or probation officer. We anticipate that a parolee or
probationer will be able to have his photograph taken in a specially designed
kiosk which uses biometrics-based technology to identify the person and inform
his parole or probation officer of his location.
PENETRATE THE ACCESS CONTROL AND IDENTIFICATION MARKETS
We believe security issues are becoming increasingly important among public
agencies, corporations, hospitals, universities and similar organizations. Using
our products, an organization can create picture IDs that correspond to images
in a digital database. A security guard can stop an individual and accurately
check his identity against a database of authorized persons, and either allow or
deny access as required. Picture IDs cannot be faked in the system, and
authorized people are not delayed more than a moment. Our technology can also be
applied in other markets to facilitate activities such as voter registration,
immigration control and welfare fraud identification. Our system has been
adopted as the picture ID system for the government of Kuwait.
DEVELOP THE INTERNET AND WIRELESS CAPABILITIES OF OUR PRODUCTS
We are currently developing a new software module, called Crime Web, which
will allow users to use the Internet or secure Intranets to conduct
investigative searches of digital booking systems. Crime Web will include the
most frequently used investigative features of the Crime Capture System to allow
users to retrieve single images, conduct searches based on one or more
parameters, create digital line-ups and print retrieved records. We are also
currently developing an Internet-based version of Face ID that will allow
investigators to use the Internet to compare the digital image of an unknown
suspect with a database of images using biometrics-based technology. We believe
our Internet products will allow users to quickly access and share images via
the Internet while maintaining the security and integrity of databases, thereby
encouraging the widespread dissemination and sharing of criminal information
among law enforcement agencies. We intend to introduce Crime Web in the first
quarter of fiscal 2000.
We also intend to develop the wireless capabilities of our products. Public
safety agencies require information to be available to their agents in the
field. Vehicles are being outfitted with wireless terminals which will allow for
the receipt of more information, including color photographs and arrest records.
Additionally, public safety agencies are investigating the feasibility of
handheld devices which can operate outside of a vehicle and accompany
investigators wherever an investigation takes them. In order to facilitate the
transfer of arrest records and investigative tools to public safety employees in
the field, we plan to develop technology in cooperation with wireless
communications companies which will allow our products in the field to operate
over wireless systems.
ACQUIRE BUSINESSES THAT ENHANCE OUR STRATEGIC POSITION
We may in the future acquire businesses that will complement our growth
strategy and enhance our competitive position in our core markets and other
markets. However, we have no current plans for such acquisitions.
SALES AND MARKETING
We market and sell our products through our direct sales force and through
indirect distribution channels, including systems integrators. Our sales and
account representatives are based in Massachusetts, New Jersey, Georgia and
California.
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<PAGE>
As of February 4, 2000, our domestic sales organization included our
director of sales, our director of major account development, our vice president
of sales and business development and five regional managers. Our director of
major account development, based in Boston, coordinates relationships with
systems integrators and other strategic partners and is responsible for U.S.
federal accounts and European sales. Other international sales are coordinated
by our vice president of sales and business development. Our sales professionals
are supported by our technical experts who are available by telephone and
conduct on-site customer presentations.
The typical sales cycle for our Crime Capture System includes a pre-sale
process to define the potential customer's needs and budget, an on-site
demonstration, and conversations between the potential customer and existing
customers. Government agencies are typically required to purchase large systems
by including a list of requirements in a Request For Proposal, known as an
"RFP", and allowing several companies to openly bid for the project by
responding to the RFP. If our response is selected, we enter into negotiations
for the contract and, if successful, ultimately receive a purchase order from
the customer. This process can take anywhere from a few months to over a year.
In addition to our direct sales force, we have developed relationships with
a number of large systems integrators who contract with government agencies for
the installation and integration of large computer and communication systems. By
acting as a subcontractor to these systems integrators, we are able to avoid the
time-consuming and often expensive task of submitting proposals to government
agencies and also gain access to large clients who might not contract directly
with small companies. In this context, we provide agencies with digital image
booking systems and our related investigative software products. As of
February 4, 2000, we were a subcontractor to the following prime contractors:
- SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, for the New York City
Police Department.
- MORPHO SYSTEMES, S.A., a subsidiary of SAGEM, S.A., a French company, for
the national identification system of Kuwait.
- PRC, INC., for the Las Vegas Metropolitan Police Department.
- DIGITAL BIOMETRICS, INC., for the Los Angeles County Sheriff's Department.
We have also entered into agreements or arrangements with the following
companies to jointly bid on certain specific projects:
- HEWLETT-PACKARD SINGAPORE (SALES) PTE LTD., to jointly bid on the booking
and facial recognition system for the Singapore Police Department.
- INTELLIGENCE AND STRATEGIC PROCESSES PTY LTD., an Australian company, to
sell our booking system in Australia and New Zealand.
We also work with companies that offer complementary products, where value
is created through product integration. These teaming arrangements allow us to
both enhance our products and expand our customer base through the relationships
and contracts of our strategic partners. We have entered into agreements with
the following companies:
- POLAROID CORPORATION. In September 1999, we entered into an agreement to
jointly market centralized imaging and facial recognition technology to
law enforcement agencies in selected states where Polaroid has state
contracts for drivers' license systems.
- H.T.E., INC. In August 1999, we entered into an agreement to integrate our
Crime Capture System with the records management system and jail
management system of H.T.E., Inc.
We promote our products through trade journal advertisements, direct mail,
and attendance at industry trade shows, including those sponsored by the
International Association for Law Enforcement, the International Association for
Identification, and the International Association of Chiefs of Police.
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<PAGE>
We also target other media through public relations efforts, including
non-industry publications, daily newspapers, local and national news programs,
and television programs related to law enforcement. Articles regarding our
products have appeared in BUSINESS WEEK, IMAGING MAGAZINE, THE WALL STREET
JOURNAL and a number of other publications.
CUSTOMERS
We have a broad range of domestic and international customers. Most of our
customers are government agencies at the federal, state and local levels in the
United States. Our products are also being used in Canada, the United Arab
Emirates, Kuwait, Mexico, Colombia, Venezuela, and the Philippines by over 450
customers, including the following:
<TABLE>
<S> <C>
New York City Police Department Los Angeles County Sheriff's Department
Arizona Department of Public Safety King County (Seattle), Washington
Orange County, Florida Sheriff's Office U.S. Army, Navy and Air Force
Hennepin County (Minneapolis), Minnesota Montreal Police Department
Government of Kuwait Milwaukee County, Wisconsin
City of San Antonio, Texas
</TABLE>
In addition to the major customers listed above, we also receive purchase
orders from or enter into contracts with cities or counties. We have agreed in
certain instances with the state agency, for example, the Arizona Department of
Public Safety, to provide our products and services to smaller cities within the
state at the price and on the terms offered to the state agency. When referring
to the number of our customers, we not only include the large entities such as
the Arizona Department of Public Safety, but also include the smaller cities (or
counties), such as Tempe and Scottsdale, which separately enter into contracts
with us or submit purchase orders for our products and services.
COMPETITION
Due to the fragmented nature of the law enforcement and public safety market
and the modular nature of our product suite, we face different degrees of
competition with respect to each C.R.I.M.E.S. module. We believe the principal
bases on which we compete with respect to all of our products are:
- The ability to integrate our modular products into a complete imaging and
facial recognition system.
- Our reputation as a reliable systems supplier.
- The usability and functionality of our products.
- The responsiveness, availability and reliability of customer support.
The Crime Capture System faces strong competition from other makers of
booking systems, including companies such as Printrak International, Inc. and
Digital Descriptors Systems, Inc. Other companies in this market include Identix
Corp., Dynamic Imaging, Inc. and Epic Solutions, Inc. Printrak serves over 250
customers, including the Philadelphia Police Department. Internationally, there
are a number of local companies offering booking solutions in most countries.
Most competitors' products in this niche offer basic image capture and storage
but lack the functionality of investigative products, including facial
recognition and image editing and enhancement.
We believe Face ID was the first facial recognition software produced and
sold to the law enforcement and public safety markets. As a result, we believe
it is the most widely recognized product in this niche, with the largest number
of installations. Identix Corp. has, through its subsidiary, developed products
with facial recognition capabilities.
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<PAGE>
Suspect ID faces competition primarily from Smith and Wesson and
Faces, Inc. Some agencies continue to employ sketch artists who develop
hand-drawn composites from witness interviews. Smith and Wesson has supplied
"acetate foil overlay" products for over 30 years. This method of creating
suspect composites requires a user to overlay sheets of clear plastic with
different facial features in order to produce a full picture. This method is
still the most widely used method for creating suspect composites, but its use
has declined since the introduction of computerized composite systems.
Crime Lab faces competition primarily from off-the-shelf image editing and
enhancement programs such as Photoshop from Adobe Systems. Photoshop is a well
known application, but was not specifically designed for the law enforcement and
public safety industry. As a result, it is not customized for use by law
enforcement agencies and cannot be easily integrated with other law enforcement
investigative software products.
Vehicle ID is, to our knowledge, the only software product using digital
images of motor vehicles to help law enforcement agencies locate and identify
stolen vehicles or vehicles involved in crimes.
INTELLECTUAL PROPERTY
We rely on patents, trademarks, trade secret and copyright laws, and
confidentiality agreements to protect our intellectual property. We own two
United States patents that are important to our business strategy. Our patented
"Color Masking System" allows a user to manipulate selected colors of an image
without affecting other colors of the image. Our patented "Object Layering"
technology allows a user to save each element of an image as a separate layer so
that edits can be made to certain elements without affecting other elements or
having to re-create the entire image. Our patented object layering technology is
used in Suspect ID, Crime Lab and Vehicle ID, and our patented color masking
technology is used in Crime Lab. These patents expire in 2012 and 2013,
respectively. We have several unregistered and federally registered trademarks,
as well as trademarks for which there are pending trademark registrations with
the United States Patent & Trademark Office, including the following marks:
<TABLE>
<S> <C>
C.R.I.M.E.S.-Registered Trademark- Crime Capture System-TM-
Image Crime Lab-TM-
Wizard-Registered Trademark-
ImageWare-Registered Trademark- Crime Web-TM-
Morphwizard-Registered Trademark- Face ID-TM-
People Face Investigate-TM-
Postcards-Registered Trademark-
Suspect ForceField 2000-TM-
ID-Registered Trademark-
Vehicle
ID-Registered Trademark-
</TABLE>
We license and depend on intellectual property from third parties. We
license certain facial recognition and retrieval technology from Excalibur
Technologies Corporation on a nonexclusive, worldwide basis. Under the agreement
with Excalibur, we can create our own intellectual property as a derivative of
the Excalibur technology. Our license from Excalibur with respect to certain
technology will expire on April 29, 2001, while our license with respect to
other technology expired on October 29, 1999. Under the license with Excalibur,
we are currently paying royalties at rates equal to 10% and 25% of the net sales
price of the product depending on the category of Excalibur's technology which
is incorporated into the specific product being sold.
We also license search engine technology from Viisage Technology, Inc. and
Visionics, Inc. Our license from Viisage Technology is a nonexclusive license
for the United States and expires on December 31, 2000. The royalties payable by
us under the license from Viisage are $5,000 for searches of up to 40,000 images
and $0.17 per image beyond 40,000 images. Our license from Visionics is on a
nonexclusive, worldwide basis and expires in July 2001. The royalties payable by
us under the license are based upon the number of images on the database and the
number of clients accessing the server.
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<PAGE>
As of February 4, 2000, we were actively using the technology licensed from
Visionics in our products. We believe that, prior to expiration of the Visionics
license, we will be able to either enter into a new license agreement with
Visionics, obtain similar search engine technology from another third party or
develop our own technology.
We also license certain of our technology to third parties. For a one-time
licensing fee of $1,961,039 received in 1997, we entered into a license
agreement pursuant to which we granted Atlus Co., Ltd. an exclusive license
(except with respect to the license granted to American Photo Booth, Inc.) to
use our patents and related technology in the entertainment photo booth market
and a nonexclusive license to use our patents and related technology in other
markets. The patents licensed to Atlus relate to only two of the six modules of
our C.R.I.M.E.S. suite of products, Suspect ID and Crime Lab. The remaining four
modules of the C.R.I.M.E.S. suite of products are not based on the patents or
technology which was the subject of this license agreement. The license
agreement also required that we first offer to Atlus, at a price and at terms
acceptable to us, the right to license all new technologies which we developed
before we could license such new technology to any third party. Atlus, in turn,
could only assign or sublicense its rights under the license agreement to an
affiliate or subsidiary of Atlus.
As of June 30, 1999, we entered into a settlement agreement and release with
Atlus in which we assigned to Atlus certain patents that were previously subject
to the license agreement mentioned above. In turn, Atlus has given us perpetual,
nonexclusive licenses to such assigned patents to use for applications other
than photo booth entertainment applications. The settlement agreement modifies
the license agreement with Atlus in that those patents which were assigned to
Atlus are no longer subject to the license agreement, and Atlus is now able to
freely sublicense to third parties the patents and intellectual property which
is still subject to the license agreement.
Pursuant to a license agreement with Panasonic Computer Peripheral Company,
Panasonic has the exclusive right to use our technology for the purpose of
bundling it with its motion printers and distributing the bundled product in the
United States and Canada. As of September 30, 1999, we had received payments
from Panasonic under this agreement of approximately $347,000, and Panasonic had
informed us that they have stopped using the technology for the time being. We
also granted to American Photo Booths Inc. a non-exclusive license to make and
sell entertainment photo booths using our "Color Masking" and "Object Layering"
technology pursuant to a confidential license agreement dated as of August 28,
1999. We do not receive royalties under this license agreement. We believe
certain of our patented technology may be currently used by third parties
without licenses from us and we intend to seek to enter into license agreements
with the parties similar to our arrangement with Panasonic.
RESEARCH AND DEVELOPMENT
Our research and development team is made up of 11 programmers, engineers
and other employees. We spent approximately $831,000 on research and development
in 1998 and $837,000 in
the first nine months of 1999. We continually work to increase the speed and
accuracy of our existing suite of products. Our research and development efforts
will continue to focus on technology and products for the law enforcement and
public safety markets. We intend to use the proceeds of this offering to expand
our research and development efforts related to other markets as well.
Currently, our principal projects include:
- Completing the development of the Crime Web product and enabling our
existing products to allow facial images and associated data to be
accessed over the Internet or an agency's Intranet.
- Completing the development of our "real time" facial recognition
application so that facial searches and resulting matches can be processed
within seconds of initial image capture.
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- Adding wireless communications capabilities to our suite of products to
allow for the transmissions of images and text between agencies and their
officers in the field.
- Developing a standard interface template to allow for easier integration
of C.R.I.M.E.S. with the complementary applications of our strategic
partners, such as jail management and record keeping programs.
EMPLOYEES
As of February 4, 2000, we had a total of 51 full-time employees, including
ten in sales and marketing, 23 in customer support and installation, eleven in
research and development and seven in administration. Our employees are not
covered by any collective bargaining agreement, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.
FACILITIES
We conduct our operations from a 16,000-square-foot facility located in San
Diego, California. The monthly rent for this facility is approximately $22,000.
This lease expires on July 31, 2003. We believe this facility will meet our
needs for the next three years and that additional space will be available on
reasonable terms upon the expiration of our current lease or in the event we
need to expand our facilities.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition.
CORPORATE INFORMATION
ImageWare Systems, Inc. was incorporated in California in February 1987 as
Practically Perfect Productions, Inc. and changed its name to ImageWare
Software, Inc. in July 1992. We first focused on the law enforcement and public
safety markets in 1994 and originally introduced our C.R.I.M.E.S. system in
August 1995. We acquired XImage Corporation in January 1998. We changed our name
to ImageWare Systems, Inc. in November 1999. Our headquarters are located at
10883 Thornmint Road, San Diego, California 92127, and our telephone number is
(858) 673-8600. Our website address is WWW.IWSINC.COM. Information contained on
our website or any other website does not constitute a part of this prospectus.
We maintain commercial general liability insurance.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------
<S> <C> <C>
S. James Miller, Jr.................. 46 Chairman, President and Chief Executive Officer
Vice President of Finance and Chief Financial
Wayne G. Wetherell................... 47 Officer
Paul J. Devermann.................... 44 Vice President of Sales and Business Development
Patricia E. Ryan..................... 35 Director of Major Account Development
William J. Ibbetson.................. 31 Chief Technical Officer
Patrick J. Downs..................... 63 Director
John L. Holleran..................... 73 Director
Yukuo Takenaka....................... 57 Director
</TABLE>
S. JAMES MILLER, JR. has served as our president and chief executive officer
and as a director since 1990. From 1980 to 1990, Mr. Miller was an executive
with Oak Industries, Inc., a manufacturer of components for the
telecommunications industry. While at Oak Industries, Mr. Miller served as a
director and as general counsel, corporate secretary and chairman/president of
Oak Industries' Pacific Rim subsidiaries. Mr. Miller has a J.D. from the
University of San Diego School of Law and a B.A. from the University of
California, San Diego.
WAYNE G. WETHERELL has served as our vice president of finance and chief
financial officer since 1996. From 1991 to 1996, Mr. Wetherell was the vice
president and chief financial officer of Bilstein Corporation of America, a
manufacturer and distributor of automotive parts. Mr. Wetherell holds a B.S. in
Management and a M.S. in Finance from San Diego State University.
PAUL J. DEVERMANN has served as our vice president of sales and business
development since 1997. From 1992 to 1997, Mr. Devermann was the managing
director and founding partner of Intra-International Trade and Transactions, an
international consulting and trading company which facilitates business
transactions between the U.S. and Japanese companies. He holds a B.S. degree in
Marketing from Northern Illinois University and an M.B.A. from the University of
Puget Sound.
PATRICIA E. RYAN has served as our director of major account development
since 1994. From 1992 to 1994, Ms. Ryan was an account executive of Noble
Broadcasting, Inc., where she was responsible for developing new business
through vendor and event marketing campaigns. Ms. Ryan holds a B.S. in Business
Administration and a B.A. in Economics from the University of New Hampshire.
WILLIAM J. IBBETSON joined us in 1992 as a field support technician and has
served as our chief technical officer since April 1996. Mr. Ibbetson holds a
Certification in Computer Electronics Technology from Coleman College.
PATRICK J. DOWNS was elected to the Board in August 1994. Since 1997,
Mr. Downs has been manager of Control Commerce, LLC, an Internet business. He is
a founding shareholder of NTN Communications, Inc., a interactive gaming company
whose common stock is listed on the American Stock Exchange, and served as its
chairman and chief executive officer from 1983 to 1997.
JOHN L. HOLLERAN was elected to the Board in May 1996. For the last five
years, Mr. Holleran has been self-employed as a management and investment
consultant.
YUKUO TAKENAKA was elected to the Board in April 1997. Since 1989,
Mr. Takenaka has been president of Takenaka & Company LLC, an investment firm.
Mr. Takenaka is a director of Atlus Dream Entertainment Co., Ltd., which is
majority owned by Atlus Holding, a wholly owned subsidiary of our largest
shareholder, Atlus Co., Ltd.
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<PAGE>
We currently have four directors on our board and we intend to maintain at
least two independent directors. Each director holds office until the next
annual meeting of shareholders and until a successor is elected and qualified.
DIRECTOR COMPENSATION
In January 1998, for past services rendered as directors, we issued 2,844
shares of common stock to S. James Miller, 2,844 shares to Patrick Downs, 2,654
shares to William Guthner, 1,327 shares to John Holleran and 569 shares to Yukuo
Takenaka. Directors did not receive any other compensation in 1998. Beginning
November 1999, directors who are not also employees will receive $12,000
annually in return for their services as directors, payable in cash or our
common stock as determined by the company. We reimburse directors for travel and
other out-of-pocket expenses incurred in attending shareholder, board and
committee meetings. Directors are also entitled to receive options under the
1994 nonqualified stock option plan.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee consisting of Mr. Downs
and Mr. Holleran and an audit committee consisting of Mr. Takenaka, Mr. Downs
and Mr. Holleran, all of whom are independent directors. The compensation
committee reviews and recommends to the board of directors the compensation and
benefits of our officers, reviews general policy matters relating to
compensation and benefits of our employees and administers the issuance of stock
options and discretionary cash bonuses to our officers, employees, directors and
consultants. The audit committee meets with management and our independent
public accountants to determine the adequacy of our internal controls and other
financial reporting matters. It is our intention to appoint only independent
directors to the audit and compensation committees.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation awarded
to, earned by or paid to our president and chief executive officer and executive
officers whose annual compensation exceeded $100,000 in 1998 for all services
rendered to us during 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#)
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
S. James Miller, Jr. .................. 1998 $159,769 -- $ 9,000(3) --
President and Chief Executive Officer 1997 156,445(1) $15,000 10,320(2)(3) 9,479
1996 155,885 -- 9,000(3) 18,957
Wayne G. Wetherell .................... 1998 $108,606 -- -- 2,844
Vice President of Finance and 1997 108,127 $ 7,500 $ 1,320(2) 18,957
Chief Financial Officer 1996 32,277 -- -- --
Paul J. Devermann ..................... 1998 $101,300 $10,000 -- 2,844
Vice President of Sales and 1997 99,865 -- -- 18,957
Business Development 1996 -- -- -- --
</TABLE>
- ------------------------
(1) Includes cash and common stock.
(2) Includes a 401(k) matching contribution of $1,320.
(3) Includes an auto allowance of $750 per month.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to the
following executive officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE
NAME OPTIONS GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
S. James Miller, Jr.................. -- -- -- --
Wayne G. Wetherell................... 2844 11.6% $5.28 April 8, 2003
Paul J. Devermann.................... 2844 11.6% $5.28 April 8, 2003
</TABLE>
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and value of
unexercised options held by the following executive officers on December 31,
1998. None of these executive officers exercised options to purchase common
stock during 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
S. James Miller, Jr............................ 28,436 -- 0 0
Wayne G. Wetherell............................. 6,635 15,166 0 0
Paul J. Devermann.............................. 6,635 15,166 0 0
</TABLE>
- ------------------------
(1) Based on the estimated fair value of our common stock as of December 31,
1998, determined by our board of directors to be $5.28 per share, as
adjusted to reflect the 5.275-to-1 reverse stock split on November 29, 1999.
STOCK OPTION PLANS
We have three separate stock option plans: the 1994 employee stock option
plan, the 1994 nonqualified stock option plan, and the 1999 stock option plan.
The 1994 employee stock option plan is an incentive stock option plan which
authorizes us to issue options to purchase up to 170,616 shares of our common
stock to our officers and key employees. Under this plan, we have issued options
to purchase 165,118 shares at a weighted average exercise price of $5.275 per
share. The plan is administered by our board of directors. Subject to the
provisions of this plan, the board determines who will receive options, the
number of options granted, the manner of exercise and the exercise price of the
options. The term of the options granted under the plan may not exceed ten
years, or five years for options granted to an optionee owning more than 10% of
our common stock. No options may be granted after August 31, 2004. The exercise
price of the options granted under this plan must be equal to or greater than
the fair market value of the shares of our common stock on the date the option
is granted or, in the case of options granted to an optionee owning more than
10% of our voting stock, at a price equal to or greater than 110% of the fair
market value of our common stock on the date the option is granted.
The 1994 nonqualified stock option plan is a non-qualified stock option plan
which authorizes us to issue options to purchase up to 18,957 shares of our
common stock to our directors and consultants. Under this plan, we have issued
options to purchase 16,492 shares at an exercise price of $8.00. The plan is
administered by our board of directors. Subject to the provisions of this plan,
the board determines who will receive options, the number of options granted,
the manner of exercise and the exercise price of the options. The term of the
options granted under the plan may not exceed five years. No options may be
granted after August 31, 2004. The exercise price of the options granted
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<PAGE>
under this plan must be equal to or greater than 85% of the fair market value of
the shares of our common stock on the date the option is granted.
The 1999 stock option plan is a combined incentive and non-qualified stock
option plan which authorizes us to issue options to purchase up to 100,000
shares of our common stock. Under this plan, we have issued options to purchase
100,000 shares at $8.00 per share, including 11,000 options to Mr. Miller, 7,000
options to Mr. Wetherell and 7,000 options to Mr. Devermann. The plan is
administered by our board of directors. Subject to the provisions of this plan,
the board determines who will receive options, the number of options granted,
the manner of exercise and the exercise price of the options. The term of the
options granted under the plan may not exceed ten years, or five years for
options granted to an optionee owning more than 10% of our voting stock. No
additional options are currently available for issuance under this plan.
The exercise price of an incentive stock option granted under the 1999 stock
option plan must be equal to or greater than the fair market value of the shares
of our common stock on the date the option is granted. The exercise price of a
non-qualified option granted under this plan must be equal to or greater than
85% of the fair market value of the shares of our common stock on the date the
option is granted. In either case, an option granted to an optionee owning more
than 10% of our voting stock must have an exercise price equal to or greater
than 110% of the fair market value of our common stock on the date the option is
granted.
In February 1999, all then-outstanding options were repriced so that the new
exercise price of these options became $5.28 per share, as adjusted to reflect
the 5.275-to-1 reverse stock split in November 1999. No outstanding options,
except those issued pursuant to our qualified stock option plans, may be
exercisable more than five years from the date of this offering.
EMPLOYMENT AGREEMENTS
S. JAMES MILLER, JR. In September 1997, we entered into an amended
employment agreement with Mr. Miller pursuant to which Mr. Miller will serve as
our president and chief executive officer. This agreement is for an initial
three-year term ending December 31, 2001, which period is renewed annually on
January 1(st) of each year for a three-year term unless we give Mr. Miller
one-year prior notice of termination. This agreement provides for annual base
compensation in the amount of $155,000, which amount will be increased based on
cost-of-living increases, and a $750 per month auto allowance. Under this
agreement, we will reimburse Mr. Miller for reasonable expenses incurred in
connection with our business. If we terminate Mr. Miller's employment without
cause or if we move our principal offices out of San Diego, Mr. Miller will be
entitled to a lump sum amount equal to the full amount of his base salary for
the remainder of the term of the agreement. Upon a change in control of the
company or a material reduction of Mr. Miller's duties by the board of
directors, Mr. Miller may provide 30 days notice of the termination of his
employment and will be entitled to his entire unpaid base salary for the
remainder of the term of the agreement.
WAYNE G. WETHERELL. On March 1, 1999, we entered into an amended employment
agreement with Mr. Wetherell pursuant to which Mr. Wetherell will serve as our
chief financial officer. This agreement is for a term ending April 30, 2002.
This agreement provides for annual base salary in the amount of $112,144, which
amount will be increased based on cost-of-living increases and may also be
increased based on performance reviews. Under this agreement, we will reimburse
Mr. Wetherell for reasonable expenses incurred in connection with our business.
If we terminate Mr. Wetherell's employment without cause, Mr. Wetherell will be
entitled to the full amount of his base salary for a period of one year after
termination. Upon a change in control of the company or a material reduction of
Mr. Wetherell's duties by the board of directors, Mr. Wetherell may provide
30 days notice of the termination of his employment and will be entitled to his
entire unpaid base salary for a period of one year from the date of termination.
Effective immediately upon the determination of the initial public offering
price of the units in this offering, the 1999 stock option plan will be amended
to authorize us to issue options to purchase an
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additional 150,000 shares of our common stock. We have entered into agreements
with Mr. Miller, Mr. Wetherell and Mr. Devermann to grant them 64,000, 43,000
and 43,000 of these options, respectively, as of the determination of the
initial public offering price of the units, at an exercise price equal to the
initial public offering price of the units.
PAUL J. DEVERMANN. On March 1, 1999, we entered into an amended employment
agreement with Mr. Devermann pursuant to which Mr. Devermann will serve as our
vice president of sales and business development. This agreement is for a term
ending February 28, 2002. This agreement provides for annual base salary in the
amount of $103,731, which amount will be increased based on cost-of-living
increases and may also be increased based on performance reviews. Under this
agreement, we will reimburse Mr. Devermann for reasonable expenses incurred in
connection with our business. If we terminate Mr. Devermann's employment without
cause, Mr. Devermann will be entitled to a lump sum equal to the full amount of
his base salary for a period of one year after termination. Upon a change in
control of the company or a material reduction of Mr. Devermann's duties by the
board of directors, Mr. Deverman may provide 30 days notice of the termination
of his employment and will be entitled to his entire unpaid base salary for a
period of one year from the date of termination.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In connection with our acquisition of XImage in January 1998, we borrowed
$700,000 from Imperial Bank. On September 18, 1998, we borrowed an additional
$500,000 from Imperial Bank which has been paid in full. The maturity date of
the outstanding balance of the $700,000 loan has been extended until March 3,
2000. Both of the loans were personally guaranteed by Mr. Miller, Mr. Wetherell
and Mr. Devermann, and by William E. Guthner, one of our former directors. In
consideration of these guarantees, we issued to each of Mr. Miller,
Mr. Wetherell, Mr. Devermann and Mr. Guthner 27,014 shares of common stock,
warrants to purchase 3,318 shares of common stock at $15.825 per share, and
warrants to purchase 2,370 shares of common stock at $7.91 per share. These
guarantees will be released upon payment of the outstanding loan from Imperial
Bank. We intend to pay this loan in full with the proceeds of this offering.
We have also entered into letter agreements with Mr. Miller, Mr. Wetherell
and Mr. Devermann which provides that, immediately upon the determination of the
initial public offering price of the units, we will grant them options to
purchase common stock at an exercise price equal to the initial public offering
price of the units, in return for services rendered. Under these agreements, we
are obligated to grant 64,000 options to Mr. Miller, 43,000 options to Mr.
Wetherell and 43,000 options to Mr. Devermann.
Mr. Miller loaned us $267,500 pursuant to the terms of a convertible note
dated June 15, 1995. This debt was incurred to meet working capital needs. The
note provides for quarterly payments of interest at an annual rate of 8%, with
the entire amount due and payable on June 15, 2000. The amount due under the
note may be converted, at Mr. Miller's election, into units comprised of shares
of Series B preferred stock and warrants to purchase common stock on the same
terms as sold to our current Series B preferred shareholders in a 1995 private
placement. If Mr. Miller converts the note, he will be entitled to any dividends
which accrue on the Series B preferred stock after the date of conversion but
not before.
As of September 30, 1999, we have an outstanding debt of approximately
$33,000 to Patrick J. Downs, a director of the company, pursuant to the terms of
a convertible note dated June 15, 1995. This debt was incurred to meet working
capital needs. The note provides for quarterly payments of interest at an annual
rate of 8%, with the entire amount due and payable on June 15, 2000. The amount
due under the note may be converted, at Mr. Downs election, into units comprised
of shares of
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Series B preferred stock and warrants to purchase common stock on the same terms
as sold to our current Series B preferred shareholders in a 1995 private
placement. If Mr. Downs converts the note, he will be entitled to any dividends
which accrue on the Series B preferred stock after the date of conversion but
not before.
We also have an outstanding debt of $55,000 to the Nossaman, Guthner,
Knox & Elliot Profit Sharing & Savings Plan dated April 1, 1969 for the benefit
of W.E. Guthner, Jr., our former director, pursuant to the terms of a promissory
note dated November 5, 1998. This debt was incurred to meet working capital
needs. The note provides for interest to accrue at the rate of 10% with a
payment of principal and interest which was due on January 31, 1999. This note
is secured by a security agreement granting a security interest in all of our
assets. The William Guthner Estate has not enforced its rights with respect to
repayment of the note. We intend to repay this obligation from the proceeds of
this offering.
We have entered into a letter agreement with Takenaka & Company LLC pursuant
to which Takenaka & Company has agreed to assist us in communicating with Atlus,
our largest shareholder. Pursuant to the terms of the letter agreement,
Takenaka & Company LLC will be compensated for its services on an hourly basis
ranging from $250 to $375 per hour depending on the level of experience of the
professional staff involved. Mr. Takenaka is the president of Takenaka & Company
LLC and one of our directors.
TRANSACTIONS WITH ATLUS CO., LTD.
Atlus Co., Ltd., a Japanese corporation, owns approximately 31% of our
common stock. In conjunction with an investment by Atlus in March of 1997, we
entered into a securities purchase agreement and a license agreement with Atlus.
The license agreement is described in "BUSINESS--Intellectual Property." The
securities purchase agreement entitles Atlus to purchase, at the end of each
quarter until the date of an initial public offering of the our common stock,
the number of warrants to purchase shares of common stock at $21.10 per share
which, if exercised, would result in Atlus owning 33 1/3% of our outstanding
common stock at the end of such quarter. The warrants granted to Atlus would be
exercisable for a period of five years after their date of issuance. Atlus has
not purchased any warrants under the Securities Purchase Agreement.
The securities agreement also grants to Atlus a right of first refusal to
participate, on a pro rata basis, in future securities offerings, and the right
to approve of:
- any changes to our articles of incorporation,
- our obtaining a controlling interest in any other entity,
- the sale of any of our intellectual property,
- any change in the nature of our business, or
- the encumbrance of any of our material assets.
The securities purchase agreement with Atlus will be terminated effective upon
the completion of this offering.
TRANSACTION WITH PRESIDENT OF ATLUS
Naoya Harano, the president of Atlus, loaned $1,250,000 to us pursuant to
the terms of a convertible promissory note dated November 10, 1999. The
convertible promissory note provides for payment upon the earlier of
February 10, 2001 or five days after the completion of this offering. The
repayment of the debt is in United States dollars, but the amount to be repaid
will be adjusted based upon the change in the exchange rate between the United
States dollar and the Japanese yen between
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the date of the promissory note and the date of repayment. If the convertible
promissory note is not paid before April 1, 2000, the holder may convert the
outstanding balance due into our common stock at $1.00 per share. The amount due
under the convertible promissory note accrues interest at the rate of 10% per
year. In connection with this loan, Mr. Harano received warrants to purchase
125,000 shares of our common stock exercisable at $6.00 per share. These
warrants are exercisable at any time after January 1, 2001 and before
November 10, 2004.
All future material transactions between us and our affiliates, including
loans and forgiveness of loans, will be made or entered into on terms that are
no less favorable to the company than those that can be obtained from
unaffiliated third parties. In addition, these future transactions will be
approved by a majority of our independent directors who do not have an interest
in the transaction and who have access to legal counsel at our expense.
All previous material transactions between us and our affiliates were
ratified by a majority of our independent directors who did not have an interest
in the transaction and who had access to legal counsel at our expense. There
were at least two independent directors on our board at the time of all such
transactions.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 4, 2000, and as adjusted to reflect
the sale of 1,500,000 units in this offering, by:
- each person or group of affiliated persons known to be the beneficial
owner of more than 5% of our outstanding common stock,
- each of our directors,
- each our executive officers, and
- all of our directors and executive officers as a group.
As of such date, there were 1,155,482 shares of common stock outstanding
before giving effect to the sale of units in the offering. The Company believes
that, except as otherwise listed below, each named beneficial owner has sole
voting and investment power with respect to the shares listed.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
------------------------
NUMBER OF SHARES BEFORE THIS AFTER THIS
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------- ------------------ ----------- ----------
<S> <C> <C> <C>
Atlus Co., Ltd.......................................... 365,116(2) 30.9% 13.6%
S. James Miller, Jr..................................... 184,054(3) 15.1% 6.8%
R Squared Limited ...................................... 120,943 10.5% 4.6%
c/o Royal Bank of Canada Trust Co.
P.O. Box 1856
Cardinal Avenue, George Town, Grand Cayman
Cayman Islands, B.W.I.
Wayne G. Wetherell...................................... 49,716(4) 4.2% 1.9%
Paul J. Devermann....................................... 46,967(5) 4.0% 1.8%
Patrick J. Downs........................................ 61,426(6) 5.3% 2.3%
John L. Holleran........................................ 10,332(7) 0.9% 0.4%
Yukuo Takenaka.......................................... 4,076(8) 0.4% 0.2%
356,571(9) 28.1% 12.9%
All directors and executive officers as a group (6
persons)..............................................
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the address of each person in this table is c/o
ImageWare Systems, Inc., 10833 Thornmint Road, San Diego, California 92127.
(2) Includes 26,540 shares subject to warrants that are exercisable within
60 days. Atlus Co., Ltd. is a Japanese company publicly traded in Japan.
(3) Includes 60,663 shares subject to options, warrants or convertible
securities that are exercisable or convertible within 60 days, and 9,479
shares held by members of Mr. Miller's immediate family.
(4) Includes 19,953 shares subject to options or warrants that are exercisable
within 60 days.
(5) Includes 19,953 shares subject to options or warrants that are exercisable
within 60 days.
(6) Includes 7,397 shares subject to options or convertible securities that are
exercisable or convertible within 60 days.
(7) Includes 2,370 shares subject to options that are exercisable within
60 days.
(8) Includes 3,507 shares subject to options that are exercisable or convertible
within 60 days.
(9) Includes 113,843 shares subject to options, warrants or convertible
securities that are exercisable or convertible within 60 days.
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DESCRIPTION OF SECURITIES
Upon completion of the offering, our authorized capital stock will consist
of (1) 50,000,000 authorized shares of common stock, $0.01 par value, and
(2) 4,000,000 authorized shares of preferred stock, $0.01 par value, of which
there will be 2,655,482 shares of common stock and 389,400 shares of preferred
stock outstanding. The following description of our capital stock is a summary
and is qualified in its entirety by the provisions of our amended and restated
articles of incorporation and our bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part.
UNITS
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 warrants will
trade only as a unit for at least 30 days following this offering. The
representative of the underwriters will then determine when the units separate,
after which the common stock and the public warrants will trade separately.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote and, in the election of directors, may
upon proper notice cumulate their votes and cast them for one or more directors.
Holders of common stock are entitled to share in dividends that the board of
directors, in its discretion, declares from legally available funds. In the
event of the liquidation or dissolution of the company, each outstanding share
entitles its holder to a proportionate share of all assets that remain after
payment of liabilities subject to the rights of any outstanding preferred stock.
Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. The rights of the holders of common stock are subject to the
rights of holders of preferred stock. All outstanding shares of common stock
are, and the shares underlying all options and public warrants will be, duly
authorized, validly issued, fully paid and non-assessable upon our issuance of
such shares.
PREFERRED STOCK
Our amended and restated articles of incorporation provide for the issuance
of up to 750,000 shares of Series B preferred stock. As of the date of this
prospectus, there are 389,400 outstanding shares of Series B preferred stock.
The Series B preferred stock have rights and preferences which are superior to
the rights of the holders of our common stock. These rights and preferences
include the right to receive a cumulative cash dividend at the rate of $0.2125
per share per year, a preference in the distribution of our assets over the
holders of common stock in event of the liquidation or dissolution of the
company, the right to convert to shares of common stock, and the right to elect
a director in the event we are in default of the provisions of the amended and
restated articles of incorporation with respect to the Series B preferred stock.
Subject to certain limitations prescribed by law and the rights and preferences
of the Series B preferred stock, our board of directors is authorized from time
to time to issue up to an aggregate of 3,610,600 shares of our preferred stock,
provided that the board shall not in the future issue shares of our preferred
stock to our officers, directors or other affiliates unless:
- the issuance is approved by our shareholders;
- the preferred stock issued is offered on the same terms as it is offered
to all other existing shareholders or to new shareholders; or
- the issuance is approved by a majority of the Corporation's independent
directors who do not have an interest in the issuance and who have access,
at the Corporation's expense, to the Corporation's legal counsel or
independent legal counsel.
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Each new series of preferred stock may have different rights and preferences
that may be established by our board of directors. The rights and preferences of
future series of preferred stock may include:
- number of shares to be issued;
- dividend rights and dividend rates;
- right to convert the preferred stock into a different type of security;
- voting rights attributable to the preferred stock;
- right to receive preferential payments upon a liquidation of the company;
- right to set aside a certain amount of assets for payments relating to the
preferred stock; and
- prices to be paid upon redemption of the preferred stock.
PUBLIC WARRANTS
GENERAL
Each public warrant entitles the holder to purchase one share of our common
stock at an exercise price per share of 120% of the initial public offering
price of the units during the first year after the offering and 150% of the
initial public offering price of the units thereafter. The exercise price is
subject to adjustment upon the occurrence of certain events as provided in the
public warrant certificate and summarized below. Our public warrants may be
exercised at any time during the period commencing 30 days after this offering
and ending on the fifth anniversary date of the closing of the offering, which
is the expiration date. Those of our public warrants which have not previously
been exercised will expire on the expiration date. A public warrant holder will
not be deemed to be a holder of the underlying common stock for any purpose
until the public warrant has been properly exercised.
SEPARATE TRANSFERABILITY
Our public warrants will trade only as a unit for a period of at least 30
days following this offering. The representative of the underwriters will then
determine when the units separate, after which the common stock and the public
warrants will trade separately.
REDEMPTION
We have the right, commencing six months after the closing of this offering,
to redeem the public warrants issued in the offering at a redemption price of
$0.25 per public warrant after providing 30 days prior written notice to the
public warrant holders, if the average closing bid price of the common stock
equals or exceeds 200% of the initial public offering price of the units for ten
consecutive trading days ending prior to the date of the notice of redemption.
We will send the written notice of redemption by first class mail to public
warrant holders at their last known addresses appearing on the registration
records maintained by the transfer agent for our public warrants. No other form
of notice or publication or otherwise will be required. If we call the public
warrants for redemption, they will be exercisable until the close of business on
the business day next preceding the specified redemption date.
EXERCISE
A public warrant holder may exercise our public warrants only if an
appropriate registration statement is then in effect with the Securities and
Exchange Commission and if the shares of common stock underlying our public
warrants are qualified for sale under the securities laws of the state in which
the holder resides.
Our public warrants may be exercised by delivering to our transfer agent the
applicable public warrant certificate on or prior to the expiration date or the
redemption date, as applicable, with the
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form on the reverse side of the certificate executed as indicated, accompanied
by payment of the full exercise price for the number of public warrants being
exercised. Fractional shares will not be issued upon exercise of our public
warrants.
ADJUSTMENTS OF EXERCISE PRICE
The exercise price is subject to adjustment if we declare any stock dividend
to shareholders or effect any split or share combination with respect to our
common stock. Therefore, if we effect any stock split or stock combination with
respect to our common stock, the exercise price in effect immediately prior to
such stock split or combination will be proportionately reduced or increased, as
the case may be. Any adjustment of the exercise price will also result in an
adjustment of the number of shares purchasable upon exercise of a public warrant
or, if we elect, an adjustment of the number of public warrants outstanding.
PRIOR WARRANTS
As of the date of this prospectus, we had issued and outstanding warrants to
purchase 328,662 shares of our common stock at a weighted average exercise price
of $9.02, the forms of which have been filed as exhibits to the registration
statement of which this prospectus is a part. These warrants include warrants
issued to Imperial Bank to purchase 13,586 shares of our common stock. These
warrants grant to Imperial Bank the right to require us to purchase such
warrants from Imperial Bank for $70,000 on or after January 15, 2001 or within
20 days after a merger, consolidation or sale of assets of the company or the
liquidation, dissolution or winding up of the company. No issued and outstanding
warrants are exercisable more than five years from the date of this offering.
REGISTRATION RIGHTS
GENERAL
We have granted certain registration rights with respect to 503,884 of our
securities. We will pay for all expenses incurred in connection with these
registrations, other than underwriting discounts and commissions. The following
is only a summary of certain of the terms and conditions of the agreements
involving parties which have registration rights. Copies of the actual
agreements have been filed with the Securities and Exchange Commission as
exhibits to the registration statement of which this prospectus is a part.
Substantially all of the holders of registration rights have not waived such
registration rights.
GRANTED TO THE SERIES B PREFERRED SHAREHOLDERS IN A 1995 PRIVATE PLACEMENT
We granted demand and incidental registration rights to our Series B
preferred shareholders with respect to the shares underlying the Series B
preferred shares and warrants issued to them in connection with the 1995 private
placement of our Series B units. Holders of Series B preferred shares may demand
to have our common stock underlying their Series B Preferred shares registered
at any time after completion of this offering and before April 30, 2000. The
Series B warrants have expired. Additionally, if we register an issuance of any
of our equity securities, other than shares issuable under employee stock option
plans, at any time prior to April 30, 2000, the Series B preferred shareholders
may request that such underlying common stock be included in the registration.
GRANTED TO ATLUS
We also granted demand and incidental registration rights to Atlus with
respect to all shares held by Atlus pursuant to the securities purchase
agreement with Atlus. The securities purchase agreement with Atlus will be
terminated effective upon the completion of this offering.
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<PAGE>
GRANTED TO FORMER XIMAGE SHAREHOLDERS
The former XImage shareholders have also been granted demand and incidental
registration rights with respect to shares underlying the warrants held by them.
The holders of a majority of all registrable securities owned by these
shareholders may demand registration for the resale of any or all of their
shares at any time after this offering and before November 30, 2003.
Additionally, if we register an issuance of our equity securities, other than
shares issuable under our employee stock option plans at any time prior to
November 30, 2003, these holders may request to include their shares in the
registration.
GRANTED TO FORMER XIMAGE OFFICERS, NOTEHOLDERS AND OTHER INVESTORS
We have also granted certain former XImage officers, noteholders and other
investors "piggyback" registration rights under which they can request to be
included in a registration of our securities, other than a registration of
shares issuable under an employee stock option plan.
GRANTED TO OFFICERS, DIRECTORS AND OTHER PARTIES
Mr. Miller, Mr. Wetherell, Mr. Devermann and the William Guthner estate have
the same registration rights as the former XImage Shareholders described above.
Mr. Miller and Mr. Wetherell have agreed not to make a demand for registration
for a period of at least one year after this offering.
Mr. Miller and Mr. Downs also have registration rights with respect to their
convertible promissory notes. These registration rights are identical to the
registration rights which have been granted to the Series B preferred
shareholders as described above.
William Guthner and related parties converted their convertible promissory
notes in December 1997 into shares of Series B preferred stock and warrants to
purchase common stock. The registration rights granted to these parties, which
apply to the shares and warrants they received upon conversion of their
convertible notes, are identical to the registration rights which have been
granted to the Series B preferred shareholders as described above.
GRANTED TO IMPERIAL BANK
In January 1998 and September 1998, in connection with the credit line
extended to us, we granted demand and incidental registration rights to Imperial
Bank with respect to shares of common stock underlying the warrants held by
Imperial Bank. Imperial Bank has the same registration rights as the Series B
preferred shareholders in the 1995 private placement described above. Imperial
Bank has agreed not to make a demand for registration for a period of at least
one year after this offering.
GRANTED TO PAULSON
We have entered into a warrant agreement with Paulson Investment
Company, Inc. as representative of the underwriters of this offering. These
representative's warrants, as well as the shares of common stock and warrants
included in the units issuable upon exercise of the representative's warrants,
are being registered on the registration statement of which this prospectus is a
part. We will cause the registration statement to remain effective until the
earlier of the time that all of the representative's warrants have been
exercised and the date which is five years after the effective date of the
offering. The common stock and warrants issued to the representative upon
exercise of these warrants will be freely tradable. All expenses incurred in
connection with the registration of the shares of common stock and warrants
included in the units issuable upon the exercise of the representatives'
warrants will be borne by us. Under the warrant agreement, the parties will also
be bound by standard indemnification and contribution provisions with respect to
the registration of the warrant shares issuable upon the exercise of the
representative's warrants.
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<PAGE>
GRANTED TO R SQUARED LIMITED
In connection with a loan made to us, R Squared Limited has also been
granted the right to include their shares in any registration made by us.
GRANTED TO THE PRESIDENT OF ATLUS
In connection with a loan made to us, Mr. Harano has been issued warrants to
purchase common stock. Mr. Harano has been granted the same demand and
incidental registration rights with respect the common stock underlying these
warrants as we have granted to the former XImage shareholders.
TRANSFER AGENT AND PUBLIC WARRANT AGENT
The transfer agent for our common stock and public warrants is American
Securities Transfer & Trust, Inc., Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
THIS OFFERING
Upon completion of the offering, we expect to have 2,655,482 shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants, or 2,880,482 shares if the underwriters' over-allotment is exercised
in full. Of these shares, the 1,500,000 shares of common stock issued as part of
the units sold in the offering will be freely tradeable without restrictions or
further registration under the Securities Act of 1933, except that any shares
purchased by our "affiliates", as that term is defined under the Securities Act,
may generally only be sold in compliance with the limitations of Rule 144 under
the Securities Act. The 1,500,000 shares of common stock underlying the public
warrants issued as part of the units sold in this offering will also be freely
tradeable, except for shares purchased by our affiliates. As of the date of this
prospectus, there are approximately 104 holders of our common stock.
OUTSTANDING RESTRICTED STOCK
The remaining 1,155,482 outstanding shares of common stock are restricted
securities within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption from registration offered by Rule 144.
Holders of 553,720 of our outstanding restricted shares of common stock have
agreed not to sell or otherwise dispose of any of their shares of common stock
for a period of one year after completion of the offering, without the prior
written consent of Paulson Investment Company, Inc., subject to certain limited
exceptions. Prior to the expiration of this lock-up period, 601,762 shares of
our outstanding restricted common stock may be sold in the public market
pursuant to Rule 144. After the expiration of this lock-up period, or earlier
with the prior written consent of Paulson Investment Company, Inc., all
1,155,482 of these outstanding restricted shares may be sold in the public
market pursuant to Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including a person who may be deemed to be our
affiliate, may sell within any three-month period a number of shares of common
stock that does not exceed a specified maximum number of shares. This maximum is
equal to the greater of 1% of the then outstanding shares of our common stock or
the average weekly trading volume in the common stock during the four calendar
weeks immediately preceding the sale. Sales under Rule 144 are also subject to
restrictions relating to manner of sale, notice and availability of current
public information about us. In addition, under Rule 144(k) of the Securities
Act, a person who is not our affiliate, has not been an affiliate of ours within
three months prior to the sale and has beneficially owned shares for at least
two years would be entitled to sell such shares immediately without regard to
volume limitations, manner of sale provisions, notice or other requirements of
Rule 144.
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SERIES B PREFERRED STOCK
As of February 4, 2000, we had 389,400 shares of Series B preferred stock
outstanding. These shares, plus accrued but unpaid dividends, are convertible at
the option of the holders into an aggregate of approximately 86,982 shares of
our common stock. Any shares issued upon the conversion of the Series B
preferred stock will be eligible for sale pursuant to Rule 144.
OPTIONS
Beginning 90 days after the date of this prospectus, certain shares issued
or issuable upon the exercise of options granted by us prior to the date of this
prospectus will also be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act of 1933, except that 77,715 of these shares
are subject to the lock-up agreements for a period of one year after completion
of this offering. Pursuant to Rule 701, persons who purchase shares upon
exercise of options granted under a written compensatory plan or contract may
sell such shares in reliance on Rule 144 without having to comply with the
holding period requirements of Rule 144, and in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. As of February 4, 2000, we had options
outstanding to purchase 281,610 shares of common stock which have not been
exercised and which become exercisable at various times in the future. Any
shares issued upon the exercise of these options will be eligible for sale
pursuant to Rule 701.
We intend to file registration statements on Form S-8 under the Securities
Act to register approximately 7,962 shares of our common stock issuable under
our stock option plans. These registration statements are expected to be filed
within three to six months after the completion of this offering. Shares of
common stock registered under these registration statements will be available
for resale in the public market, subject to Rule 144 volume limitations
applicable to our affiliates and to the lock-up agreements which will be in
effect for a period of one year after the completion of this offering.
WARRANTS
As of February 4, 2000, we had warrants outstanding to purchase 328,662
shares of common stock which have not been exercised and which become
exercisable at various times in the future. Any shares issued upon the exercise
of these warrants will be eligible for sale pursuant to Rule 144, except that
51,500 of these shares are subject to the lock-up agreements for a period of one
year after the completion of this offering.
REPRESENTATIVE'S WARRANTS
In connection with the offering, we have agreed to issue to the
representative of the underwriters warrants to purchase 150,000 units. This
number is equal to 10% of the number of units being offered by this prospectus,
excluding over-allotment shares. The representative's warrants will be
exercisable into units at any time during the four-year period commencing one
year after the effective date of the offering. We will cause the registration
statement to remain effective until the earlier of the time that all of the
representative's warrants have been exercised and the date which is five years
after the effective date of the offering. The common stock and warrants issued
to the representative upon exercise of these warrants will be freely tradable.
REGISTRATION RIGHTS
As of February 4, 2000, holders of approximately 503,844 shares of our
outstanding or issuable common stock had the right to include their shares in
registration statements relating to our securities or to require us to register
their shares. Mr. Miller, Mr. Wetherell, Mr. Downs and Imperial Bank, which hold
56,530 of these shares, have agreed to waive these registration rights for a
period of one year after this offering or shorter as determined by Paulson
Investment Company, Inc. Holders of registration rights may cause the price of
our common stock to fall by exercising their registration rights
47
<PAGE>
and causing a large number of shares to be registered and sold in the public
market. In addition, any demand for future registration of these shares could
have a material adverse effect on our ability to raise needed capital.
Prior to the offering, there has been no public market for our common stock
and there can be no assurance that a significant public market for the common
stock will develop or be sustained after the offering.
48
<PAGE>
UNDERWRITING
Paulson Investment Company, Inc. is acting as representative of the
underwriters. We and the underwriters named below have entered into an
underwriting agreement with respect to the units being offered. In connection
with this offering and subject to certain conditions, each of the underwriters
named below has severally agreed to purchase, and we have agreed to sell, the
number of units set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
- ------------ ---------------
<S> <C>
Paulson Investment Company, Inc.............................
I-Bankers Securities, Inc...................................
---------
Total.....................................................
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the units offered by this prospectus, other than those covered
by the over-allotment option, if any units are purchased. The underwriting
agreement also provides that the obligations of the several underwriters to pay
for and accept delivery of the units are subject to the approval of certain
legal matters by counsel and certain other conditions. These conditions include
the requirements that no stop order suspending the effectiveness of the
registration statement be in effect and that no proceedings for such purpose
have been instituted or threatened by the Securities and Exchange Commission.
The representative has advised us that the underwriters propose to offer our
units to the public initially at the offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession of
not more than $ per unit. The underwriters and selected dealers may reallow a
concession to other dealers, including the underwriters, of not more than $
per unit. After completion of the initial public offering of the units, the
offering price, the concessions to selected dealers and the reallowance to their
dealers may be changed by the underwriters.
The underwriters have informed us that they do not expect to confirm sales
of our units offered by this prospectus to any accounts over which they exercise
discretionary authority.
OVER-ALLOTMENT OPTION
Pursuant to the underwriting agreement, we have granted to the
representative an option, exercisable for 45 days from the date of this
prospectus, to purchase up to an additional 225,000 units on the same terms as
the units being purchased by the underwriters from us. The representative may
exercise the option solely to cover over-allotments, if any, in the sale of the
units that the underwriters have agreed to purchase. If the over-allotment
option is exercised in full, the total public offering price, underwriting
discounts and commissions, and proceeds to the company before offering expenses
will be $ , $ and $ , respectively.
STABILIZATION
Until the distribution of the units offered by this prospectus is completed,
rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for and purchase units. As an exception to these rules, the
underwriters may engage in transactions that stabilize the price of the units.
The representative on behalf of the underwriters may engage in over-allotment
sales, stabilizing transactions, syndicate covering transactions and penalty
bids in accordance with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
49
<PAGE>
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock and
public warrants in the open market after the distribution has been
completed in order to cover syndicate short positions. The underwriters
may also elect to reduce any short position by exercising all or part of
the over-allotment option to purchase additional units as described above.
- Penalty bids permit the representative to reclaim a selling concession
from a syndicate member when the units originally sold by the syndicate
member are purchased in a syndicate covering transaction to cover
syndicate short positions.
In general, the purchase of a security to stabilize or to reduce a short
position could cause the price of the security to be higher than it might be
otherwise. These transactions may be effected on the Nasdaq SmallCap Market or
otherwise. Neither we nor the underwriters can predict the direction or
magnitude of any effect that the transactions described above may have on the
price of the units. In addition, neither we nor the underwriters can represent
that the underwriters will engage in these types of transactions or that these
types of transactions, once commenced, will not be discontinued without notice.
INDEMNIFICATION
The underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities under the Securities Act of 1933 is against
public policy as expressed in the Securities Act and is therefore unenforceable.
UNDERWRITERS' COMPENSATION
We have agreed to sell the units to the underwriters at the initial offering
price of $ , less the % underwriting discount. The underwriting
agreement also provides that upon the closing of the sale of the units offered,
the representative will be paid a nonaccountable expense allowance equal to two
percent of the gross proceeds from the sale of the units offered by this
prospectus, including the over-allotment option, of which $35,000 has already
been paid.
We have also agreed to issue warrants to the representative to purchase from
us up to 150,000 units at an exercise price per unit equal to 120% of the
offering price per unit. These warrants are exercisable during the four-year
period beginning one year from the date of effectiveness of the registration
statement of which this prospectus is a part. These warrants are not
transferable, except to an individual who is either a partner or an officer of
an underwriter, by will or by the laws of descent and distribution and are not
redeemable. These warrants will have registration rights. We will cause the
registration statement to remain effective until the earlier of the time that
all of the representative's warrants have been exercised and the date which is
five years after the effective date of the offering. The common stock and
warrants issued to the representative upon exercise of these warrants will be
freely tradable.
The holder of the representative's warrant will have, in that capacity, no
voting, dividend or other shareholder rights. Any profit realized by the
representative on the sale of the securities issuable upon exercise of the
representative's warrant may be deemed to be additional underwriting
compensation. The securities underlying the representative's warrant are being
registered on the registration statement of which this prospectus is a part.
During the term of the representative's warrant, the holder thereof is given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while the
representative's warrant is outstanding. At any time at which the
representative's warrant is likely to be exercised, we may be able to obtain
additional equity capital on more favorable terms.
50
<PAGE>
LOAN BY CHESTER PAULSON
Chester L.F. Paulson, the chairman and indirect majority shareholder of
Paulson Investment Company, Inc., loaned $500,000 to us pursuant to a promissory
note and loan agreement dated November 24, 1999. Mr. Paulson has borrowed the
$500,000 which he has loaned to us from U.S. Bank National Association. Paulson
Investment Company, Inc. has agreed to indemnify Mr. Paulson against any default
by us. We are paying Paulson Investment Company, Inc. a $75,000 fee for
guaranteeing the loan.
We must repay the loan to Mr. Paulson upon the earlier of a demand for
payment by U.S. Bank, the completion of this offering, or April 3, 2000. If we
are unable to repay the loan, Paulson Investment Company, Inc. is entitled to
receive warrants to purchase one share of our common stock for each dollar which
Mr. Paulson must repay to U.S. Bank. If this offering is not completed, we must
offer to pay Paulson Investment Company, Inc. from the proceeds of any other
financing in excess of $575,000 which we complete prior to December 31, 2000.
Upon our offer of repayment, Paulson Investment Company, Inc. may either accept
such repayment and surrender the warrants issued to him or keep the warrants in
which case we will have no further obligations to Mr. Paulson under the
promissory note or loan agreement. The amount due under the promissory note
accrues interest at the same variable rate of interest which Mr. Paulson must
pay U.S. Bank, which is based on the prime lending rate. The initial interest
rate is 9%.
LOCK-UP AGREEMENT
Our officers, directors and certain of our shareholders also have agreed
that, for a period of one year from the date this registration statement becomes
effective, they will not sell, contract to sell, grant any option for the sale
or otherwise dispose of any of our equity securities, or any securities
convertible into or exercisable or exchangeable for our equity securities, other
than through intra-family transfers or transfers to trusts for estate planning
purposes, without the consent of Paulson Investment Company, Inc., as
representative of the underwriters, which consent will not be unreasonably
withheld.
EXPENSES
The following table sets forth an itemization of all expenses we will pay in
connection with the issuance and distribution of the securities being
registered. Except for the SEC registration fee, the NASD filing fee and the
Nasdaq listing fee, the amounts listed below are estimates:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC registration fee........................................ $ 12,455
NASD filing fees............................................ $ 5,218
Nasdaq listing fee.......................................... $ 8,000
Pacific Stock Exchange listing fee.......................... $ 25,500
Accounting fees and expenses................................ $150,000
Legal fees and expenses..................................... $250,000
Director and officer insurance expenses..................... $150,000
Printing and related expenses............................... $145,000
Blue sky legal fees and expenses............................ $ 65,000
Transfer agent fees and expenses............................ $ 1,250
Miscellaneous expenses...................................... $ 22,347
--------
TOTAL..................................................... $834,770
</TABLE>
In addition, we have been advised that the representative will pay $50,000
to J. Michael Reisert for services as a finder in connection with the offering.
This payment, payable only if the offering is completed, is the customary fee
paid to a third party who introduces a company to an underwriter.
51
<PAGE>
DETERMINATION OF OFFERING PRICE
Before this offering, there has been no public market for the units and the
common stock and public warrants contained in the units. Accordingly, the
initial public offering price of the units offered by this prospectus and the
exercise price of the public warrants were determined by negotiation between us
and the underwriters. Among the factors considered in determining the initial
public offering price of the units and the exercise price of the public warrants
were:
- our history and our prospects,
- the industry in which we operate,
- the status and development prospects for our proposed products and
services,
- our past and present operating results,
- the previous experience of our executive officers, and
- the general condition of the securities markets at the time of this
offering.
The offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the units. That price is subject
to change as a result of market conditions and other factors, and we cannot
assure you that the units, or the common stock and public warrants contained in
the units, can be resold at or above the initial public offering price.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon on
our behalf by Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite
2600, San Diego, CA 92101. Certain legal matters will be passed upon for the
underwriters by Tonkon Torp LLP, 1600 Pioneer Tower, 888 SW Fifth Avenue,
Portland, Oregon 97204.
EXPERTS
The financial statements for the years ended December 31, 1998 and 1997
included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act
with the Securities and Exchange Commission with respect to the units offered
hereby. This prospectus does not contain all of the information contained in the
registration statement and the exhibits to the registration statement.
Statements made in this prospectus concerning any contracts, agreements or
documents are not necessarily complete. We refer you to the copies of these
contracts, agreements and documents filed as exhibits to the registration
statement. These statements are qualified in all respects by this reference to
these exhibits.
The registration statement and the exhibits and schedules thereto filed with
the Securities and Exchange Commission may be inspected by you at the Securities
and Exchange Commission's principal office in Washington, D.C. Copies of all or
any part of the registration statement may be obtained from the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the commissions' regional offices located at
Seven World Trade Center, 13(th)Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 11400, Chicago, Illinois 60661.
The commission also maintains a website (http://www.sec.gov) that contains
reports, proxy statements and information statements and other information
regarding registrants that file electronically with the Commission. For further
information pertaining to us and the units offered by this prospectus, reference
is made to the registration statement.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent accountants.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
IMAGEWARE SYSTEMS, INC.:
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1997 and 1998 and the
Nine Months Ended September 30, 1999 (unaudited).......... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
XIMAGE CORPORATION:
Report of Independent Accountants........................... F-21
Statement of Operations for the Year Ended December 31,
1997...................................................... F-22
Statement of Shareholders' Deficit for the Year Ended
December 31, 1997......................................... F-23
Statement of Cash Flows for the Year Ended December 31,
1997...................................................... F-24
Notes to Financial Statements............................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
ImageWare Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
ImageWare Systems, Inc. and its subsidiary at December 31, 1998 and the results
of their operations and their cash flows for each of the years ended December
31, 1997 and 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, the Company has recurring losses from operations and
significant negative working capital at December 31, 1998. Until sufficient
revenues are generated, the Company will be required to obtain additional
financing to meet cash and working capital requirements. There can be no
assurance that additional financing will be available.
PricewaterhouseCoopers LLP
San Diego, California
October 22, 1999, except as to Note 5,
which is as of December 13, 1999
F-2
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 45,793 $ 89,216
Accounts receivable, net.................................. 931,654 1,137,357
Inventories............................................... 43,386 169,133
Other current assets...................................... 256,838 231,280
------------ ------------
Total current assets.................................. 1,277,671 1,626,986
Property and equipment, net................................. 269,594 196,004
Intangible assets, net of accumulated amortization of
$852,408 and $1,573,863................................... 2,836,740 2,115,284
------------ ------------
$ 4,384,005 $ 3,938,274
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable.......................................... $ 1,030,716 $ 1,429,749
Deferred revenue.......................................... 421,351 406,587
Accrued expenses.......................................... 1,342,901 1,588,559
Deferred compensation..................................... 261,015 261,015
Accrued interest.......................................... 300,440 414,930
Notes payable to bank..................................... 700,000 1,000,000
Notes payable to related parties.......................... 299,775 1,327,925
------------ ------------
Total current liabilities............................. 4,356,198 6,428,765
Notes payable to bank, net of current portion............... 500,000 --
Notes payable to related parties, net of current portion.... 973,172 165,022
------------ ------------
Total liabilities..................................... 5,829,370 6,593,787
------------ ------------
Commitments
Shareholders' deficit
Preferred stock, $.01 par value, authorized 4,000,000
shares:
Series B convertible redeemable preferred stock,
designated 750,000 shares, 389,400 shares issued and
outstanding, $973,500 liquidation preference.......... 3,894 3,894
Common stock, $.01 par value, 50,000,000 shares
authorized, 899,081 and 1,131,404 shares issued and
outstanding............................................. 8,991 11,314
Additional paid-in capital................................ 14,792,783 16,013,412
Accumulated deficit....................................... (16,251,033) (18,684,133)
------------ ------------
Total shareholders' deficit........................... (1,445,365) (2,655,513)
------------ ------------
$ 4,384,005 $ 3,938,274
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IMAGEWARE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Product.................................. $ 459,358 $ 2,708,856 $ 1,932,813 $ 2,531,144
Maintenance.............................. 2,610 1,307,286 1,004,328 954,321
License and other........................ 2,434,108 220,175 150,978 9,319
----------- ----------- ----------- -----------
2,896,076 4,236,317 3,088,119 3,494,784
Cost of revenues
Product.................................. 77,584 1,354,920 764,122 943,004
Maintenance.............................. -- 1,065,740 927,680 607,171
----------- ----------- ----------- -----------
Gross margin......................... 2,818,492 1,815,657 1,396,317 1,944,609
----------- ----------- ----------- -----------
Operating, general and administrative
expenses................................. 1,436,447 2,265,312 1,676,542 1,874,811
Sales and marketing expenses............... 918,557 960,246 714,276 701,183
Research and development expenses.......... 482,834 831,034 569,443 836,542
Depreciation and amortization.............. 167,402 988,838 723,869 725,234
----------- ----------- ----------- -----------
3,005,240 5,045,430 3,684,130 4,137,770
----------- ----------- ----------- -----------
Loss from operations................. (186,748) (3,229,773) (2,287,813) (2,193,161)
----------- ----------- ----------- -----------
Interest expense, net...................... 17,629 204,287 155,633 239,939
----------- ----------- ----------- -----------
Loss before income taxes............. (204,377) (3,434,060) (2,443,446) (2,433,100)
----------- ----------- ----------- -----------
Provision for income taxes................. 196,104 -- -- --
----------- ----------- ----------- -----------
Net loss............................. $ (400,481) $(3,434,060) $(2,443,446) $(2,433,100)
=========== =========== =========== ===========
Net loss per common share (see Note 2)..... $ (.70) $ (4.08) $ (2.91) $ (2.56)
=========== =========== =========== ===========
Basic and diluted common shares............ 680,273 861,875 860,674 974,283
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE,
REDEEMABLE
PREFERRED COMMON STOCK ADDITIONAL
------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- --------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 341,000 $3,410 612,329 $ 6,123 $10,641,468 $(12,344,030) $(1,693,029)
Issuance of common stock for
cash, net of issuance costs... -- -- 202,976 2,030 3,170,867 -- 3,172,897
Conversion of notes payable to
common stock.................. -- -- 37,914 379 499,621 -- 500,000
Issuance of Series B preferred
stock for payment of debt..... 48,400 484 -- -- 120,516 -- 121,000
Dividends paid on Series B
preferred stock............... -- -- -- -- -- (72,462) (72,462)
Repurchase of shares............ -- -- (8,056) (80) (136,170) -- (136,250)
Net loss........................ -- -- -- -- -- (400,481) (400,481)
------- ------ --------- ------- ----------- ------------ -----------
Balance at December 31, 1997.... 389,400 3,894 845,163 8,452 14,296,302 (12,816,973) 1,491,675
Issuance of common stock for
loan guarantees............... -- -- 44,866 449 359,571 -- 360,020
Issuance of common stock for
payment of Board fees......... -- -- 10,236 102 161,898 -- 162,000
Repurchase of shares............ -- -- (1,184) (12) (24,988) -- (25,000)
Net loss........................ -- -- -- -- -- (3,434,060) (3,434,060)
------- ------ --------- ------- ----------- ------------ -----------
Balance at December 31, 1998.... 389,400 3,894 899,081 8,991 14,792,783 (16,251,033) (1,445,365)
Issuance of common stock for
loan guarantees (unaudited)... -- -- 73,465 735 348,044 -- 348,779
Issuance of common stock for
cash (unaudited).............. -- -- 37,914 379 299,619 -- 299,998
Conversion of note payable to
common stock (unaudited)...... -- -- 120,944 1,209 572,966 -- 574,175
Net loss (unaudited)............ -- -- -- -- -- (2,433,100) (2,433,100)
------- ------ --------- ------- ----------- ------------ -----------
Balance at September 30, 1999
(unaudited)................... 389,400 $3,894 1,131,404 $11,314 $16,013,412 $(18,684,133) $(2,655,513)
======= ====== ========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................. $ (400,481) $(3,434,060) $(2,443,446) $(2,433,100)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization......... 166,228 988,838 723,870 725,234
Deferred revenue...................... 16,000 (431,271) (261,486) 80,057
Noncash compensation and fees......... -- 522,020 372,000 348,779
Change in assets and liabilities
Accounts receivable, net............ 44,129 40,482 96,834 (205,702)
Inventory........................... -- 69,895 (133,099) (125,747)
Other current assets................ (331,494) 114,313 269,168 25,558
Accounts payable.................... 68,070 292,320 187,052 399,032
Accrued expenses.................... 128,825 (165,925) (156,132) 245,658
Accrued interest.................... (6,653) 61,344 112,269 188,666
---------- ----------- ----------- -----------
Total adjustments................. 85,105 1,492,016 1,210,476 1,681,535
---------- ----------- ----------- -----------
Net cash used by operating
activities...................... (315,376) (1,942,044) (1,232,970) (751,565)
---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........ (134,120) (68,991) (65,679) (25,010)
Purchase of patent........................ (236,611) -- -- --
Acquisition of business, net of cash
acquired................................ -- (2,129,331) (2,129,331) --
---------- ----------- ----------- -----------
Net cash used by investing
activities...................... (370,731) (2,198,322) (2,195,010) (25,010)
---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................ (72,462) -- -- --
Principal repayments on amounts due
stockholders............................ (11,250) -- -- (10,000)
Proceeds from issuance of stock........... 3,172,897 -- -- 299,998
Repurchase of common stock................ (136,250) (25,000) (25,000) --
Proceeds from issuance of notes payable... -- 1,905,000 1,200,000 730,000
Repayment of loans........................ -- (3,700) -- (200,000)
---------- ----------- ----------- -----------
Net cash provided by financing
activities...................... 2,952,935 1,876,300 1,175,000 819,998
---------- ----------- ----------- -----------
Net increase (decrease) in cash... 2,266,828 (2,264,066) (2,252,980) 43,423
Cash at beginning of period................. 43,031 2,309,859 2,309,859 45,793
---------- ----------- ----------- -----------
Cash at end of period............. $2,309,859 $ 45,793 $ 56,879 $ 89,216
========== =========== =========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest.................... $ 50,480 $ 99,079 $ 21,085 $ 125,449
========== =========== =========== ===========
Issuance of Series B preferred stock for
payment of debt......................... $ 121,000 $ -- $ -- $ --
========== =========== =========== ===========
Conversion of notes payable to common
stock................................... $ 500,000 $ -- $ -- $ 500,000
========== =========== =========== ===========
Issuance of common stock to loan
guarantors.............................. $ -- $ 360,020 $ 210,000 $ 348,779
========== =========== =========== ===========
Issuance of common stock for Board of
Director's fees......................... $ -- $ 162,000 $ 162,000 $ --
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. DESCRIPTION OF BUSINESS AND OPERATIONS
ImageWare Systems, Inc. (the "Company"), formerly known as ImageWare
Software, Inc., was incorporated in the State of California on February 6,
1987 for the purpose of developing, manufacturing and distributing products
utilizing electronic imaging technology. The Company has developed the Crime
Reduction, Image Management and Enhancement System ("C.R.I.M.E.S.") and
several related products which are being marketed to law enforcement
agencies throughout the United States.
The Company has incurred losses of $400,481 and $3,434,060 for the years
ended December 31, 1997 and 1998, respectively. Additionally, the Company
has a net loss of $2,433,100 (unaudited) for the nine months ended September
30, 1999. The Company also has significant working capital deficiencies as
of December 31, 1998 and September 30, 1999.
While the Company has continued as a going concern one year from the audited
balance sheet date (December 31, 1999), the Company will be required to generate
sufficient cash flow from increased revenues or additional financing in order to
continue as a going concern and meet its obligations on a timely basis. However,
there can be no assurance that additional financing will be available or that an
increase in revenues will improve the Company's current financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary which was acquired on January 26, 1998 (see
Note 3). All significant intercompany transactions and balances have been
eliminated.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements for the nine months ended
September 30, 1998 and 1999 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information set forth therein, in accordance
with generally accepted accounting principles. The data disclosed in the
notes to the financial statements for these interim periods is unaudited.
Operating results for interim periods are not necessarily indicative of
operating results for an entire year.
USE OF ESTIMATES
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 the reported amounts of revenue and expense during the
reporting period. Actual results could differ from estimates.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the estimated
useful lives of the assets, which range from three to five years.
Maintenance and repairs are charged to expense as incurred. Major renewals
or
F-7
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
improvements are capitalized. When assets are sold or abandoned, the cost
and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is recognized.
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has recorded no
impairment losses.
INTANGIBLE ASSETS
Intangible assets consist of patents and goodwill which are stated at cost.
Amortization is calculated using the straight-line method over five years
for patents and four years for goodwill.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Sales are typically made on credit and the Company generally
does not require collateral. The Company performs ongoing credit evaluations
of its customers' financial condition and maintains an allowance for
estimated potential losses. Accounts receivable are presented net of an
allowance for doubtful accounts of $10,000 at December 31, 1998 and
September 30, 1999.
For the year ended December 31, 1997, the Company received license revenue
of $1,961,000, or 68% of total revenues, from one customer. The Company had
combined sales to two major customers which represented 30% and 24%
(unaudited) of total revenues for the year ended December 31, 1998 and for
the nine months ended September 30, 1999, respectively.
As of December 31, 1998, the Company had amounts due from three major
customers which represented 41% of total accounts receivable. As of
September 30, 1999, the Company had amounts due from four major customers
which represented 31% (unaudited) of total accounts receivable.
STOCK-BASED COMPENSATION
The Company measures compensation costs related to stock option plans using
the intrinsic value method and provides pro forma disclosures of net income
(loss) and earnings (loss) per common share as if the fair value based
method had been applied in measuring compensation costs. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the fair value of the Company's common stock at the date of measurement over
the amount an employee must pay to acquire the stock and is amortized over
the vesting period, generally three years.
INCOME TAXES
Current income tax expense or benefit is the amount of income taxes expected
to be payable or refundable for the current year. A deferred income tax
asset or liability is computed for the expected future impact of differences
between the financial reporting and tax bases of assets and liabilities and
for the expected future tax benefit to be derived from tax credits and loss
carryforwards. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
F-8
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license
periods provided no significant obligations remain and collectibility of the
related receivable is probable. The Company's revenue from software and
hardware installation and implementation and from contract services is
generally recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to total
estimated costs at completion. Amounts received under contracts in advance
of performance are recorded as deferred revenue and are generally recognized
within one year from receipt. Contract losses are recorded as a charge to
income in the period such losses are first identified. Unbilled accounts
receivable are stated at estimated realizable value. Revenue from contract
services for which the Company cannot reliably estimate total costs are
recognized upon completion.
Revenue from royalties is recognized in the period earned.
CAPITALIZED SOFTWARE COSTS
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a
working model. Software development costs incurred subsequent to the time a
product's technological feasibility has been established, through the time
the product is available for general release to customers, are capitalized
if material. To date, the Company has not capitalized any software costs as
the period between achieving technological feasibility and the general
availability of the related products has been short and software development
costs qualifying for capitalization have been insignificant.
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 years ended December 31,
1997 and 1998, and for the nine months ended September 30, 1998 and 1999,
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.
F-9
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss........................... $(400,481) $(3,434,060) $(2,443,446) $(2,433,100)
Less Series B preferred
dividends........................ (72,462) (82,748) (62,061) (62,061)
--------- ----------- ----------- -----------
Income available to common
shareholders..................... $(472,943) $(3,516,808) $(2,505,507) $(2,495,161)
--------- ----------- ----------- -----------
Denominator:
Weighted-average shares
outstanding...................... 680,273 861,875 860,674 974,283
========= =========== =========== ===========
Basic and diluted earnings per
share............................ $ (0.70) $ (4.08) $ (2.91) $ (2.56)
========= =========== =========== ===========
</TABLE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This statement requires that all components of
comprehensive income be reported in the financial statements in the period
in which they are recognized. During the years ended December 31, 1997 and
1998, and for the nine months ended September 30, 1998 and 1999, the Company
did not have any components of comprehensive income.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement
requires disclosure of certain information about the Company's operating
segments, products, geographic areas in which it operates and its major
customers. This statement also allows a company to aggregate similar
segments for reporting purposes. Management has determined that its
operations can be aggregated into one reportable segment. Additionally, as
the Company's products are sold primarily within the U.S., no segment
disclosures have been included in the accompanying notes to the consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statements to conform to the current year presentation.
3. ACQUISITION
On January 26, 1998, the Company completed the acquisition of all the
outstanding common stock of XImage Corporation ("XImage") located in San
Jose, California. XImage's principal business activity is the design,
implementation and maintenance of digital booking systems.
F-10
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
3. ACQUISITION (CONTINUED)
The Company paid approximately $2,150,000 in cash, issued warrants to
purchase 61,611 shares of the Company's Common Stock and incurred
approximately $310,000 in direct acquisition costs. The acquisition was
accounted for as a purchase with goodwill being amortized over four years.
The purchase price was allocated to identifiable assets and liabilities
based on their estimated fair values, with the excess of the purchase price
over the fair value of such net liabilities acquired reflected as goodwill,
as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 947,177
Property and equipment...................................... 53,132
Goodwill.................................................... 3,526,322
Liabilities assumed......................................... (2,069,100)
-----------
Purchase price.............................................. $ 2,457,531
===========
</TABLE>
The results of operations of XImage for the period from January 26, 1998
(acquisition) through December 31, 1998 are included in the Company's
consolidated statement of operations for the year ended December 31, 1998.
The unaudited pro forma results of operations below present the effect on
the Company's results of operations as if the acquisition had occurred on
January 1, 1997, instead of on the acquisition date.
<TABLE>
<CAPTION>
1997
(UNAUDITED)
------------------------------------------------------
HISTORICAL
----------------------- PRO FORMA
IMAGEWARE XIMAGE ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues........................ 2,896,076 4,016,286 6,912,362
Cost of revenues.................... 77,584 2,504,146 2,581,730
---------- ---------- -----------
Gross margin...................... 2,818,492 1,512,140 4,330,632
---------- ---------- -----------
Operating expenses.................. 3,022,869 1,523,544 $992,596(a) 5,539,009
---------- ---------- -----------
Loss before income taxes.......... (204,377) (11,404) (1,208,377)
---------- ---------- -----------
Provision for income taxes.......... 196,104 -- 196,104
---------- ---------- -----------
Net loss.......................... $ (400,481) $ (11,404) $(1,404,481)
========== ========== ===========
Net loss per common share........... $ (2.06)
===========
</TABLE>
- ------------------------
(a) Adjusted for goodwill amortization and interest expense related to
acquisition indebtedness.
F-11
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
Equipment........................................... $ 804,007 $ 825,813
Furniture........................................... 63,313 63,313
--------- ---------
867,320 889,126
Less accumulated depreciation....................... (597,726) (693,122)
--------- ---------
$ 269,594 $ 196,004
========= =========
</TABLE>
Total depreciation expense for the years ended December 31, 1997 and 1998
was $79,834 and $100,215, and depreciation expense for the nine months ended
September 30, 1998 and 1999 was $74,508 and $78,286 (unaudited),
respectively.
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Short-term note payable to shareholder. Such note accrues
interest at prime and is due upon demand.................. $ 30,000 $ 30,000
8% convertible notes payable to shareholders due June 15,
2000. At the option of either the Company or the holder,
interest may be accrued and added to principal or paid.
The notes, at the option of the holders, shall be prepaid
to the extent of 20% of the Company's pre-tax income
earned subsequent to June 30, 1995. The principal amount
of the notes plus accrued interest shall be convertible,
at the option of the holder, at any time after date of
issuance, into units of Series B preferred stock and
common stock purchase warrants of the Company at $13.19
per unit, subject to adjustment........................... 208,150 208,150
8% convertible note payable to employee, due June 15, 2000.
At the option of either the Company or the holder,
interest may be accrued and added to principal or paid.
The principal amount of the note plus accrued interest
shall be convertible, at the option of the holder, at any
time after the date of issuance in common stock at $7.91
per share................................................. -- 50,000
</TABLE>
F-12
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
5. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Short-term notes payable to financial institution. Such
notes accrue interest at prime plus 2% and were due
April 15, 1999. Due date extended to November 7, 1999 for
$500,000 and March 3, 2000 for the remaining $500,000.
The notes are guaranteed by certain officers and directors
of the Company............................................ 1,200,000 1,000,000
Short-term notes payable to lending institution. Such notes
accrue at prime plus 2% and were due September 28,
1999...................................................... $ -- $ 180,000
Short-term notes payable to shareholders and other related
parties. Such notes accrue interest at 10% and are due on
the earlier of February 15, 1999 or the closing of
permanent financing....................................... 150,000 140,000
Short-term note payable to shareholder to accrue interest at
10%. Note due the earlier of January 31, 1999 (extended to
March 15, 2000) or the closing of permanent financing..... 55,000 55,000
Short-term notes payable to previous XImage employees. Such
notes accrue interest at prime plus 2% and were due
December 31, 1998. The notes' terms were revised to
include monthly payments through November 2000............ 600,000 600,000
Short-term notes payable to XImage officers. Such notes
accrue interest at 10% and were due upon the acquisition
of XImage. The note's terms were revised to include
monthly payments through November 2000.................... 152,500 152,500
Short-term note payable to prior XImage shareholder. Such
note accrues interest at 10% and was due upon acquisition
of XImage. The note's terms were revised to include
monthly payments through November 2000.................... 51,000 51,000
Short-term notes payable to certain vendors................. 26,297 26,297
---------- -----------
2,472,947 2,492,947
Less current portion........................................ (999,775) (2,327,925)
---------- -----------
Long-term notes payable..................................... $1,473,172 $ 165,022
========== ===========
</TABLE>
In February 1999, the Company issued a promissory note to a third party for
$500,000 at an interest rate of 9.75% to mature February 2000. In
conjunction with the note, the Company issued a warrant to purchase 324,300
shares of common stock at $4.75 per share. The fair value of the warrants
was calculated using the minimum value method and was determined to be de
minimis as the exercise price is equal to fair value. In August 1999, the
note plus accrued interest was converted into 120,944 shares of common
stock.
F-13
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
5. NOTES PAYABLE (CONTINUED)
In August 1999, the Company issued two $100,000 promissory notes at prime
plus 2%. Principal and interest was due September 28, 1999 and October 1,
1999 with a 30-day extension option. The Company has exercised the 30-day
extension options in exchange for warrants to acquire 10,000 shares of
common stock at $7.91 per share. In October 1999, the Company made a
principal payment of $20,000 on one of the promissory notes, and in November
1999 paid off the remaining balance on that note.
In September 1999, the Company issued a promissory note for $50,000 due June
15, 2000 to an employee with interest at 8%, convertible into common stock
at $7.91 at the option of the holder.
In November 1999, the Company issued a convertible promissory note for
$1,250,000 at an interest rate of 10%, due the earlier of February 10, 2001
or five days following the closing of an IPO, to an individual affiliated
with Atlus Co. (which owns approximately 31% of the Company's common shares
outstanding). Under the terms of the note, the principal amount is fixed in
Japanese yen and shall be repaid in U.S. dollars at a fixed (104.55 Japanese
yen per U.S. dollar) conversion rate established on the date of issuance. If
the principal and interest has not been paid prior to April 1, 2000, the
note becomes convertible to common stock at $1.00 per share. In conjunction
with the note, the Company issued the individual a warrant to purchase
125,000 shares of common stock for $6.00 per share. The Company will record
the note net of a discount equal to the fair value of the beneficial
conversion feature of the note and the warrants issued.
In November 1999, the Company issued a $500,000 note to a third party with
interest payable monthly beginning on December 15, 1999. The note is due at
the earlier of (i) any written or oral demand by lender, (ii) the closing of
borrower's initial public offering or (iii) April 3, 2000.
In November 1999, the maturity date for the remaining $500,000 balance of
the note to financial institution was extended to March 3, 2000.
Additionally, approximately $800,000 in notes to shareholders and XImage
employees, officers and shareholders were revised to include payments
through November 2000.
In December 1999, the $140,000 of short-term notes to shareholders and other
related parties, plus accrued interest, were converted into 20,919 shares of
common stock.
At December 31, 1998 and September 30, 1999, approximately $0 and $320,000
(unaudited), respectively, of notes payable were in default for non-payment.
Subsequent to September 30, 1999, $140,000 of notes in default were paid by
the Company. The remaining notes in default are uncollateralized.
6. INCOME TAXES
Due to the Company's net loss position for the year ended December 31, 1998
and for the nine months ended September 30, 1999 and as the company has
recorded a full valuation allowance against deferred tax assets, there was
no provision for income taxes recorded.
The provision for income taxes for the year ended December 31, 1997 consists
of a 10% foreign tax withholding from certain license income earned under a
license agreement with a Japanese shareholder.
F-14
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
6. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1997 1998 1999
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate.......... (34)% (34)% (34)%
State tax, net of federal tax benefit.............. (6) 5 (2)
Research credits................................... (8) (1) (2)
Foreign taxes...................................... 71 -- --
Goodwill amortization.............................. -- 8 9
Other permanent differences........................ 5 4 1
Net change in valuation allowance.................. 43 18 28
--- --- ---
71% 0% 0%
=== === ===
</TABLE>
The components of the net deferred tax assets at December 31, 1998 and
September 30, 1999 (unaudited) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
Intangible assets.................................. $ 102,459 $ 124,544
Fixed assets....................................... (34,111) (32,480)
Reserves and accrued expenses...................... 65,694 72,428
Net operating loss carryforwards................... 3,836,515 4,546,554
Research credit carryforwards...................... 340,187 395,173
----------- -----------
4,310,744 5,106,219
Less valuation allowance........................... (4,310,744) (5,106,219)
----------- -----------
Net deferred tax asset............................. $ -- $ --
=========== ===========
</TABLE>
The Company has established a valuation allowance against its deferred tax
asset due to the uncertainty surrounding the realization of such asset.
Management periodically evaluates the recoverability of the deferred tax
asset. At such time as it is determined that it is more likely than not that
deferred tax assets are realizable, the valuation allowance will be reduced.
At December 31, 1998 and September 30, 1999, the Company had federal net
operating loss carryforwards of approximately $10,400,000 and $12,500,000
(unaudited), respectively, and state net operating loss carryforwards of
approximately $4,900,000 and $4,200,000 (unaudited), respectively, which may
be available to offset future taxable income for tax purposes. The federal
net operating loss carryforwards expire at various dates from 2003 through
2019. The California net operating loss carryforwards expire at various
dates through 2004.
F-15
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
6. INCOME TAXES (CONTINUED)
The Company also had federal research tax credit carryforwards of
approximately $226,000 and $280,000 (unaudited) and state research tax
credit carryforwards of approximately $122,000 and $167,000 (unaudited) for
tax purposes at December 31, 1998 and September 30, 1999, respectively.
These carryforwards will begin expiring, if unused, in 2005.
The Internal Revenue Code (the "Code") limits the availability of income tax
net operating losses and certain tax credits that arose prior to certain
cumulative changes in a corporation's ownership resulting in a change of
control of the Company. The Company's use of its net operating loss
carryforwards and tax credit carryforwards will be significantly limited
because the Company underwent "ownership changes" in 1991, 1995 and 1997.
Net operating loss carryforwards, which are subject to a limitation of
$165,000 per annum with respect to amounts generated through 1991, $411,000
per annum for amounts generated between 1991 and 1995, and $748,000 per
annum for amounts generated between 1995 and 1997, can be used to offset
taxable income. Net operating losses and tax credits that are unavailable in
any year as a consequence of this limitation may be carried forward for
future use subject to the restrictions of the Code.
7. COMMITMENTS
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its President, Vice President of
Finance and Vice President of Sales and Business Development. The Company
may terminate the agreements with or without cause. Should the Company
terminate the agreements without cause, the President is entitled to
compensation for up to 36 months salary, and the Vice Presidents of Finance
and of Sales and Business Development are entitled to compensation equal to
12 months salary.
LICENSE AGREEMENTS
During 1998, the Company entered into certain license agreements related to
technology used in its products. Under the terms of the agreements, the
Company is required to pay royalties at fixed fees or percentages based upon
product sales. The agreements expire at various dates from October 1999
through October 2001.
LITIGATION
The Company is, from time to time, subject to legal proceedings and claims
which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
LEASES
The Company entered into a 5-year operating lease for its office and
research and development facilities which commenced August 1998.
F-16
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
7. COMMITMENTS (CONTINUED)
At December 31, 1998, future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES TOTAL
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
1999............................................ $259,941 $8,496 $268,437
2000............................................ 270,338 8,496 278,834
2001............................................ 281,152 3,540 284,692
2002............................................ 292,398 -- 292,398
2003............................................ 174,480 -- 174,480
</TABLE>
Rental expense under operating leases for the year ended December 31, 1997
and 1998 was approximately $110,000 and $311,985, respectively.
8. EQUITY
The Company's Articles of Incorporation were amended effective August 31,
1994 and authorize the issuance of two classes of stock to be designated
"Common Stock" and "Preferred Stock," provide that both Common and Preferred
Stock shall have a par value of $.01 per share and authorize the Company to
issue 50,000,000 shares of Common Stock and 4,000,000 shares of Preferred
Stock. The Preferred Stock may be divided into such number of series and
with the rights, preferences, privileges and restrictions as the Board of
Directors may determine.
COMMON STOCK
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.
In March 1997, the Company completed a transaction with a foreign investor
whereby the Company issued 34,058 shares of common stock at a price of
$15.83 per share. Contingent on the Company meeting certain targets, the
investor was required to purchase an additional 157,978 shares of common
stock at $15.83 per share. The specified targets were not met. In November
1997, the investor purchased the additional 157,978 shares of common stock
at $15.83 per share. In December 1997, the same foreign investor purchased,
from the holders, $500,000 of 8% convertible notes which were subsequently
converted into 200,000 shares of common stock at $13.19 per share.
During 1998, the Company issued 44,866 shares of common stock to certain
officers and directors as compensation for personally guaranteeing the
$1,200,000 bank note. The estimated fair value of $360,020 was capitalized
as loan fees and amortized as interest expense during 1998.
During 1998, the Company issued 10,236 shares of common stock to directors
for payment of loan fees. The estimated fair value of $162,000 was expensed
during 1998.
In April 1999, the Company issued 73,465 shares of common stock to certain
officers and directors for the extension of loan guarantees. The estimated
fair value of $348,779 (unaudited) was
F-17
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. EQUITY (CONTINUED)
capitalized as loan fees and amortized as interest expense during the nine
month period ended September 30, 1999.
SERIES B CONVERTIBLE, REDEEMABLE PREFERRED STOCK
In April 1995, the Company's Articles of Incorporation were amended to
authorize 750,000 shares of Series B Convertible Redeemable Preferred Stock
("Series B").
The holders of Series B are entitled to cumulative preferred dividends
payable at the rate of $0.2125 per share per annum commencing April 30,
1996, subject to legally available funds. The Series B plus accrued but
unpaid dividends are convertible at the option of the holder into shares of
common stock at a conversion price equal to the original Series B issue
price as adjusted to prevent dilution. The Series B will automatically be
converted into shares of common stock upon the closing of a firm commitment
underwritten public offering at a price per common share of not less than
$31.65. If the public offering price is less than $31.65 but at least $21.10
per share, the conversion shall still be automatic upon written consent of a
majority of the then outstanding shareholders of Series B.
The Series B, on an as-converted basis, have the same voting rights per
share as the Company's common shares. The Series B are entitled to initial
distributions of $13.19 per share, upon liquidation and in preference to
common shares and any other series of preferred stock, except Series A, plus
all accrued but unpaid dividends.
Any time after December 31, 2000, the Company has the right to redeem all or
some of the outstanding shares of Series B at a price equal to the original
issue price, plus all accrued but unpaid dividends.
As of December 31, 1998 and September 30, 1999, the Company had cumulative
undeclared dividends of $94,825 and $156,885 (unaudited), respectively.
In December 1997, an existing shareholder and holder of a note exercised his
right in accordance with the terms of the note to convert the note to 48,400
shares of the Company's Series B stock.
WARRANTS
As of December 31, 1998, warrants to purchase 183,461 shares of common stock
at prices ranging from $7.90 to $31.65 were outstanding. All warrants are
exercisable as of December 31, 1998 and begin to expire in December 1999
through November 2004.
9. STOCK OPTION PLAN
On August 31, 1994, the directors of the Company adopted the Company's 1994
Employee Stock Option Plan (the "Plan") and the 1994 Nonqualified Stock
Option Plan (the "Nonqualified Plan"). The 1992 Stock Option Plan and
options previously granted were canceled by the Board of Directors.
The Plan provides that officers and other key employees may receive
nontransferable incentive stock options to purchase up to 170,616 shares of
the Company's common stock. The option price
F-18
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
9. STOCK OPTION PLAN (CONTINUED)
per share must be at least equal to 100% of the market value of the
Company's common stock on the date of grant and the term may not exceed ten
years.
The Nonqualified Plan provides that directors and consultants may receive
nontransferable options to purchase up to 18,957 shares of the Company's
common stock. The option price per share must be at least equal to 85% of
the market value of the Company's common stock on the date of grant and the
term may not exceed five years.
Both the Plan and the Nonqualified Plan are administered by the Board of
Directors or a Committee of the Board which determines the employees,
directors or consultants which will be granted options and the terms of the
options, including vesting provisions which to date has been over a three
year period. Both the Plan and the Nonqualified Plan expire in ten years.
Due to a significant decline in the estimated fair value of the Company's
common stock, in February 1999, the exercise price of previously granted
stock options was repriced to $5.28 per share, which was based upon the fair
value of the Company's common stock as of that date, as determined by the
Company's board of directors. Under proposed accounting rules, the Company
will be required to record compensation expense equal to the difference
between the estimated fair value of the common stock and the exercise price
of the repriced options. For the nine months ending September 30, 1999, the
Company recorded no compensation expense as the exercise price was equal to
the estimated fair value.
In December 1999, the Company's Board of Directors adopted the ImageWare
Systems, Inc. Amended and Restated 1999 Stock Option Plan. Under the terms
of the 1999 Plan, the Company may issue up to 100,000 non-qualified or
incentive stock options to purchase common stock of the Company. The 1999
Plan has substantially the same terms as the 1994 Employee Stock Option Plan
and the 1994 Nonqualified Stock Option Plan and expires in ten years.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net losses would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- --------------
1997 1998 1999
---------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss:
As reported............................ $(400,481) $(3,434,060) $(2,433,100)
Pro forma.............................. (616,253) (3,709,771) (2,714,919)
Earnings per common share:
As reported............................ $ (.70) $ (4.08) $ (2.56)
Pro forma.............................. (.91) (4.30) (2.79)
</TABLE>
F-19
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
9. STOCK OPTION PLAN (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions:
dividend yield of 0%, risk-free interest rate ranging from 5.4% to 6.6%, and
expected lives of five years.
Stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS PRICE
-------- ---------
<S> <C> <C>
Balance at January 1, 1997................................ 66,825 $5.28
Granted................................................. 95,261 $5.28
Expired/canceled........................................ (38,389) $5.28
-------
Balance at December 31, 1997.............................. 123,697 $5.28
Granted................................................. 24,455 $5.28
Expired/canceled........................................ --
-------
Balance at December 31, 1998.............................. 148,152 $5.28
Granted (unaudited)..................................... 34,028 $5.28
Expired/canceled (unaudited)............................ (17,062) $5.28
-------
Balance at September 30, 1999 (unaudited)................. 165,118 $5.28
=======
</TABLE>
At December 31, 1998, a total of 94,173 options were exercisable at a
weighted average price of $5.28 per share.
10. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined contribution 401(k) retirement
plan ("the Plan"). All employees aged 21 years and older become participants
after completion of three months of employment. The Plan provides for annual
contributions determined at the discretion of the Board of Directors.
Participants may contribute up to 20% of their compensation.
Employees are fully vested in their share of the Company's contributions
after the completion of five years of service. For the year ended December
31, 1998 and the nine months ended September 30, 1999, there were no
contributions to the Plan by the Company.
11. SUBSEQUENT EVENTS
In July 1999, the Company sold 31,595 shares of common stock for $250,000.
In August 1999, the Company sold 6,319 shares of common stock for $50,000.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
XImage Corporation
In our opinion, the accompanying statements of operations, of shareholders'
deficit and of cash flows present fairly, in all material respects, the results
of operations and cash flows of XImage Corporation for the year ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Diego, California
October 22, 1999
F-21
<PAGE>
XIMAGE CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues
Product................................................... $2,886,799
Maintenance............................................... 1,129,487
----------
4,016,286
Cost of revenues
Product................................................... 1,745,066
Maintenance............................................... 759,080
----------
Gross margin............................................ 1,512,140
----------
Operating, general and administrative expenses.............. 1,314,353
Sales and marketing expenses................................ 7,023
Research and development expenses........................... 162,243
----------
Total operating expenses................................ 1,483,619
----------
Income from operations.................................. 28,521
----------
Interest expense, net....................................... 39,925
----------
Loss before income taxes................................ (11,404)
Provision for income taxes.................................. --
----------
Net loss................................................ $ (11,404)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
XIMAGE CORPORATION
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ 1,629,554 $1,414,249 $ (2,838,802) $ (1,424,553)
Net loss.................................... -- -- (11,404) (11,404)
--------- ---------- ------------ ------------
Balance at December 31, 1997................ 1,629,665 $1,414,249 $ (2,850,206) $ (1,435,957)
========= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
XIMAGE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (11,404)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization........................... 29,295
Deferred revenue........................................ (207,241)
Change in assets and liabilities
Accounts receivable, net.............................. (78,550)
Inventory............................................. 77,544
Prepaid and other current assets...................... 4,852
Accounts payable...................................... (146,384)
Accrued compensation and other expenses............... 53,266
Salary accrual........................................ 8,816
---------
Total adjustments................................... (258,402)
---------
Net cash used by operating activitiesu.............. (269,806)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (7,952)
---------
Net cash used by investing activities............... (7,952)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable................... 291,380
---------
Net cash provided by financing activities........... 291,380
---------
Net increase in cash................................ 13,622
Cash at beginning of year................................... 436
---------
Cash at end of year................................. $ 14,058
=========
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid during the year for interest.................... $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
XIMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Ximage Corporation (the "Company") is a designer and distributor of image
viewing and communication systems (hardware and software) for the law
enforcement and identification industries. The Company markets and sells its
products worldwide. The Company was incorporated in January 1987.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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 the reported amounts of revenue and expense during the
reporting period. Actual results could differ from estimates.
STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the estimated market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
REVENUE RECOGNITION
The Company's revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license
periods. The Company's revenue from hardware and software installation and
implementation and from contract services is generally recognized as the
services are performed using the percentage of completion method based on
costs incurred to date compared to total estimated costs at completion.
Amounts received under contracts in advance of performance are recorded as
deferred revenue and are generally recognized within one year from receipt.
Contract losses are recorded as a charge to income in the period such losses
are first identified. Revenue from contract services for which the Company
cannot reliably estimate total costs are recognized upon completion.
INCOME TAXES
The Company is an S corporation and, as such, income for federal and state
income tax purposes is passed through directly to its shareholders who are
responsible for any resulting income tax liability or benefit.
F-25
<PAGE>
XIMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
Equipment used for research and development is charged to a capital account
and is depreciated over its estimated useful life.
DEPRECIATION
Property and equipment is stated at cost. Depreciation is provided using an
accelerated method of depreciation over the useful lives of the equipment
which range from three to seven years.
3. CONTINGENCIES
LEASES
The Company conducted its business from leased offices in San Jose,
California, under a noncancellable operating lease which expired in February
1999.
Rent expense for the year ended December 31, 1997 was $122,072.
4. STOCK OPTION PLAN
The Company maintained a stock option plan for eligible employees. Options
to purchase common stock were granted at a price set by a committee selected
by the Board of Directors. Options generally expire in ten years if not
exercised.
As of December 31, 1997, options to purchase 2,197,688 shares of common
stock were outstanding with a weighted average exercise price of $.79.
In conjunction with the subsequent sale of the Company (Note 5), all
outstanding options immediately vested and 2,051,193 options were exercised
at the following prices:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
- ------ --------------
<S> <C>
1,194,693................................................... $0.50
856,500.................................................... $1.00
</TABLE>
As a result of the sale, the Company's stock option plan was cancelled.
5. SUBSEQUENT EVENT
On January 26, 1998, the Company completed the sale of all of its
outstanding common stock to ImageWage Software, Inc. for approximately
$2,150,000 and relocated its business to San Diego, California.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, UNITS ONLY IN JURISDICTIONS IN WHICH OFFERS AND SALES ARE
PERMITTED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Use of Proceeds....................... 10
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Information........ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 34
Certain Transactions.................. 38
Security Ownership of Certain
Beneficial Owners and Management.... 41
Description of Securities............. 42
Shares Eligible for Future Sale....... 46
Underwriting.......................... 49
Legal Matters......................... 52
Experts............................... 52
Available Information................. 52
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
BROKER-DEALERS THAT EFFECT THE TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 UNITS
[LOGO]
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
I-BANKERS SECURITIES, INC.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 204 of the California General Corporation Law permits a corporation
to include in its Articles of Incorporation provisions eliminating or limiting
the personal liability of directors for monetary damages in an action brought by
or in the right of the corporation for breach of a director's fiduciary duties,
subject to certain limitations. Section 317 of the California General
Corporation Law requires a corporation to indemnify its directors and other
agents to the extent they incur expenses in successfully defending lawsuits
brought against them by reason of their status as directors or agents.
Section 317 also permits a corporation to indemnify its directors and other
agents to a greater extent than specifically required by law.
Our amended and restated articles of incorporation eliminate the personal
liability of our directors for monetary damages upon breach of fiduciary duties
as a director except:
- acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
- acts or omissions that the director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director;
- any transaction from which a director derived an improper personal
benefit;
- acts or omissions that show a reckless disregard for the director's duty
in circumstances in which the director was aware, or should have been
aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders;
- an unexcused pattern of inattention that amounts to an abdication of the
director's duty;
- unlawful dividends or distributions; and
- for unlawful interested director transactions.
Article VI of our bylaws permits us to indemnify any of our directors,
officers and other agents who is a party, or is threatened to be made a party,
to any proceeding by reason of his or her status as our agent. In such a case,
we may indemnify the agent against expense, liability and loss actually and
reasonably incurred by the agent in connection with such a proceeding if he or
she acted in good faith and in a manner he or she reasonably believed to be in
the best interests of the corporation, and, with respect to any criminal
proceeding, had no reasonable cause to believe that the conduct was unlawful.
If such a proceeding is brought by or on behalf of the corporation in the
form of a derivative suit, the agent may be indemnified against expenses
actually and reasonably incurred if the agent acted in good faith, in a manner
reasonably believed to be in the best interests of the corporation, and with
reasonable care. There can be no indemnification with respect to any matter as
to which the agent is adjudged to be liable to the corporation unless and only
to the extent that the court in which such proceeding was brought determines
upon application that, in view of all of the circumstances of the case, the
agent is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Where an agent is successful in any such proceeding, the agent is entitled
to be indemnified against expenses actually and reasonably incurred by him or
her. In all other cases (unless by court order), indemnification is made by the
corporation upon determination by it that indemnification of the agent is proper
in the circumstances because the agent has met the applicable standard of
conduct. We may advance expenses incurred in defending any such proceeding upon
receipt of an undertaking to repay any amount so advanced if it is ultimately
determined that the agent is not eligible for indemnification.
II-1
<PAGE>
Our bylaws also provide that we may purchase and maintain liability
insurance on behalf of any of our directors, officers, employees and agents. As
of the date of this registration statement, we do not maintain such policies of
insurance. We intend to purchase director and officer insurance for the benefit
of our directors and officers.
We have entered into indemnification agreements with each of our directors
and officers, a form of which is attached as Exhibit 10.4 to this registration
statement. We intend to enter into indemnification agreements with any new
directors and officers in the future. The indemnification agreements require us
to indemnify our directors and officers to the extent permitted by our bylaws
and to advance their expenses incurred in connection with a proceeding with
respect to which they are entitled to indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC Registration fee........................................ $ 12,455
NASD Filing fees............................................ $ 5,218
Nasdaq Listing fee.......................................... $ 8,000
Pacific Stock Exchange listing fee.......................... $ 25,500
Accounting fees and expenses................................ $150,000
Legal fees and expenses..................................... $250,000
Directors and officers insurance expenses................... $150,000
Printing and related expenses............................... $145,000
Blue sky legal fees and expenses............................ $ 65,000
Transfer agent fees and expenses............................ $ 1,250
Miscellaneous expenses...................................... $ 22,347
--------
TOTAL..................................................... $834,770
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We have issued the following securities within the last three years. The
following information regarding our securities has been adjusted to reflect a
5.275-to-1 reverse stock split effected on November 29, 1999.
(1) During the last three years, we granted options to purchase a total of
281,610 shares of our common stock, at an average weighted exercise price of
$6.41 per share, to employees and consultants pursuant to our 1994 Employee
Stock Option Plan, our 1994 Nonqualified Stock Option Plan and our 1999 Stock
Option Plan. Each grant was made in reliance on Rule 701 promulgated under the
Securities Act of 1933. All of these options were granted in return for services
provided to us by these employees and consultants, and certain of these options
were granted to replace options granted earlier at a higher exercise price.
(2) In January 1997, pursuant to an exemption under Section 4(2) of the
Securities Act, we sold shares of our common stock to the following accredited
investors as follows: 4,739 shares at $21.10 per share for an aggregate purchase
price of $100,000 to The Melvin Garb Foundation; 1,896 shares at $21.10 per
share for an aggregate purchase price of $40,000 to The Harold Stern Trust; and
3,791 shares at $13.19 per share for an aggregate purchase price of $50,000 to
Private Asset Management Inc.
II-2
<PAGE>
(3) In February 1997, in return for services rendered in relation to the
development of a business plan, we issued a warrant to purchase 9,479 shares of
our common stock, exercisable at $13.19 per share, to Mark Guthner, a
sophisticated investor with full access to company information, pursuant to an
exemption under Section 4(2) of the Securities Act.
(4) In March 1997, we sold 34,058 shares of common stock at approximately
$15.82 per share for an aggregate purchase price of $538,961 to Atlus
Co., Ltd., an accredited investor, pursuant to an exemption under Section 4(2)
of the Securities Act.
(5) In November 1997, we sold 157,978 shares of our common stock at
approximately $15.82 per share for an aggregate purchase price of $2,500,000 to
Atlus Co., Ltd., pursuant to an exemption under Section 4(2) of the Securities
Act.
(6) In December 1997, in connection with the conversion of a promissory
note, we issued 37,915 shares of our common stock to Atlus Co., Ltd., pursuant
to an exemption under Section 4(2) of the Securities Act.
(7) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act and in connection with the conversion of promissory notes, we
issued four warrants to purchase an aggregate of 9,175 shares of our common
stock, exercisable at $21.10 per share, to the following sophisticated investors
with access to company information: William E. Guthner, Jr., a former director;
Thomas Guthner; William E. Guthner III, Trustee for Gabriella Guthner; and
Nossaman, Knox, Guthner & Elliott Profit Sharing and Savings Plan, FBO
William E. Guthner, Jr.
(8) In December 1997, in connection with the exercise of warrants to
purchase common stock, we sold 3,412 shares of our common stock at $6.07 per
share for an aggregate purchase price of $20,700 to J. Michael Reisert, Inc., a
sophisticated investor with access to the company's business plan, chief
executive officer and chief financial officer, pursuant to an exemption under
Section 4(2) of the Securities Act.
(9) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act and in connection with the conversion of promissory notes, we
issued an aggregate of 48,400 shares of our Series B preferred stock to the
following sophisticated investors with access to company information:
William E. Guthner, Jr., a former director; Thomas Guthner; William E.
Guthner III, Trustee for Gabriella Guthner; and Nossaman Knox, Guthner and
Elliott Profit Sharing & Savings Plan, FBO William E. Guthner, Jr.
(10) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 894 shares of our common stock to S. James Miller,
Jr., our president and chief executive officer and a sophisticated investor, in
return for services rendered as an executive officer.
(11) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued shares of our common stock as follows in return for
services rendered as directors by the following sophisticated investors: 2,844
shares to S. James Miller, Jr.; 2,654 shares to William Guthner, Jr.; 2,844
shares to Patrick Downs; 1,327 shares to John Holleran; and 569 shares to Yukuo
Takenaka.
(12) In January 1998, in return for a $700,000 loan to assist in the purchase
of XImage Corporation, we issued a warrant to purchase 8,847 shares of our
common stock, exercisable at $7.91 per share, to Imperial Bank pursuant to an
exemption under Section 4(2) of the Securities Act.
(13) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 3,318 shares of our common stock to each of the
following employees and directors, all sophisticated investors, in return for
the personal guarantee of the $700,000 promissory note issued by us in favor of
Imperial Bank: S. James Miller, Jr.; Wayne Wetherell, our vice president of
finance and chief financial officer; Paul Devermann, our vice president of sales
and business development; and William Guthner, Jr.
II-3
<PAGE>
(14) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued a warrant to purchase 3,318 shares of our common
stock, exercisable at $15.83 per share, to each of the following employees and
directors in return for the personal guarantee of the $700,000 promissory note
issued by us in favor of Imperial Bank: S. James Miller, Jr.; Wayne Wetherell;
Paul Devermann; and William Guthner, Jr.
(15) In January 1998, in connection with our acquisition of XImage
Corporation, we issued warrants to purchase a total of 61,611 shares of our
common stock, exercisable at $7.91 per share, to shareholders the of XImage
Corporation, pursuant to an exemption under Section 4(2) of the Securities Act.
The shareholders of XImage Corporation were represented in the acquisition by
the principals of XImage at the time, including: James Gossett, chairman of the
board; Jagdish Narasimhan, director, vice president, treasurer and secretary;
Kenneth Fields, director and vice president; Donald Dehaan, director and vice
president; and Neil Kelly, director.
(16) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act and in return for loans to us in the aggregate amount of
$500,000, we issued warrants to purchase a total of 9,479 shares of our common
stock, exercisable at $7.91 per share, to the following former shareholders of
XImage Corporation: James Gossett, Jagdish Narasimhan, Kenneth Fields, Donald
Dehaan, Dennis Honeywell and Herbert Fields. These loans were used in connection
with our acquisition of XImage.
(17) In February 1998, in connection with the conversion of a promissory
note, we issued a warrant to purchase 26,540 shares of our common stock,
exercisable at $21.10 per share, to Atlus Co., Ltd., pursuant to an exemption
under Section 4(2) of the Securities Act.
(18) In March 1998, as required by the agreement to acquire XImage
Corporation, we issued a warrant to purchase 948 shares of our common stock at
an exercise price of $7.91 to Jagdish Narasimhan and a warrant to purchase 948
shares of our common stock at an exercise price of $7.91 to Kenneth Fields, each
pursuant to an exemption under Section 4(2) of the Securities Act. Each of these
investors was a sophisticated investor with full access to company information
as a result of the acquisition of XImage Corporation.
(19) In July 1998, pursuant to an exemption under Section 4(2) of the
Securities Act and in return for the extension of the time for payment on
promissory notes issued by us, we issued warrants to purchase a total of 9,479
shares of our common stock, exercisable at $7.91 per share, to the following
former shareholders of XImage Corporation: James Gossett, Jagdish Narasimhan,
Kenneth Fields, Donald Dehaan, Dennis Honeywell and Herbert Fields.
(20) In July 1998, in return for the extension of the time for payment on
promissory notes issued by us, we issued a warrant to purchase 948 shares of our
common stock, exercisable at $7.91 per share, to Jagdish Narasimhan and a
warrant to purchase 948 shares of our common stock, exercisable at $7.91 per
share, to Kenneth Fields, each pursuant to an exemption under Section 4(2) of
the Securities Act.
(21) In July 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued a warrant to purchase 2,370 shares of our common
stock, exercisable at $7.91 per share, to each of the following employees and
directors in return for the personal guarantee of loans made to us by Imperial
Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and William
Guthner, Jr.
(22) In September 1998, in return for a $500,000 loan, we issued a warrant to
purchase 4,739 shares of our common stock, exercisable at $7.91 per share, to
Imperial Bank, an accredited investor, pursuant to an exemption under
Section 4(2) of the Securities Act.
(23) In November 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 7,899 shares of our common stock to each of the
following employees and directors as follows in return for the personal
guarantee of a $500,000 promissory note issued by us in favor of Imperial Bank
II-4
<PAGE>
and the extended $700,000 promissory note previously issued by us in favor of
Imperial Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and
William Guthner, Jr.
(24) In November 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued warrants to purchase shares of our common stock,
exercisable at $7.91 per share, to each of the following persons in return for a
$50,000 loan from each of them and for services provided by J. Michael
Reisert, Inc., as follows: warrant to purchase 6,872 shares to J. Michael
Reisert, Inc.; warrant to purchase 4,739 shares to Case Holding Company, Inc.,
an accredited investor; and warrant to purchase 4,739 shares to William Boyd, an
accredited investor.
(25) In February 1999, pursuant to an exemption under Section 3(b) of the
Securities Act and Rule 504 promulgated thereunder, we issued a convertible
promissory note in the amount of $500,000 and a warrant to purchase 324,301
shares of our common stock, exercisable at $4.75 per share, to R Squared
Limited, an accredited investor, in return for an aggregate purchase price of
$500,000.
(26) In April 1999, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 15,798 shares of our common stock to each of the
following employees and directors as follows in return for the personal
guarantee of the promissory notes previously issued by us in favor of Imperial
Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and William
Guthner, Jr.
(27) In April 1999, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued shares of our common stock as follows in return for
loans made to us by the following employees and directors: 8,853 shares to S.
James Miller, Jr.; and 1,422 shares to Wayne Wetherell.
(28) In July and August 1999, we sold 37,914 shares of common stock at
approximately $7.91 per share for an aggregate purchase price of $300,000 to the
following four accredited investors pursuant to an exemption under Section 4(2)
of the Securities Act: J. Michael Reisert, Inc.; Case Holding Company, Inc.;
William Boyd; and Al Sorenson.
(29) In August and September 1999, pursuant to an exemption under
Section 4(2) of the Securities Act, we issued warrants to purchase 4,739 shares
of our common stock, exercisable at $7.91 per share, to each of the Richard K.
Roberts Trust and Private Asset Management Inc., each an accredited investor, in
return for a $100,000 loan from each of them.
(30) In August 1999, R Squared Limited forgave an outstanding loan to us as
payment in connection with its exercise of a warrant to purchase our common
stock. In connection with the exercise of this warrant, we issued 120,943 shares
of our common stock to R Squared Limited pursuant to an exemption under
Section 4(2) of the Securities Act.
(31) In November 1999, in consideration of a $1,250,000 loan to us, we issued
a warrant to purchase 125,000 shares of our common stock, exercisable at $6.00
per share, to Naoya Harano, an accredited investor and president of Atlus
Co., Ltd., pursuant to an exemption under Section 4(2) of the Securities Act.
(32) In December 1999, in connection with the conversion of debt, we issued
20,919 shares of common stock to the following three accredited investors
pursuant to an exemption under Section 4(2) of the Securities Act: J. Michael
Reisert, Inc.; Case Holding Company, Inc.; and William Boyd.
(33) In December 1999, we sold 3,160 shares of common stock at approximately
$7.91 per share for an aggregate purchase price of $25,000 to John D. Lium, an
accredited investor, pursuant to an exemption under Section 4(2) of the
Securities Act.
(34) In December 1999, in consideration of services rendered, we issued a
warrant to purchase 6,161 shares of common stock, at an exercise price of $16.46
per share, to J. Michael Reisert, Inc. pursuant to an exemption under
Section 4(2) of the Securities Act.
II-5
<PAGE>
As of the date of this registration statement, there are approximately 104
holders of our common stock and 35 holders of our Series B preferred stock.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of ImageWare
Systems, Inc.*
3.2 Bylaws of ImageWare Systems, Inc.*
4.1 Form of Common Stock Certificate*
4.2 Reference is made to pages 1-5 and 12-15 of Exhibit 3.2*
4.3 Form of Public Warrant*
4.4 Form of Representative's Warrant
4.5 Form of Warrant Agent Agreement+
5.1 Opinion of Luce, Forward, Hamilton & Scripps LLP*
10.1 Employment Agreement with S. James Miller dated January 1,
1996, as amended September 1997*
10.2 Employment Agreement with Wayne G. Wetherell dated April 1,
1997, as amended March 1, 1999*
10.3 Employment Agreement with Paul J. Devermann dated July 20,
1997, as amended March 1, 1999*
10.4 Form of Indemnity Agreement entered into by the registrant
with its directors and executive officers*
10.5 Letter Agreement with Takenaka & Company LLC*
10.6 1994 Employee Stock Option Plan*
10.7 1994 Nonqualified Stock Option Plan*
10.8 1999 Stock Option Plan*
10.9 Merger Agreement with XImage Corporation dated November 12,
1997*
10.10 Promissory Note in favor of Chester L.F. Paulson dated
November 1999*
10.11 Loan and Indemnification Agreement with Chester L.F.
Paulson*
10.12 Teaming Agreement with Hewlett-Packard Singapore (Sales) PTE
Ltd. dated April 30, 1999*
10.13 Value Added Reseller Agreement with Intelligence and
Strategic Processes Pty. Ltd.
dated January 1, 1999*
10.14 OEM and Development Agreement with Excalibur Technologies
Corporation
dated April 30, 1998*
10.15 Lease between Thormint I and the registrant dated June 9,
1998*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.16 [Intentionally left blank.]
10.17 Teaming Agreement with PRC Inc. dated November 5, 1998*
10.18 Memorandum of Understanding with Polaroid Corporation dated
September 13, 1999*
10.19 Teaming Agreement with H.T.E., Inc. dated August 6, 1999*
10.20 Software License and Services Subcontract with PRC Inc.
dated June 29, 1999*
10.21 Agreement with Kitsap County dated June 28, 1999*
10.22 Maintenance Agreement between Sagem S.A. and XImage
Corporation
dated January 31, 1994 for the portrait storage system of
Kuwait*
10.23 Agreement with Law Enforcement Support Agency (County of
Pierce and City of Tacoma, Washington) dated April 23, 1999*
10.24 Agreement with the State Procurement Office of Arizona dated
January 14, 1999*
10.25 Agreement with the City of San Antonio dated September 2,
1999*
10.26 Agreement with Milwaukee County dated June 21, 1999*
10.27 Procurement Agreement with the Orange County Sheriff's
Office, Florida
dated August 2, 1999*
10.28 Subcontract Agreement between Science Applications
International Corporation and XImage Corporation dated
September 26, 1996 with regard to the City of New York
Police Department*
10.29 Agreement with King County, Washington dated November 1,
1999*
10.30 Agreement with County of Hennepin dated November 23, 1993*
10.31 Agreement with Ventura County Sheriff's Department dated
October 12, 1999*
10.32 Securities Purchase Agreement with Atlus Co., Ltd. dated
March 7, 1997*
10.33 Notes and Security Agreements in favor of Imperial Bank*
10.34 Convertible Promissory Note in favor of S. James Miller, Jr.
dated June 15, 1995*
10.35 Convertible Promissory Note in favor of Naoya Harano dated
November 10, 1999
10.36 Convertible Promissory Note in favor of Patrick Downs dated
June 15, 1995*
10.37 Stock Purchase Warrant in favor of Naoya Harano dated
November 10, 1999
10.38 Stock Purchase Warrant in favor of Torrey Pines Securities*
10.39 Form of Warrant (Former XImage Shareholders)*
10.40 Form of Warrant (Former XImage Officers, Noteholders and
Other Investors)*
10.41 Form of Warrant (Officers and directors)*
10.42 Warrant to Purchase Common Stock in favor of Imperial Bank*
10.43 Registration Rights Agreement with R Squared Limited dated
February 1999*
10.44 Form of Warrant (Purchasers of Series B units)*
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.45 Relationship Agreement with the National Insurance Crime
Bureau dated January 20, 1997*
10.46 License Agreement with Atlus Co., Ltd. dated March 7, 1997*
10.47 Software Development and Technology License Agreement with
Panasonic Computer Peripherals Company dated October 20,
1998*
10.48 Licensing Agreement with Viisage Technology, Inc. dated
November 16, 1998*
10.49 Value Added Reseller Agreement with Visionics Corporation
dated October 7, 1998*
10.50 Software License and Services Subcontract with Digital
Biometrics, Inc. dated July 23, 1999*
21 Subsidiaries of the Registrant*
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors
23.2 Consent of Luce, Forward, Hamilton & Scripps LLP. Reference
is made to Exhibit 5.1
24 Power of Attorney.*
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
+ To be filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the dollar value of the
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate
II-8
<PAGE>
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
In addition, the undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment no. 1
to the registration statement to be signed on its behalf by the undersigned, in
the City of San Diego, State of California, on February 8, 2000.
<TABLE>
<S> <C> <C>
IMAGEWARE SYSTEMS, INC.
BY: /S/ S. JAMES MILLER, JR.
-----------------------------------------
S. James Miller, Jr., PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
amendment no. 1 to the registration statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*/s/ S. JAMES MILLER, JR. President and Chief Executive
--------------------------------- Officer (Principal Executive February 8, 2000
S. James Miller, Jr. Officer) and Director
Vice President of Finance and Chief
*/s/ WAYNE WETHERELL Financial Officer (Principal
--------------------------------- Financial Officer and Principal February 8, 2000
Wayne Wetherell Accounting Officer)
*/s/ PATRICK J. DOWNS Director
--------------------------------- February 8, 2000
Patrick J. Downs
*/s/ JOHN L. HOLLERAN Director
--------------------------------- February 8, 2000
John L. Holleran
*/s/ YUKUO TAKENAKA Director
--------------------------------- February 8, 2000
Yukuo Takenaka
*By: /s/ S. JAMES MILLER, JR.
---------------------------------
S. James Miller, Jr.
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
FORM OF
IMAGEWARE SYSTEMS, INC.
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
150,000 UNITS
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
Void after __________, 2005
<PAGE>
This is to certify that, for value received and subject to the terms
and conditions set forth below, the Warrantholder (hereinafter defined) is
entitled to purchase, and the Company promises and agrees to sell and issue to
the Warrantholder, at any time on or after ______ ___, 2000 and on or before
__________ ___, 2005, up to 150,000 Units (hereinafter defined) at the Exercise
Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.01 par value, of the
Company.
(e) "Company" means ImageWare Systems, Inc., a California
corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $_____ per Unit (120% of the
initial public offering price of a Unit). If a Warrant is exercised for a
component of a Unit or Units, then the price payable in connection with such
exercise shall be determined by allocating $0.001 to the Unit Warrant and the
balance of the Exercise Price to the share of Common Stock, or, in each case, to
any securities obtainable in addition to or in lieu of such Unit Warrant or
share of Common Stock by virtue of the application of Section 3 of this Warrant.
(i) "Offering" means the public offering of Units made pursuant to
the Registration Statement.
(j) "Participating Underwriter" means any underwriter participating
in the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement (File No. 333-____), as amended on the Closing Date.
Page 1 - Purchase Warrant
<PAGE>
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant, each Unit consisting of one share of Common
Stock and one Unit Warrant to purchase one share of Common Stock on the terms
and conditions described in the Registration Statement.
(o) "Unit Warrant" means a Common Stock purchase warrant included as
a component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction, the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering on
behalf of the Warrantholder and the denominator of which is the aggregate sales
price of all of the securities sold by such underwriter, underwriting syndicate,
or agent in such offering and (ii) all out-of-pocket expenses of the
Warrantholder, except for the fees and disbursements of one firm retained as
legal counsel for the Warrantholder on behalf of all of the Warrantholders that
will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and
ending at 5:00 p.m. (Pacific Time) on the fifth anniversary of the Effective
Date by surrendering this Warrant Certificate, together with appropriate
instructions, duly executed by the Warrantholder or by its duly authorized
attorney, at the office of the Company, 10833 Thornmint Road, San Diego,
California 92127, or at such other office or agency as the Company may
designate. Upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When
such certificates are prepared, the Company shall notify the Warrantholder
and deliver such certificates to the Warrantholder or as per the
Warrantholder's instructions immediately upon payment in full by the
Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased. If the Warrantholder
shall represent and warrant that all applicable registration and prospectus
delivery requirements for their sale have been complied with upon sale
Page 2 - Purchase Warrant
<PAGE>
of the securities received upon exercise of the Warrant, such certificates
shall not bear a legend with respect to the Act.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver
to the Warrantholder a new Warrant Certificate (dated the date hereof), in
form and tenor similar to this Warrant Certificate, evidencing that portion
of the Warrant not exercised. The Securities to be obtained on exercise of
the Warrant will be deemed to have been issued, and any person exercising the
Warrants will be deemed to have become a holder of record of those
Securities, as of the date of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is
then exercisable will be proportionately increased and the Exercise Price
will be proportionately reduced; and, conversely, if the outstanding shares
of Common Stock are combined into a smaller number of shares of Common Stock,
the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately reduced and the Exercise Price will be
proportionately increased. The increases and reductions provided for in this
subsection 3(a) will be made with the intent and, as nearly as practicable,
the effect that neither the percentage of the total equity of the Company
obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or
other change in the capital structure of the Company, then, as a condition of
such change, lawful and adequate provision will be made so that the holder of
this Warrant Certificate will have the right thereafter to receive upon the
exercise of the Warrant the kind and amount of shares of stock or other
securities or property to which he would have been entitled if, immediately
prior to such event, he had held the number of shares of Common Stock
obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to
the end that the provisions set forth herein will thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The
Company will not permit any change in its capital structure to occur unless
the issuer of the shares of stock or other securities to be received by the
holder of this Warrant Certificate, if not the Company, agrees to be bound by
and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of
shares of Common Stock, other securities, or the property purchasable upon
exercise of the Warrant, the Company will promptly determine the new number of
such shares or other securities or property
Page 3 - Purchase Warrant
<PAGE>
purchasable upon exercise of the Warrant and (i) prepare and retain on file a
statement describing in reasonable detail the method used in arriving at the
new number of such shares or other securities or property purchasable upon
exercise of the Warrant and (ii) cause a copy of such statement to be mailed
to the Warrantholder within thirty (30) days after the date of the event
giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will
be issued in connection with the exercise of the Warrant, but the Company
will pay, in lieu of fractional shares, a cash payment therefor on the basis
of the mean between the bid and asked prices of the Common Stock in the
over-the-counter market or the last sale price of the Common Stock on the
Nasdaq SmallCap Market or a national securities exchange on the day
immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary
of the Company are distributed pro rata to holders of Common Stock, such
number of securities will be distributed to the Warrantholder or his assignee
upon exercise of his rights hereunder as such Warrantholder or assignee would
have been entitled to if this Warrant Certificate had been exercised prior to
the record date for such distribution. The provisions with respect to
adjustment of the Common Stock provided in this Section 3 will also apply to
the securities to which the Warrantholder or his assignee is entitled under
this subsection 3 (e).
(f) Notwithstanding anything herein to the contrary, there will be
no adjustment made hereunder on account of the sale by the Company of the
Common Stock or other Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of
shares of Common Stock, Unit Warrants or other Securities sufficient to provide
for the exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for issuance upon exercise of the
Warrant.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT
CERTIFICATE.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. (Pacific Time) on the fifth anniversary
of the Effective Date (the "Registration Period"). The Company will also file
such applications and other documents necessary to permit the sale of the
Securities to the public during the Registration Period in those states
designated by the Warrantholders among those in which the Units were qualified
for sale in the Offering or in such other states as the Company and the
Warrantholder agree to. In order to comply with the provisions of this Section
6(a), the Company is not required to file more than one registration statement
in addition to the Registration Statement.
Page 4 - Purchase Warrant
<PAGE>
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct
of the registration, including the contents of the registration statement,
will be entirely in the control and at the discretion of the Company. The
Company will file such post-effective amendments and supplements as may be
necessary to maintain the currency of the registration statement during the
Registration Period. In addition, if the Warrantholder participating in the
registration is advised by counsel that the registration statement, in their
opinion, is deficient in any material respect, the Company will use its best
efforts to cause the registration statement to be amended to eliminate the
concerns raised.
(d) The Company will furnish to the Warrantholder the number of
copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as it may
reasonably request in order to facilitate the disposition of Securities owned
by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of
the counsel representing the Company for the purposes of the registration
pursuant to this Section 6, addressed to the Warrantholders and any
Participating Underwriter, (ii) in the event of an underwritten offering,
furnish an appropriate letter from the independent public accountants of the
Company, addressed to the Warrantholders and any Participating Underwriter,
and (iii) make such representations and warranties to the Warrantholders and
any Participating Underwriter as are customarily given to underwriters of
public offerings of equity securities in connection with such offerings. A
request pursuant to this subsection (e) may be made on three occasions. The
documents required to be delivered pursuant to this subsection (e) will be
dated within ten days of the request and will be, in form and substance,
equivalent to similar documents furnished to the underwriters in connection
with the Offering, with such changes as may be appropriate in light of
changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who
controls any selling Warrantholder within the meaning of the Act, and any
Participating Underwriter against any losses, claims, damages, or
liabilities, joint or several, to which any Warrantholder, controlling
person, or Participating Underwriter may be subject under the Act or
otherwise; and it will reimburse each Warrantholder, each controlling person,
and each Participating Underwriter for any legal or other expenses reasonably
incurred by the Warrantholder, controlling person, or Participating
Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action, insofar as such losses, claims, damages,
or liabilities, joint or several (or actions in respect thereof), arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any such
registration statement or any preliminary prospectus or final prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated
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<PAGE>
therein or necessary to make the statements therein not misleading; PROVIDED,
HOWEVER, that the Company will not be liable in any case to the extent that
any loss, claim, damage, or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in any registration statement, preliminary prospectus, final prospectus,
or any amendment or supplement thereto, in reliance upon and in conformity
with written information furnished by a Warrantholder for use in the
preparation thereof. The indemnity agreement contained in this subsection
will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Company, such approval not
to be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed any registration
statement or other filing, or any amendment or supplement thereto, and any
person who controls the Company within the meaning of the Act, against any
losses, claims, damages, or liabilities to which the Company or any such
director, officer, or controlling person may become subject under the Act or
otherwise, and will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said registration
statement, any preliminary or final prospectus, or other filing or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in said registration statement,
preliminary or final prospectus, or other filing, or amendment or supplement,
in reliance upon and in conformity with written information furnished by such
Warrantholder for use in the preparation thereof; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection (b) will not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Warrantholder, such approval not to be
unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, notify the indemnifying party of the commencement
thereof; but the omission to notify the indemnifying party will not relieve
it from any liability that it may have to any indemnified party otherwise
than under subsections (a) and (b).
(d) If any such action is brought against any indemnified party
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent
that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; and after notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation.
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<PAGE>
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the
Warrant may not be sold, transferred, assigned or hypothecated except to
underwriters of the Offering or to individuals who are either a partner or an
officer of such an underwriter or by will or by operation of law. The
Warrant may be divided or combined, upon request to the Company by the
Warrantholder, into a certificate or certificates evidencing the same
aggregate number of Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. OPTIONAL CONVERSION.
(a) In addition to and without limiting the right of any Warrantholder
under the terms of this Warrant, the Warrantholder shall have the right (the
"Conversion Right") to convert this Warrant or any portion thereof into
Securities as provided in this Section 10 at any time or from time-to-time after
the first anniversary of the date hereof and prior to its expiration. Upon
exercise of the Conversion Right with respect to a particular number of Units
subject to this Warrant (the "Converted Securities"), the Company shall deliver
to the holder of this Warrant, without payment by the holder of any exercise
price or any cash or other consideration, that number of Units equal to the
quotient obtained by dividing the Net Value (as hereinafter defined) of the
Converted Securities by the sum of the fair market value (as defined in
paragraph (c) below) of a single share of Common Stock plus a single Unit
Warrant, determined in each case as of the close of business on the Conversion
Date (as hereinafter defined). The "Net Value" of the Converted Securities
shall be determined by subtracting the aggregate Exercise Price of the Converted
Securities from the aggregate fair market value of the Converted Securities.
Notwithstanding anything in this Section 10 to the contrary, the Conversion
Right cannot be exercised with respect to a number of Converted Securities
having a Net Value below $100. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the holder of this Warrant an amount in cash equal to the fair
market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Warrant
by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends
to exercise the Conversion Right and indicating the number of Securities
subject to this Warrant which are being surrendered (referred to in paragraph
(a) above as the Converted Securities) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this
Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the "Conversion Date"), but not later than the
expiration date of this Warrant. Certificates for the shares of Common Stock
and Unit Warrants issuable upon exercise of the Conversion Right, together
with a check in payment of any fractional share and, in the case of a partial
exercise, a new Warrant evidencing the Securities remaining subject to this
Warrant, shall be issued as of the Conversion Date, and shall be delivered to
the holder of this Warrant within seven days following the Conversion Date.
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<PAGE>
(c) For purposes of this Section 10, the "fair market value" of a share
of Common Stock or Unit Warrant as of a particular date shall be the mean
between the bid and asked price of the Common Stock or Unit Warrant, as the
case may be, as quoted in the over the counter market, or, if applicable, the
closing sale price of the Common Stock or Unit Warrant, as the case may be,
on the Nasdaq Stock Market or a national exchange.
11. NOTICE. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail addressed as
follows:
If to the Company:
10833 Thornmint Road
San Diego, California 92127
Attn: President
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
12. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this
Warrant Certificate shall be tried before the courts of Oregon located in
Multnomah County, Oregon, to the exclusion of all other courts that might have
jurisdiction.
Dated as of _______ ___, 2000.
IMAGEWARE SYSTEMS, INC.
By:________________________________
________________________________
Agreed and Accepted as of ________ ___, 2000
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<PAGE>
PAULSON INVESTMENT COMPANY, INC.
By:_______________________________
_______________________________
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<PAGE>
Exhibit 10.35
CONVERTIBLE PROMISSORY NOTE
$1,250,000.00 November 10, 1999
San Diego, California
FOR VALUE RECEIVED, ImageWare Software, Inc., a California corporation
("Maker"), promises to pay to Naoya Harano ("Holder"), or order, at the address
of Holder as set forth on the signature page hereof, or such other place as
Holder may from time to time designate, the principal amount of One Million Two
Hundred Fifty Thousand Dollars ($1,250,000.00), with interest on such amount
until paid, at the rate set forth below and payable as follows:
INTEREST RATE
The amount of outstanding principal shall bear interest at the rate of
ten percent (10%) per annum. Interest shall accrue on the principal balance from
and after November 10, 1999 and shall be calculated on the basis of a 365-day
year.
PAYMENT
A payment of interest only shall be paid annually on each anniversary
of the date of this Note; provided, however, if the Maker does not make such
payment, the amount equivalent to the interest accrued hereunder as of each
anniversary date shall be added to the principal and shall accrue interest at
the rate of ten percent (10%) per annum. All outstanding principal and accrued
and unpaid interest shall be payable upon the earlier of (a) February 10, 2001
or (b) within five business (5) days after the closing of the initial
underwritten public offering of Maker's common stock pursuant to a registration
statement under the Securities Act of 1933.
Any payment hereunder shall be applied first to expenses of collection,
if any, then to accrued interest, and the balance, if any, shall be then applied
to reduction of principal. All amounts due hereunder shall be paid in lawful
money of the United States of America.
CONVERSION OPTION
If the outstanding principal and accrued and unpaid interest due
hereunder has not been paid on or before April 1, 2000 (the "Exercise Date"),
then Holder may, at its option, at any time and from time to time, elect to
convert (the "Conversion Right") all or a portion of the then outstanding
principal and accrued and unpaid interest and any other amount due hereunder
into shares of the Common Stock (the "Shares") of Maker at $1.00 (the
"Conversion Price") per Share. Notwithstanding the section entitled "ADJUSTMENTS
TO THE CONVERSION PRICE" below, it is the intent of the Maker and the Holder
that the Conversion Price is on a post-split basis after the 5.275 to 1 reverse
stock split which is anticipated to occur prior to Maker's filing of a
registration statement for its initial public offering of securities. The
Conversion Right shall be exercisable by written notice to Maker by Holder at
any time after the Exercise Date.
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In order to effect the Conversion Right, Holder shall deliver a copy of
the fully executed Notice of Conversion (the form of which is attached hereto)
to Maker for the Shares. Upon receipt by Maker of the Notice of Conversion from
Holder, Maker shall promptly send a confirmation to Holder stating that the
Notice of Conversion has been received and the date upon which Maker expects to
deliver the Shares which are the subject of such Notice of Conversion. No
fractional Shares shall be issued upon conversion. Amounts converted pursuant to
the foregoing shall be deemed fully paid and satisfied and Holder shall note
such satisfaction in the original copy of this Note.
The Shares shall not be registered under the Securities Act of 1933, as
amended (the "Securities Act"), and shall be subject to restrictions on transfer
as imposed by the Securities Act and/or state securities laws. The Holder shall
have the same registration rights with respect to the Shares as have been
granted to Holder in the Stock Purchase Warrant between Holder and Maker of even
date herewith.
Holder represents, warrants and covenants that (i) Holder has had, and
continues to have, access to detailed information with respect to the business,
financial condition, results of operations and prospects of Maker; (ii) Holder
has received or has been provided access to all material information concerning
an investment in Maker represented by the Conversion Right and the Shares; (iii)
as a result of Holder's study of the aforementioned information and Holder's
prior overall experience in financial matters, and Holder's familiarity with the
nature of businesses such as Maker, Holder is properly able to evaluate the
capital structure of Maker, the business of Maker, and the risks inherent
therein; (iv) Holder has been given the opportunity to obtain any additional
information or documents from, and to ask questions and receive answers of, the
officers, directors and representatives of Maker to the extent necessary to
evaluate the merits and risks related to an investment in Maker represented by
the Conversion Right and the Shares; (v) Holder's investment in securities of
Maker pursuant hereto is consistent, in both nature and amount, with Holder's
overall investment program and financial condition; (vi) Holder's financial
condition is such that Holder can afford to bear the economic risk of holding
securities and to suffer a complete loss of Holder's investment in Maker
represented by the Conversion Right and the Shares; and (v) Holder presently
qualifies and will as of the date of the Conversion Right qualify as an
"accredited investor" within the meaning of Regulation D of the rules and
regulations promulgated under the Securities Act.
ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time
only as follows:
(a) If at any time on or after the date of this Note, the number of
outstanding shares of Common Stock of Maker is increased by a stock split, stock
dividend, combination, reclassification or other similar event, the Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a reverse stock split, combination or
reclassification of shares, or other similar event, the Conversion Price shall
be proportionately increased.
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(b) In case the Maker shall make or issue, or shall fix a record date
for the determination of eligible holders entitled to receive, a dividend or
other distribution with respect to the shares payable in (i) securities of the
Maker (other than Shares of Common Stock) or (ii) assets (excluding cash
dividends paid or payable solely out of retained earnings), then in each case,
the holder of this Note on conversion hereof at any time after the consummation,
effective date or record date of such event, shall receive, in addition to the
Shares issuable on such conversion prior to such date, the securities or other
assets of the Maker to which such holder would have been entitled upon such date
if such holder had converted this Note immediately prior thereto (all subject to
further adjustment as provided in this Note).
(c) In case of any merger of the Maker with or into any other
corporation, entity or person, or any other corporate reorganization, in which
the Maker shall not be the continuing or surviving entity of such reorganization
or merger, or any sale of all or substantially all of the assets of the Maker
(any such transaction being hereinafter referred to as a "Reorganization"),
then, in each case, (i) the holder of this Note shall be provided with written
notice of the proposed Reorganization at least thirty (30) days prior to the
proposed Reorganization date, and (ii) the holder of this Note, on conversion
hereof at any time after the consummation or effective date of such
Reorganization (the "Reorganization Effective Date"), shall receive, in lieu of
the Shares issuable on such conversion prior to the Reorganization Effective
Date, the stock and other securities and property (including cash) to which such
Holder would have been entitled upon the Reorganization Effective Date if such
Holder had converted this Note immediately prior thereto (all subject to further
adjustment as provided in this Note).
(d) In case of any adjustment or readjustment in the price or kind of
securities issuable on the conversion of this Note, the Maker will promptly give
written notice thereof to the holder of this Note setting forth such adjustment
or readjustment and showing in reasonable detail the computation of such
adjustment.
(e) The Maker will not, by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Note,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holder of this Note against dilution or other
impairment. Without limiting the generality of the foregoing, the Maker (a) will
at all times reserve and keep available a number of its authorized Shares of
Common Stock, free from all preemptive rights therein, which will be sufficient
to permit the conversion of this Note and (b) shall take all such action as may
be necessary or appropriate in order that all Shares as may be issued pursuant
to the conversion of this Note will, upon issuance, be duty and validly issued,
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof.
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DEFAULT/ACCELERATION
If any one or more of the following events shall occur (hereinafter
called an "Event of Default"), namely: (i) default shall be made in the payment
of any amount owning hereunder when due; or (ii) the Maker shall become
insolvent, or shall be unable to pay its debts as they mature; or shall admit in
writing its inability to pay its debts as they mature; or shall make an
assignment for the benefit of its creditors; or shall file or commence or have
filed or commenced against it any proceeding for any relief under any bankruptcy
or insolvency law or any law or laws relating to the relief of debtors,
readjustment of indebtedness, reorganizations, compositions or extensions (and
in the case of an in voluntary proceeding, the same shall not be dismissed or
stayed within sixty (60) days thereof), THEN, upon the occurrence of any such
Event of Default, Holder at its election, and without presentment, demand,
notice of any kind, all of which are expressly waived by Maker, may declare the
entire outstanding balance of principal and interest thereon immediately due and
payable; provided, however, that upon the occurrence of an Event of Default
described in clause (ii) above, all amounts due hereunder shall become
immediately and automatically due and payable without any requirement of notice
or other action by Holder.
NO WAIVER BY HOLDER
The acceptance by Holder of any payment under this Note after the date
such payment is due, or the failure to declare an Event of Default as herein
provided, shall not constitute a waiver of any of the terms of this Note or the
right to require the prompt payment when due of future or succeeding payments or
to declare an Event of Default for any failure to so pay or for any other
default. The acceptance by Holder of a payment of a portion of any installment
at any time that such installment is due in full shall not cure or excuse the
default caused by the failure to pay such installment in full and shall not
constitute a waiver of the right to require full payment when due of all future
or succeeding installments.
ATTORNEYS' FEES AND COSTS
In the event Holder takes any action to enforce any provision of this
Note, either through legal proceedings or otherwise, Maker promises to
immediately reimburse Holder for reasonable attorneys' fees and all other costs
and expenses so incurred. Maker shall also reimburse Holder for all attorneys'
fees and costs reasonably incurred in the representation of Holder in any
bankruptcy, insolvency, reorganization or other debtor-relief proceeding of or
relating to Maker or any security for the obligations hereunder, or for any
action to enforce any judgment rendered hereon or relating to enforcement
hereof.
WAIVERS
The Maker, endorsers, guarantors and sureties of this Note hereby waive
diligence, demand, presentment, protest and demand and notice of such protest,
demand, dishonor and non-payment of this Note; expressly agree that this Note,
or any payment or performance or other term hereunder,
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<PAGE>
may be renewed, modified or extended from time to time and at any time; and
consent to the acceptance or release of security for this Note or the release of
any party or guarantor, all without in any way affecting their liability and
waive the right to plead any and all statutes of limitations as a defense to any
demand on this Note, or on any guaranty thereof, or to any agreement to pay the
same to the full extent permissible by law.
MAXIMUM INTEREST
In no event whatsoever shall the amount paid, or agreed to be paid, to
Holder for the use, forbearance or detention of money to be loaned hereunder or
otherwise, or for the performance or payment of any covenant or obligation
contained herein, exceed the maximum amount permissible under applicable law. If
from any circumstance whatsoever fulfillment of any provision hereof exceeds the
limit of validity prescribed by law, then, IPSO FACTO, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstance Holder shall ever receive as interest under this Note or otherwise
an amount that would exceed the highest lawful rate, such amount that would be
excessive interest shall be applied to the reduction of the principal amount
owing hereunder (without charge for prepayment) and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal,
such excess shall be refunded to Maker.
PREPAYMENT
Maker may prepay this Note in full or in part at any time without
premium. No partial prepayment shall release Maker from thereafter tendering
required payments until the Note is paid in full. Upon any election by Maker to
prepay this Note, Holder shall have the right to accept such prepayment or elect
to convert the amount sought to be prepaid. If such prepayment is made prior to
the Exercise Date, Holder shall retain the right to purchase shares in the
amount of such prepayment at the Conversion Price provided Holder exercises such
right within 30 days after the Exercise Date.
BINDING ON SUCCESSORS
The terms of this Note shall inure to the benefit of and bind the
parties hereto and their heirs, legatees, devisees, representatives, successors
and assigns. As used herein the term "Maker" shall include the undersigned Maker
and any other person or entity who may subsequently become liable for the
payment hereof. The term "Holder" shall include the named Holder as well as any
other person or entity to whom this Note or any interest in this Note is
conveyed, transferred or assigned.
AUTHORITY TO BIND
Each person signing this Note on behalf of Maker represents and
warrants that he has full authority to do so and that this Note binds the
corporation.
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TIME OF ESSENCE
It is agreed that time is of the essence as to every term, condition
and provision of this Note.
NOTICE
All notices, demands and other communications required or permitted
hereunder shall be in writing and shall be deemed effective the earliest of (i)
actual delivery if delivered by personal delivery, (ii) three (3) days following
deposit, first class postage prepaid, with the United States mail, (iii) upon
the earliest to occur, if sent by certified postage prepaid mail, of three (3)
days following deposit thereof in the United States mail or receipt (or refusal
to accept delivery), or (iv) on the next business day after timely and proper
deposit with an overnight air courier with request for next business day
delivery. For purposes of notice, the address of Maker shall be as set forth on
the signature page hereof and the address of the Holder shall be as set forth on
the signature page hereof; provided, however, that any party shall have the
right to change its address for notice hereunder to any other location by giving
notice to the other party in the manner set forth above.
SEVERABILITY
Every provision hereof is intended to be several and if any provision
is determined by a court of competent jurisdiction to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall not affect
the other provisions hereof, which shall remain binding and enforceable.
MODIFICATION
This Note may not be changed or modified orally, nor may any right or
provision hereof be waived orally, but in each instance only by an instrument in
writing signed by the party against which enforcement of such change,
modification or waiver is sought.
REMEDIES CUMULATIVE
Each and every right, remedy and power hereby granted to Holder or
allowed it by law or other agreement shall be cumulative and not exclusive and
may be exercised by Holder from time to time.
CURRENCY CONVERSION
It is the intent of the Maker and Holder that the principal of this
Note be subject to adjustment based upon the fluctuation of the rate of exchange
between U.S. dollars and Japanese yen between the date hereof and the date of
repayment of the principal hereunder. It is agreed that the rate of exchange
between U.S. dollars and Japanese yen as of the date of this Note is 104.55
Japanese yen per U.S. dollar, and therefore the original principal amount of
this Note of
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$1,250,000.00 is as of the date hereof equal to 130,687,500 Japanese yen (the
"Original Yen Amount"). Thus, the principal amount of this Note shall be
adjusted as of the time of final payment hereunder so that the amount repaid
hereunder in U.S. dollars shall equal, based upon the foreign exchange rate
published in the Wall Street Journal on such repayment date setting forth the
foreign exchange rate as of the business day proceeding the date of repayment,
the Original Yen Amount. Maker and Holder acknowledge that such adjustment may
either increase or decrease the principal amount owing hereunder as of the date
of repayment.
IMPERIAL BANK LOAN
Maker shall use its best efforts to obtain the consent of Imperial Bank
to permit Maker to grant to Holder a security interest in the assets of Maker to
secure Maker's obligations to Holder hereunder and shall make a written request
to Imperial Bank for such consent within 45 days from the date of this Note and
will provide a copy of such written request to Holder. During the term of this
Note, upon notice by Holder to Maker of Holder's desire to pay off in full and
receive an assignment of Maker's outstanding obligation to Imperial Bank under
Maker's existing line of credit with Imperial Bank, Maker shall cooperate with
Holder (which shall not include any expenditure of funds) to cause Imperial Bank
to permit such repayment and assignment.
GOVERNING LAW
This Note shall be governed by and construed under the internal laws of
the State of California. This Note shall be deemed made and entered into in San
Diego County, California.
HOLDER: MAKER:
ImageWare Software, Inc., a California
corporation
/s/ Naoya Horano /s/ S. James Miller, Jr.
- ------------------------------------ By: -----------------------------------
Naoya Harano S. James Miller, Jr., President
ADDRESS: ADDRESS:
c/o Atlus Co., Ltd. 10883 Thornmint Road
4-8 Kagurazaka San Diego, California 92127
Shinjuku-ku, Tokyo, Japan Attn: S. James Miller, Jr.
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NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert $________________ principal
amount of the Convertible Promissory Note dated November 10, 1999 (the "Note")
issued by ImageWare Software, Inc. ("Maker"), plus all accrued and unpaid
interest on such principal amount (i.e. $______________), into shares of common
stock ("Common Stock") of Maker according to the conditions of the Note, as of
the date written below. If securities are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto.
The undersigned represents and warrants that al offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Note shall be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from
registration under the Act.
In the event this Notice of Conversion is for the remaining amount owing under
the Note, the undersigned acknowledges that this Notice of Conversion shall not
become effective until and unless the original copy of this Note marked "PAID IN
FULL" has been delivered to Maker or other satisfactory evidence of payment of
the Note is provided to Maker.
Date of Conversion:__________________________
Applicable Conversion Price:_________________
Number of Shares of
Common Stock to be Issued:___________________
Signature:___________________________________
Name:________________________________________
Address:_____________________________________
ACKNOWLEDGED AND AGREED:
IMAGEWARE SOFTWARE, INC.
By:______________________________
Name:____________________________
Title:___________________________ Date:_________________________________
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Exhibit 10.37
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND ITS SALE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993. NEITHER THIS WARRANT NOR THE
SECURITIES ISSUABLE UPON THE EXERCISE HEREOF NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
Void after November 10, 2004
STOCK PURCHASE WARRANT
This Stock Purchase Warrant ("Warrant") is issued, for good and
valuable consideration, receipt of which is hereby acknowledged, to Naoya Harano
(the "Purchaser"), by ImageWare Software, Inc., a California corporation (the
"Company").
1. PURCHASE OF SHARES; PURCHASE PRICE. Subject to the terms and
conditions hereinafter set forth, the holder of this Warrant is entitled, upon
surrender of this Warrant at the office of the Company at 10883 Thornmint Road,
San Diego, California 92127 (or at such other place as the Company shall notify
the holder hereof in writing), to purchase from the Company 125,000 shares of
Common Stock for $6.00 per share. The shares of Common Stock of the Company
issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares." Notwithstanding the provisions of Section 4 or 5 below, it is the
intent of the Company and the Purchaser that the amount of warrants to purchase
shares of Common Stock being granted hereunder and the $6.00 per share exercise
price are on a post-split basis after the 5.275 to 1 reverse stock split which
is anticipated to occur prior to the Company's filing of a registration
statement for its initial public offering of securities. If such reverse stock
split does not occur, the amount of warrants granted hereunder and the exercise
price will be adjusted accordingly.
2. EXERCISE PERIOD. This Warrant is exercisable at any time after
January 1, 2001 and before 5:00 P.M., San Diego, California time, on November
10, 2004, at which time this Warrant shall expire.
3. METHOD OF EXERCISE. During the period this Warrant remains
outstanding and exercisable in accordance with Section 2 above, the holder may
exercise this Warrant, in whole or in part, by:
a. surrendering this Warrant, together with a duly executed
copy of the form of Subscription attached hereto to the Secretary of the Company
at its principal offices; and
b. paying to the Company an amount equal to the aggregate
Exercise Price of the number of Shares being purchased.
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4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number of
Shares purchasable upon exercise of this Warrant and the Exercise Price shall be
subject to adjustment from time to time only as follows:
a. The Exercise Price of this Warrant and the number of Shares
issuable upon exercise of this Warrant shall be appropriately adjusted to
reflect any stock dividend, stock split, combination of shares of stock,
reclassification, recapitalization or other similar event affecting the number
of outstanding shares of Common Stock, as follows:
i. The Exercise Price in effect at the time of such
event shall be adjusted so that it shall equal the price determined by
multiplying the Exercise Price by a fraction, the denominator of which shall be
the number of shares of Common Stock outstanding immediately after giving effect
to such event, and of which the numerator shall be the number of shares of
Common Stock outstanding immediately prior to such event. Such adjustment shall
be made successively whenever any event specified above shall occur.
ii. Whenever the Exercise Price payable upon exercise
of this Warrant is adjusted pursuant to subparagraph (i) above, the number of
Shares purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of Shares initially issuable upon exercise of
this Warrant by the initial Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
b. In case the Company shall make or issue, or shall fix a
record date for the determination of eligible holders entitled to receive, a
dividend or other distribution with respect to the shares payable in (i)
securities of the Company (other than Shares of Common Stock) or (ii) assets
(excluding cash dividends paid or payable solely out of retained earnings), then
in each case, the holder of this Warrant on exercise hereof at any time after
the consummation, effective date or record date of such event, shall receive, in
addition to the Shares issuable on such exercise prior to such date, the
securities or other assets of the Company to which such holder would have been
entitled upon such date if such holder had exercised this Warrant immediately
prior thereto (all subject to further adjustment as provided in this Warrant).
c. In case of any merger of the Company with or into any other
corporation, entity or person, or any other corporate reorganization, in which
the Company shall not be the continuing or surviving entity of such
reorganization or merger, or any sale of all or substantially all of the assets
of the Company (any such transaction being hereinafter referred to as a
"Reorganization"), then, in each case, (i) the holder of this Warrant shall be
provided with written notice of the proposed Reorganization at least thirty (30)
days prior to the proposed Reorganization date, and (ii) the holder of this
Warrant, on exercise hereof at any time after the consummation or effective date
of such Reorganization (the "Effective Date"), shall receive, in lieu of the
Shares issuable on such exercise prior to the Effective Date, the stock and
other securities and property (including cash) to which such Holder would have
been entitled upon the Effective Date if such
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Holder had exercised this Warrant immediately prior thereto (all subject to
further adjustment as provided in this Warrant).
d. In case of any adjustment or readjustment in the price or
kind of securities issuable on the exercise of this Warrant, the Company will
promptly give written notice thereof to the holder of this Warrant in the form
of a certificate, certified and confirmed by the Board of Directors of the
Company, setting forth such adjustment or readjustment and showing in reasonable
detail the computation of such adjustment.
5. DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against dilution or other impairment. Without limiting the generality of
the foregoing, the Company (a) will at all times reserve and keep available a
number of its authorized Shares of Common Stock, free from all preemptive rights
therein, which will be sufficient to permit the exercise of this Warrant and (b)
shall take all such action as may be necessary or appropriate in order that all
Shares as may be issued pursuant to the exercise of this Warrant will, upon
issuance, be duty and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof.
6. PRE-EXERCISE RIGHTS. Prior to exercise of this Warrant, the holder
shall not be entitled to any rights of a shareholder with respect to the Shares,
including (without limitation) the right to vote such Shares, receive dividends
or other distributions thereon, exercise preemptive rights or be notified of
shareholder meetings, and such holder shall not be entitled to any notice or
other communication concerning the business or affairs of the Company, except as
set forth herein.
7. RESTRICTED SECURITIES. The holder understands that this Warrant and
the Shares purchasable hereunder constitute "restricted securities" under the
federal securities laws inasmuch as they have been, or will be, acquired from
the Company in transactions not involving a public offering and accordingly may
not, under such laws and applicable regulations, be resold or transferred
without registration under the Securities Act of 1933, as amended, or an
applicable exemption from registration. The holder further acknowledges that the
Shares and any other securities issued upon exercise of this Warrant shall bear
a legend substantially in the form of the legend appearing on the face hereof.
8. CERTIFICATION OF INVESTMENT PURPOSE. Unless a current registration
statement under the Securities Act of 1933, as amended (the "Act"), shall be in
effect with respect to the offer and sale of the securities to be issued upon
exercise of this Warrant, the holder of this Warrant covenants and agrees that,
at the time of exercise hereof, such holder will deliver to the Company a
written certification that the securities acquired by the holder upon exercise
hereof are for the account of the
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holder, are being acquired for investment purposes only and are not being
acquired with a view to, or for sale in connection with, any public distribution
thereof.
9. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
a. The Holder agrees that prior to making any disposition of
the Warrants or the Shares, the Holder shall give written notice to the Company
describing briefly the manner in which any such proposed disposition is to be
made; and no such disposition shall be made if the Company has notified the
Holder that in the opinion of counsel reasonably satisfactory to the Holder a
registration statement or other notification or post-effective amendment thereto
(hereinafter collectively a "Registration Statement") under the Act is required
with respect to such disposition and no such Registration Statement has been
filed by the Company with, and declared effective, by the Securities and
Exchange Commission.
b. (i) At any time commencing after the closing of the
Company's initial public offering of its securities and prior to November 30,
2003, the Company will, as promptly as practicable (but in any event within 60
days), after written request by a person or persons holding (or having the right
to acquire by virtue of holding the Warrants) at least 50% of the Shares which
have been (or may be) issued upon exercise of all of the Warrants that were
issued to the shareholders of XImage upon the acquisition of XImage by
ImageWare, prepare and file at the Company's expense a Registration Statement
with the Commission and appropriate Blue Sky authorities sufficient to permit
the public offering of the Shares (but not the Warrants) and will use its best
efforts through its officers, directors, auditors and counsel, in all matters
necessary or advisable, to cause such Registration Statement to become effective
as promptly as practicable and to keep such registration effective for a period
of the lesser of 90 days or the date of completion of the distribution described
in the Registration Statement; provided, however, that the Company shall only be
obligated to file one such Registration Statement under this Section 9(b)(i).
(ii) Whenever during the period ending on November 30,
2003, the Company proposes to file with the Commission a Registration
Statement (other than as to securities issued pursuant to an employee benefit
plan or as to a transaction subject to Rule 145 promulgated under the Act or
which a form S-4 Registration Statement could be used), it shall, promptly
prior to each such filing, give written notice of such proposed filing to the
Holder and each holder of Shares at their respective addresses as they appear
on the records of the Company, and shall offer to include and shall include
in such filing any proposed disposition of the Shares (but not the Warrants)
upon receipt by the Company, within 20 days after such written notice is
given, of a request therefor setting forth the facts with respect to such
proposed disposition and all other information with respect to such person
reasonably necessary to be included in such Registration Statement. If the
registration for which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise as part of
the written notice given pursuant to this Section. In such event, the right
of any Holder or holder of Shares to registration pursuant to Section 9(b)(i)
shall be conditioned upon the participation in such underwriting of the
Holder or holder of Shares, and the inclusion of their Shares in the
underwriting shall be limited to the extent provided
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herein. All Holders or holders of Shares proposing to distribute their Shares
through such underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by
the Company. Notwithstanding any other provision of this Section 9(b), if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, such underwriter may limit the amount
of securities to be included in the registration and underwriting by the holders
of Company securities exercising "piggyback" registration rights (including the
Holder and each holder of Shares). The Company shall so advise all such holders
of Company securities exercising "piggyback" registration rights, and the number
of shares of such securities that may be included in the registration and
underwriting shall be allocated among all of such holders, in proportion, as
nearly as practicable, to the respective amounts of securities requested by such
holders to be included in such registration statement. Any securities excluded
or withdrawn from such registration and underwriting shall not be transferred
prior to one hundred twenty (120) days after the effective date of the
registration statement relating thereto, or such shorter period of time as the
underwriters may require.
(iii) In the event that any such Registration Statement
is utilized for a public offering of any of the Shares to be received upon
exercise of the Warrants pursuant to this Section 9, the Holder may elect to
pay the Exercise Price of the Warrants to the Company out of the proceeds of
the sale of the Shares pursuant to the Registration Statement concurrently
with the closing of such sale of the Shares. In such event, (1) the Shares
will not be issued by the Company until they are sold, and (2) the Shares
will not be delivered to the purchaser of such Shares until satisfactory
provision is made for paying the Warrant Price to the Company with respect to
such Shares.
c. All fees, disbursements and out-of-pocket expenses (other
than the Holder's brokerage fees and commissions and legal fees of counsel to
the Holder, if any) in connection with the filing of any Registration Statement
under Section 9(b) (or obtaining the opinion of counsel and any no-action
position of the Commission with respect to sales under Rule 144) and in
complying with applicable securities and Blue Sky laws shall be borne by the
Company. The Company at its expense will supply any Holder and any holder of
Shares with copies of such Registration Statement and the prospectus included
therein and other related documents any opinions and no-action letters in such
quantities as may be reasonably requested by the Holder or holder of Shares.
d. The Company shall not be required by this Section 9 to file
such Registration Statement if, in the opinion of counsel for the Holders and
holders of Shares and the Company (or, should they not agree, in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such holders and the Company), the proposed transfer as to which such
Registration Statement is requested is exempt from applicable federal and state
securities laws under Rule 144 promulgated under the Act.
e. The provisions of this Section 9 and Section 10 hereof
shall apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
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f. The Company agrees that until all Shares have been sold
under a Registration Statement or pursuant to Rule 144 under the Act, it will
use its best efforts to keep current in filing all materials required to be
filed with the Commission in order to permit the holders of such securities to
sell the same under Rule 144.
g. The Company shall be entitled, for a reasonable period of
time which in no event shall exceed 60 days (i) to postpone the filing of a
Registration Statement or any amendment or supplement thereto or to the
prospectus relating thereto otherwise required, or (ii) to suspend effectiveness
of the Registration Statement, if the Company (a) determines, in its reasonable
judgment, that the registration or sale of the Shares would materially interfere
with any pending or proposed financing, acquisition, corporate reorganization or
other material transaction involving the Company or any of its subsidiaries, and
(b) promptly gives those persons exercising their registration right hereunder
written notice of such determination.
h. The Company may require those persons exercising their
registration rights hereunder to furnish to the Company such information
regarding the distribution of such Shares as the Company may from time to time
request in writing and such other information as may be legally required in
connection with such registration.
i. At any time when a prospectus relating to a sale of the
Shares is required to be delivered under the Act, there occurs an event
requiring the preparation of a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of the Shares, such prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, then the Company will promptly make available to any
Holder any such supplement of amendment. Each Holder agrees that, upon receipt
of any notice from the Company of the happening of any event of the kind
described in the preceding sentence hereof, such Holder will forthwith
discontinue disposition of Shares pursuant to the Registration Statement
covering such Shares until the Holder's receipt of the copies of the
supplemented or amended prospectus, and, if so directed by the Company, the
Holder will deliver to the Company all copies, other than permanent file copies
then in the Holder's possession of the prospectus covering such Shares current
at the time of receipt of such notice. If such amendments or supplements are not
made by the Company within ten (10) days of such notice by the Company or if in
the opinion of counsel to the Holders such amendments or supplements to the
prospectus, if made, are insufficient in light of the requirements of the Act
and other applicable law, the Holders shall not be deemed to have exercised
their demand registration rights pursuant to Section 9(b)(i) herein.
10. INDEMNIFICATION.
a. In the event of the filing of any Registration Statement
with respect to the Shares pursuant to Section 9 hereof, the Company agrees to
indemnify and hold harmless the Holder or any holder of Shares and each person,
if any, who controls the Holder or any holder of Shares
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within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Holder or any holder of Shares or controlling
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any such Registration Statement or Prospectus included
therein, or amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or Prospectus or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by such Holder, the holder of such Shares or the
underwriters of such offering specifically for use in the preparation thereof.
This indemnity will be in addition to any liability which the Company may
otherwise have.
b. The Holders and the holders of Shares agree that they will
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect hereof) arise out of or are based upon any
untrue statement of any material fact contained in such Registration Statement
or Prospectus included therein, or amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such Registration Statement or Prospectus included therein, or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by the Holder or holder of Shares specifically for use
in the preparation thereof, this indemnity agreement will be in addition to any
liability which the Holder or holder of Shares may otherwise have.
c. Promptly after receipt by an indemnified party under this
Section 10 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 10, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
the indemnifying party from any liability which it may have to any indemnified
party otherwise than as to the a particular item as to which indemnification is
then being sought solely pursuant to this Section 10. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly
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notified, reasonably assume the defense thereof, subject to the provisions
herein stated, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party under this Section 10 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof, other than reasonable costs of investigation, unless
the indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
a Holder or a holder of Shares or a person who controls a Holder or a holder of
Shares within the meaning of the Act, the fees and expenses of such counsel
shall be at the expenses of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action, including any impleaded parties,
include both a Holder or a holder of Shares or such controlling person and the
indemnifying party and a Holder or a holder of Shares or such controlling person
shall have been advised by such counsel that there may be one or more legal
defenses available to a Holder or a holder of Shares or controlling person which
are not available to or in conflict with any legal defenses which may be
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of a Holder or
a holder of Shares or such controlling person, it being understood, however,
that the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
Holders, the holders of the Shares and controlling persons, which firm shall be
designated in writing by a majority in interest of such holders and controlling
persons based upon the value of the securities included in the Registration
Statement). No settlement of any action against an indemnified party shall be
made without the consent of the indemnified and the indemnifying parties, which
shall not be unreasonably withheld in light of all factors of importance to such
parties.
11. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is
lost, stolen, mutilated or destroyed, the Company shall, upon receipt of a
reasonable agreement to indemnify the Company, and, in the case of a mutilated
warrant, upon the surrender thereof, issue in the name requested a new warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed.
12. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon, the Company and the holders
hereof and their respective successors and permitted assigns.
13. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the substantive laws of the State of California without regard
to principles of conflicts of laws.
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14. STATUS OF HOLDER. The holder represents and warrants that the
holder is not an affiliate of, or related party to, any underwriter or
broker-dealer, and acknowledges that the Company is issuing this Warrant in
reliance upon such representation and warranty of holder.
Dated: November 10, 1999 IMAGEWARE SOFTWARE, INC.
By: /s/ S. James Miller, Jr.
-------------------------------------
S. James Miller, Jr., President
/s/ Naoya Harano
----------------------------------------
Naoya Harano
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SUBSCRIPTION
ImageWare Software, Inc.
Attention: Corporate Secretary
The undersigned hereby elects to purchase, pursuant to the provisions
of the Stock Purchase Warrant issued by ImageWare Software, Inc. and held by the
undersigned, shares of Common Stock of ImageWare Software, Inc.
Payment of the purchase price per Share required under such Warrant
accompanies this Subscription.
The undersigned hereby represents and warrants that the undersigned is
acquiring such shares for his own account, for investment purposes only and not
for resale or with a view to distribution of such Shares or any part thereof.
Date:
------------------------
Signature:
-----------------------------
Address:
-------------------------------
-------------------------------
Name in which Shares should be registered:
- -----------------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form SB-2 of our report dated October 22, 1999, except as to
Note 5, which is as of December 13, 1999, relating to the financial
statements of ImageWare Systems, Inc. and our report dated October 22, 1999
relating to the financial statements of XImage Corporation, which appear in
such Registration Statement. We also consent to references to us under the
headings "Experts" and "Selected Financial Information" in such Registration
Statement.
PricewaterhouseCoopers LLP
San Diego, California
February 8, 2000
