UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10
-K/A
(Amendment
No. 1)
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ANNUAL
REPORT
PURSUANT
TO
SECTION
13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934.
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For
the fiscal year ended December 31, 2007.
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934.
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For
the transition
period to .
Commission
File Number 001-15757
IMAGEWARE
SYSTEMS, INC.
(Exact
name of Registrant as Specified in its Charter)
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Delaware
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33-0224167
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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10883
Thornmint Road, San Diego, California
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92127
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(Registrant’s
telephone number, including area code):
(858) 673-8600
Securities
registered pursuant to Section 12(b) of the Exchange Act:
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Title
of Each Class
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Name
of Each Exchange
on
Which Registered
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Common
Stock, $0.01 par value
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American
Stock Exchange
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Warrants
to Purchase Common Stock
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
x
(Do
not check if a
smaller
reporting company)
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Smaller
reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing sales price of the
issuer’s Common Stock on June 30, 2007, as reported on the American Stock
Exchange was approximately $27,985,450. Excluded from this
computation were 557,118 shares of Common Stock held by all current executive
officers and directors and 1,539,901 shares held by each person who is known by
the registrant to own 5% or more of the outstanding Common
Stock. Share ownership information of certain persons known by the
issuer to own greater than 5% of the outstanding Common Stock for purposes of
the preceding calculation is based solely on information on Schedule 13G
filed with the Commission and is as of June 30, 2006. Exclusion of shares
held by any person or entity should not be construed to indicate that such
person or entity possesses the power, directly or indirectly, to direct or cause
the direction of the management or the policies of the Registrant.
The
number of shares of the registrant’s common stock outstanding as of
April 4, 2008 was 18,075,639.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
EXPLANATORY
NOTE: This Amendment No. 1 on Form 10-K/A amends the Registrant’s Annual Report
on Form 10-K, as filed by the Registrant on April 15, 2008, and is being filed
solely to amend (i) Item 1A to update risks related to the Registrant’s business
and (ii) Item 5 to incorporate the stock performance graph in accordance with
Item 201(e) of Regulation S-K and (iii) replace Part III, Item 10 through Item
14, previously intended to be incorporated by reference to the
definitive proxy statement for our annual meeting. The required
certifications are included with this amendment as Exhibits 31.1 and 31.2 of
this amended report.
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PART
I
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Item
1A.
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Risk
Factors
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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Item
11.
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Executive
Compensation
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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Item
14.
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Principal
Accountant Fees and Services
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Item
15.
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Exhibits
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Signatures
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PART
I
An
investment in our common stock involves a high degree of risk. before investing
in our common stock, you should consider carefully the specific risks detailed
in this “Risk Factors” section and any applicable prospectus supplement,
together with all of the other information contained in this prospectus and any
prospectus supplement. If any of these risks occur, our business, results of
operations and financial condition could be harmed, the price of our common
stock could decline, and you may lose all or part of your
investment.
RISKS
RELATED TO OUR BUSINESS
Risks
Related to Our Business
AMEX has notified us of its intent
to remove our common stock from listing and registration on the
exchange
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On April
25, 2008, we received a letter from the American Stock Exchange (“AMEX”)
advising that a Listing Qualifications Panel of the AMEX Committee on Securities
(the “Panel”) had affirmed the determination of the staff of the Listing
Qualifications Department of AMEX (the “Staff”) to delist our common stock from
AMEX as a result of our failure to comply with: (A) Section
1003(a)(ii) of the AMEX Company Guide (the “Company Guide”), because we have
shareholders’ equity of less than $4 million and and have sustained losses from
continuing operations and net losses in three out of our four most recent fiscal
years; and (B) Section 1003(a)(iii) of the Company Guide, because we have
shareholders’ equity of less than $6 million and have sustained losses from
continuing operations and net losses in our five most recent fiscal
years.
Additionally,
AMEX informed us that it will suspend trading in our common stock as soon as
practicable and will file an application with the Securities and Exchange
Commission ("SEC") to remove our common stock from listing and registration on
AMEX when and if authorized by the SEC.
Upon
delisting, our common stock may be eligible for quotation on the
Over-the-Counter Bulletin Board ("OTCBB"). However, the delisting
could adversely affect the public price of our common stock and limit our
stockholders' ability to dispose of, or to obtain accurate quotations as to the
prices of, our common stock. Moreover, our ability to obtain financing on
favorable terms, or at all, may be adversely affected by the delisting because
certain institutional investors that have policies against investments in
companies that are not traded on a national securities exchange and other
investors may refrain from purchasing our common stock because of the
delisting. Our ability to obtain financing may also be more limited
in numerous states because we will no longer benefit from state exemptions from
registration which are dependent upon the listing of our common stock on
AMEX.
We have a history of significant
recurring losses totaling approximately $75.9 million, and these losses may
continue in the future
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As of
December 31, 2007, we had an accumulated deficit of $75.9 million, and
these losses may continue in the future. We will need to raise capital to fund
our continuing operations, and financing may not be available to us on favorable
terms or at all. In the event financing is not available in the time frame
required, we will be forced to sell certain of our assets or license our
technologies to others. 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 we may never achieve profitability.
Our
operating results have fluctuated in the past and are likely to fluctuate
significantly in the future. We may experience fluctuations in our quarterly
results of operations as a result of:
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varying demand for and market
acceptance of our technology and
products;
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changes in our product or
customer mix;
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the gain or loss of one or more
key customers or their key customers, or significant changes in the
financial condition of one or more of our key customers or their key
customers;
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our ability to introduce, certify
and deliver new products and technologies on a timely
basis;
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the announcement or introduction
of products and technologies by our
competitors;
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competitive pressures on selling
prices;
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costs associated with
acquisitions and the integration of acquired companies, products and
technologies;
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our ability to successfully
integrate acquired companies, products and technologies, including the
assets acquired from Sol
Logic;
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our accounting and legal
expenses; and
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general economic
conditions.
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These
factors, some of which are not within our control, may cause the price of our
stock to fluctuate substantially. To respond to these and other factors, we may
need to make business decisions that could result in failure to meet financial
expectations. If our quarterly operating results fail to meet or exceed the
expectations of securities analysts or investors, our stock price could drop
suddenly and significantly. Most of our expenses, such as employee compensation,
inventory and debt repayment obligations, are relatively fixed in the short
term. Moreover, our expense levels are based, in part, on our expectations
regarding future revenue levels. As a result, if our revenue for a particular
period were below our expectations, we would not be able to proportionately
reduce our operating expenses for that period. Any revenue shortfall would have
a disproportionately negative effect on our operating results for the
period.
We
received a “going concern” opinion from our independent registered public
accounting firm for the fiscal years ended December 31, 2006 and
2007, which may negatively impact our business.
We
received a report from Stonefield Josephson, Inc., our independent
registered public accounting firm (“Stonefield Josephson”), regarding our
consolidated financial statements for the fiscal year ended December 31,
2006 and 2007, which included an explanatory paragraph stating that the
consolidated financial statements were prepared assuming we will continue as a
going concern. The report also stated that our substantial net losses and
monetary liabilities have raised substantial doubt about our ability to continue
as a going concern. The “going concern” opinion for the fiscal year ended
December 31, 2007, may fail to dispel any continuing doubts about our
ability to continue as a going concern and could adversely affect our ability to
enter into collaborative relationships with business partners, to raise
additional capital and to sell our products, and could have a material adverse
effect on our business, financial condition and results of
operations.
We currently have limited cash
resources and we will require additional funding to finance our working capital
requirements for at least the next twelve months
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We
currently have limited cash resources and we will require financing to fund our
anticipated working capital requirements for at least the next twelve months. If
we are not able to generate positive cash flows from operations in the near
future, we will be required to seek additional funding through public or private
equity or debt financing. There can be no assurance that additional financing
will be available on acceptable terms, or at all. If we are required to sell
equity to raise additional funds, our existing stockholders may incur
substantial dilution and any shares so issued may have rights, preferences and
privileges superior to the rights, preferences and privileges of our outstanding
common stock. If we seek debt financing, the terms of the financing may require
us to agree to restrictive covenants or impose other obligations that limit our
ability to grow our business, acquire necessary assets or take other actions
that we consider necessary or desirable. Also, we may be required to
obtain funds through arrangements with third parties that require us to
relinquish rights to certain of our technologies or products that we would seek
to develop or commercialize ourselves. In addition, our ability to raise
additional capital may be dependent upon our common stock being listed on AMEX.
We have not satisfied the criteria for continued listing on AMEX in the past and
we cannot guarantee that we will be able to satisfy the criteria for continued
listing on AMEX in the future.
Our current ineligibility to use the
Registration Statement on Form S-3 may affect our ability to finance our
working capital requirements for the next twelve months
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As a
result of the fact that our Current Report on Form 8-K, filed with the SEC
on December 21, 2007, was filed after the deadline for its filing, we
became ineligible through December 2008 to register shares of our common
stock on a Form S-3 Registration Statement. Certain investors, for whom the
ability to resell their shares relatively soon after they acquire them is
important, may only be willing to participate in private financings by us if we
can register their shares using a Form S-3 Registration Statement.
Therefore, our ineligibility to use Form S-3 could limit our ability to
raise additional capital for at least the next 12 months or such longer period
that we are ineligible to use the Form S-3 Registration
Statement.
We depend upon a small number of
large system sales ranging from $500,000 to in excess of $2,000,000, and we may
fail to achieve one or more large system sales in the
future
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Historically,
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
$500,000 to $2,000,000. If we fail to receive orders for these large systems in
a given sales cycle on a consistent basis, our business 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 to certain customers, yet we still may fail to complete the
sale
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When
considering the purchase of a large computerized identity management system,
potential customers of ours may take as long as one year to evaluate different
systems and obtain approval for the purchase. Under these circumstances, if we
fail to complete a sale, we will have expended significant resources and
received no revenue in return. Generally, customers 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
budgetary constraints. While potential customers are evaluating our products, we
may incur substantial selling costs and expend significant management resources
in an effort to accomplish potential sales that may never occur.
A significant number of our
customers and potential customers are government agencies that are subject to
unique political and budgetary constraints and have special contracting
requirements which may affect our ability to obtain new and retain current
government customers
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A
significant number 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 from quarter-to-quarter or year-to-year. In
addition, these agencies experience political pressure that may dictate the
manner in which they spend money. Due to political and budgetary processes and
other scheduling delays that may frequently occur relating to the contract or
bidding process, some government agency orders may be canceled or substantially
delayed, and the receipt of revenues or payments from these agencies may be
substantially delayed. In addition, 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. Common requirements in government contracts include
bonding requirements, provisions permitting the purchasing agency to modify or
terminate at will the contract without penalty, and provisions permitting the
agency to perform investigations or audits of our business practices, any of
which may limit our ability to enter into new contracts or maintain our current
contracts.
We may fail to create new
applications for our products and enter new markets, which may have an adverse
effect on our operations, financial condition and prospects
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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 intend to
expend significant resources to develop new technology, but the successful
development of new technology cannot be predicted and we cannot guarantee we
will succeed in these goals.
We occasionally rely on systems
integrators to manage our large projects, and if these companies do not perform
adequately, we may lose business
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We
occasionally act as a subcontractor to systems integrators who manage large
projects that incorporate our systems, particularly in foreign countries. We
cannot control these companies, and they may decide not to promote our products
or may price their services in such a way as to make it unprofitable for us to
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 results of operations may suffer.
If the patents we own or license, or
our other intellectual property rights, do not adequately protect our products
and technologies, we may lose market share to our competitors and our business,
financial condition and results of operations would be adversely
affected
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Our
success depends significantly on our ability to protect our rights to the
technologies used in our products. We rely on patent protection, trade secrets,
as well as a combination of copyright and trademark laws and nondisclosure,
confidentiality and other contractual arrangements to protect our technology.
However, these legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep any competitive advantage. In
addition, we cannot be assured that any of our current and future pending patent
applications will result in the issuance of a patent to us. The U.S. Patent and
Trademark Office (“PTO”) may deny or require significant narrowing of claims in
our pending patent applications, and patents issued as a result of the pending
patent applications, if any, may not provide us with significant commercial
protection or be issued in a form that is advantageous to us. We could also
incur substantial costs in proceedings before the PTO. These proceedings could
result in adverse decisions as to the claims included in our
patents.
Our
issued and licensed patents and those that may be issued or licensed in the
future may be challenged, invalidated or circumvented, which could limit our
ability to stop competitors from marketing related products. Additionally, upon
expiration of our issued or licensed patents, we may lose some of our rights to
exclude others from making, using, selling or importing products using the
technology based on the expired patents. We also must rely on contractual rights
with the third parties that license technology to us to protect our rights in
the technology licensed to us. Although we have taken steps to protect our
intellectual property and technology, there is no assurance that competitors
will not be able to design around our patents. We also rely on unpatented
proprietary technology. We cannot assure you that we can meaningfully protect
all our rights in our unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products or processes
or otherwise gain access to our unpatented proprietary technology. We seek to
protect our know-how and other unpatented proprietary technology with
confidentiality agreements and intellectual property assignment agreements with
our employees. However, such agreements may not provide meaningful protection
for our proprietary information in the event of unauthorized use or disclosure
or other breaches of the agreements or in the event that our competitors
discover or independently develop similar or identical designs or other
proprietary information. In addition, we rely on the use of registered and
common law trademarks with respect to the brand names of some of our products.
Our common law trademarks provide less protection than our registered
trademarks. Loss of rights in our trademarks could adversely affect our
business, financial condition and results of operations.
Furthermore,
the laws of foreign countries may not protect our intellectual property rights
to the same extent as the laws of the United States. If we fail to apply for
intellectual property protection or if we cannot adequately protect our
intellectual property rights in these foreign countries, our competitors may be
able to compete more effectively against us, which could adversely affect our
competitive position, as well as our business, financial condition and results
of operations.
If third parties claim that we
infringe their intellectual property rights, we may incur liabilities and costs
and may have to redesign or discontinue selling certain
products
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Whether a
product infringes a patent involves complex legal and factual issues, the
determination of which is often uncertain. We face the risk of claims that we
have infringed on third parties’ intellectual property rights. Searching for
existing intellectual property rights may not reveal important intellectual
property and our competitors may also have filed for patent protection, which is
not as yet a matter of public knowledge, or claimed trademark rights that have
not been revealed through our availability searches. Our efforts to identify and
avoid infringing on third parties’ intellectual property rights may not always
be successful. Any claims of patent or other intellectual property infringement,
even those without merit, could:
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increase the cost of our
products;
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be expensive and time consuming
to defend;
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result
in us being required to pay significant damages to third
parties;
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force us to cease making or
selling products that incorporate the challenged intellectual
property;
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require us to redesign,
reengineer or rebrand our
products;
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require us to enter into royalty
or licensing agreements in order to obtain the right to use a third
party’s intellectual property, the terms of which may not be acceptable to
us;
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require us to indemnify third
parties pursuant to contracts in which we have agreed to provide
indemnification to such parties for intellectual property infringement
claims;
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divert the attention of our
management; and
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result in our customers or
potential customers deferring or limiting their purchase or use of the
affected products until the litigation is
resolved.
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In
addition, new patents obtained by our competitors could threaten a product’s
continued life in the market even after it has already been
introduced.
The failure to successfully
integrate any business or asset acquisitions into our existing operations, or if
we discover previously undisclosed liabilities, could negatively affect our
business, financial condition and results of operations
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We
completed the acquisition of certain assets of Sol Logic in December 2007,
and we plan to continue to review potential acquisition candidates. Our business
and our strategy include building our business through acquisitions. However,
acceptable acquisition candidates may not be available in the future or may not
be available on terms and conditions acceptable to us.
Successful
acquisitions depend upon our ability to identify, negotiate, complete and
integrate suitable acquisitions and to obtain any necessary financing. Even if
we complete acquisitions, we may experience:
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difficulties in integrating any
acquired companies, personnel and products into our existing
business;
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delays in realizing the benefits
of the acquired company or
products;
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diversion of our management’s
time and attention from other business
concerns;
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limited or no direct prior
experience in new markets or countries we may
enter;
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higher costs of integration than
we anticipated; and
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difficulties in retaining key
employees of the acquired business who are necessary to manage these
acquisitions.
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In
addition, an acquisition could materially impair our operating results by
causing us to incur debt or requiring us to amortize acquisition expenses and
acquired assets. We may also discover deficiencies in internal controls, data
adequacy and integrity, product quality, regulatory compliance and product
liabilities that we did not uncover prior to our acquisition of such businesses,
which could result in us becoming subject to penalties or other liabilities. Any
difficulties in the integration of acquired businesses or unexpected penalties
or liabilities in connection with such businesses could have a material adverse
effect on our business, financial condition and results of
operations.
We operate in foreign countries and
are exposed to risks associated with foreign political, economic and legal
environments and with foreign currency exchange rates
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With our
acquisition of G&A Imaging Ltd. in 2001, we have significant foreign
operations. As a result, we are exposed to risks, including among others, risks
associated with foreign political, economic and legal environments and with
foreign currency exchange rates. Our results may be adversely affected by, among
other things, changes in government policies with respect to laws and
regulations, anti-inflation measures, currency conversions, remittance abroad
and rates and methods of taxation.
We depend on key
personnel, the loss of any of whom could materially adversely affect future
operations
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Our
success will depend to a significant extent upon the efforts and abilities of
our executive officers and other key personnel. The loss of the services of one
or more of these key employees and any negative market or industry perception
arising from the loss of such services could have a material adverse effect on
us and the trading price of our common stock. Our business will also be
dependent upon our ability to attract and retain qualified personnel. Acquiring
and keeping these personnel could prove more difficult or cost substantially
more than estimated and we cannot be certain that we will be able to retain such
personnel or attract a high caliber of personnel in the future.
Compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 may result in substantial
costs to us and a diversion of management attention and resources, and failure
to maintain adequate internal controls over financial reporting could result in
our business being harmed and our stock price declining
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Section 404
of the Sarbanes-Oxley Act of 2002 requires us to document and test the
effectiveness of our internal controls over financial reporting in accordance
with an established control framework and to report on our management’s
conclusion as to the effectiveness of these internal controls over financial
reporting beginning with the fiscal year ending December 31, 2007.
This section also requires that our independent registered public accounting
firm provide an attestation report on our internal control over financial
reporting beginning with the fiscal year ending December 31, 2008. Our
management completed its evaluation of the effectiveness of our disclosure
controls and procedures as of December 31, 2007 and concluded that our internal
controls over financial reporting were effective as of that date.
The
standards that must be met for management to continue to assess the internal
control over financial reporting are complex and will require significant
documentation, testing and possible remediation to meet the detailed
standards. In addition, the attestation process that must be performed by
our independent registered public accounting firm is new and complex. We may
encounter problems or delays in completing the activities necessary to continue
to make assessments of our internal control over financial reporting, completing
the implementation of any requested improvements, or receiving an unqualified
attestation of our assessment by our independent registered public
accountants. Ensuring that we have adequate internal financial and
accounting controls and procedures in place is a costly and time-consuming
effort that needs to be evaluated frequently, so compliance with these new
rules could require us to incur substantial costs and may require a
significant amount of time and attention of management, which could seriously
harm our business, financial condition and results of operations. If we are
unable to continue to our internal control over financial reporting as
effective, or if our independent registered public accounting firm is unable to
provide an unqualified attestation report on our assessment, investors may lose
confidence in us and our stock price may be negatively impacted.
We face
competition from companies with greater financial, technical, sales, marketing
and other resources, and, if we are unable to compete effectively with these
competitors, our market share may decline and our business could be
harmed
.
We face
competition from other established companies. A number of our competitors have
longer operating histories, larger customer bases, significantly greater
financial, technological, sales, marketing and other resources than we do.
As a result, our competitors may be able to respond more quickly than we can to
new or changing opportunities, technologies, standards or client requirements,
more quickly develop new products or devote greater resources to the promotion
and sale of their products and services than we can. Likewise, their
greater capabilities in these areas may enable them to better withstand periodic
downturns in the identity management solutions industry and compete more
effectively on the basis of price and production. In addition, new
companies may enter the markets in which we compete, further increasing
competition in the identity management solutions industry.
We
believe that our ability to compete successfully depends on a number of factors,
including the type and quality of our products and the strength of our brand
names, as well as many factors beyond our control. We may not be able to compete
successfully against current or future competitors, and increased competition
may result in price reductions, reduced profit margins, loss of market share and
an inability to generate cash flows that are sufficient to maintain or expand
the development and marketing of new products, any of which would adversely
impact our results of operations and financial condition.
Risks
Related to Our Securities
The holders of our preferred stock
have certain rights and privileges that are senior to our common stock, and we
may issue additional shares of preferred stock without stockholder approval that
could have a material adverse effect on the market value of the common
stock
.
Our Board
of Directors (“Board”) has the authority to issue a total of up to 4,000,000
shares of preferred stock and to fix the rights, preferences, privileges, and
restrictions, including voting rights, of the preferred stock, which typically
are senior to the rights of the common stockholders, without any further vote or
action by the common stockholders. The rights of our common stockholders will be
subject to, and may be adversely affected by, the rights of the holders of the
preferred stock that have been issued, or might be issued in the future.
Preferred stock also could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. This could
delay, defer, or prevent a change in control. Furthermore, holders of preferred
stock may have other rights, including economic rights, senior to the common
stock. As a result, their existence and issuance could have a material adverse
effect on the market value of the common stock. We have in the past issued and
may from time to time in the future issue, preferred stock for financing or
other purposes with rights, preferences, or privileges senior to the common
stock. As of December 31, 2007, we had three series of preferred stock
outstanding, Series B preferred stock, Series C 8% convertible
preferred stock and Series D 8% convertible preferred stock.
The
provisions of our Series B Preferred Stock prohibit the payment of
dividends on the common stock unless the dividends on those preferred shares are
first paid. In addition, upon a liquidation, dissolution or sale of our
business, the holders of the Series B Preferred Stock will be entitled to
receive, in preference to any distribution to the holders of common stock,
initial distributions of $2.50 per share, plus all accrued but unpaid
dividends. Pursuant to the terms of our Series B Preferred Stock we
are obligated to pay cumulative cash dividends on shares of Series B
Preferred Stock from legally available funds at the annual rate of $0.2125 per
share, payable in two semi-annual installments of $0.10625 each, which
cumulative dividends must be paid prior to payment of any dividend on our common
stock. As of December 31, 2007, we had cumulative undeclared dividends on
the Series B Preferred Stock of approximately $9,000.
The
Series C Preferred Stock has a liquidation preference equal to its stated
value, plus any accrued and unpaid dividends thereon and any other fees or
liquidated damages owing thereon. The Series C Preferred Stock accrues
cumulative dividends at the rate of 8.0% of the stated value per share per
annum. At the option of the Company, the dividend payment may be made in
the form of cash, after the payment of cash dividends to the holders of
Series B Preferred Stock, or common stock issuable upon conversion of the
Series C Preferred Stock. Each share of Series C Preferred Stock
is convertible at any time at the option of the holder into a number of shares
of common stock equal to the stated value (initially $1,000 per share, subject
to adjustment), plus any accrued and unpaid dividends, divided by the conversion
price (initially $1.50 per share, subject to adjustment). Subject to certain
limitations, the conversion price per share shall be adjusted in the event of
certain subsequent stock dividends, splits, reclassifications, dilutive
issuances, rights offerings, and reclassifications. Certain activities may
not be undertaken by the Company without the affirmative vote of a majority of
the holders of the outstanding shares of Series C Preferred Stock. As of
December 31, 2007, we had cumulative undeclared dividends on the
Series C Preferred Stock of approximately $234,000.
The
Series D Preferred Stock has a liquidation preference equal to its stated
value, plus any accrued and unpaid dividends thereon and any other fees or
liquidated damages owing thereon. The Series D Preferred Stock accrues
cumulative dividends at the rate of 8.0% of the stated value per share per
annum. At the option of the Company, the dividend payment may be made in
the form of cash, after the payment of cash dividends to the holders of
Series B and Series C Preferred Stock, or common stock issuable upon
conversion of the Series D Preferred Stock. Each share of
Series D Preferred Stock is convertible at any time at the option of the
holder into a number of shares of common stock equal to the stated value
(initially $1,000 per share, subject to adjustment), plus any accrued and unpaid
dividends, divided by the conversion price (initially $1.90 per share, subject
to adjustment). Subject to certain limitations, the conversion price per share
shall be adjusted in the event of certain subsequent stock dividends, splits,
reclassifications, dilutive issuances, rights offerings, and
reclassifications. Certain activities may not be undertaken by the Company
without the affirmative vote of a majority of the holders of the outstanding
shares of Series D Preferred Stock. As of December 31, 2007, we had
cumulative undeclared dividends on the Series D Preferred Stock of
approximately $98,000.
Our stock price has been volatile,
and your investment in our common stock could suffer a decline in
value
.
There has
been significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of our common stock. You may not be able to resell your shares
at or above the price you pay for those shares due to fluctuations in the market
price of our common stock caused by changes in our operating performance or
prospects and other factors.
Some
specific factors that may have a significant effect on our common stock market
price include:
|
|
·
|
actual or anticipated
fluctuations in our operating results or future
prospects;
|
|
|
·
|
our announcements or our
competitors’ announcements of new
products;
|
|
|
·
|
the public’s reaction to our
press releases, our other public announcements and our filings with the
SEC;
|
|
|
·
|
strategic actions by us or our
competitors, such as acquisitions or
restructurings;
|
|
|
·
|
new laws or regulations or new
interpretations of existing laws or regulations applicable to our
business;
|
|
|
·
|
changes in accounting standards,
policies, guidance, interpretations or
principles;
|
|
|
·
|
changes in our growth rates or
our competitors’ growth
rates;
|
|
|
·
|
developments regarding our
patents or proprietary rights or those of our
competitors;
|
|
|
·
|
our inability to raise additional
capital as needed;
|
|
|
·
|
substantial sales of common stock
underlying warrants and preferred
stock;
|
|
|
·
|
concern as to the efficacy of our
products;
|
|
|
·
|
changes in financial markets or
general economic conditions;
|
|
|
·
|
sales of common stock by us or
members of our management team;
and
|
|
|
·
|
changes in stock market analyst
recommendations or earnings estimates regarding our common stock, other
comparable companies or our industry
generally.
|
Our future sales of our common stock
could adversely affect its price and our future capital-raising activities could
involve the issuance of equity securities, which would dilute your investment
and could result in a decline in the trading price of our common
stock
.
We may
sell securities in the public or private equity markets if and when conditions
are favorable, even if we do not have an immediate need for additional capital
at that time. Sales of substantial amounts of our common stock, or the
perception that such sales could occur, could adversely affect the prevailing
market price of our common stock and our ability to raise capital. We may issue
additional common stock in future financing transactions or as incentive
compensation for our executive management and other key personnel, consultants
and advisors. Issuing any equity securities would be dilutive to the equity
interests represented by our then-outstanding shares of common stock. The market
price for our common stock could decrease as the market takes into account the
dilutive effect of any of these issuances. Furthermore, we may enter into
financing transactions at prices that represent a substantial discount to the
market price of our common stock. A negative reaction by investors and
securities analysts to any discounted sale of our equity securities could result
in a decline in the trading price of our common stock.
If registration rights that we have
previously granted are exercised, then the price of our common stock may be
adversely affected
.
We have
agreed to register with the SEC certain shares of our common stock which we
issued in unregistered offerings. In the event these securities are
registered with the SEC, they may be freely sold in the open market provided the
registration statement relating to such shares becomes effective and subject to
trading restrictions to which our affiliates holding the shares may be subject
from time to time. We expect that we also will be required to register any
securities sold in future private financings. Additionally, the number of shares
of our common stock underlying issued and outstanding warrants and preferred
stock registered under prior registration statements, many of which are now
available for resale under Rule 144 of the Securities Act, is substantial
and sales of such underlying stock could cause significant dilution. The
sale of a significant amount of shares in the open market, or the perception
that these sales may occur, could cause the trading price of our common stock to
decline or become highly volatile.
Our corporate documents and Delaware
law contain provisions that could discourage, delay or prevent a change in
control of our company
.
Provisions
in our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition involving us that our stockholders may consider
favorable. For example, our certificate of incorporation authorizes preferred
stock, which carries special rights, including voting and dividend rights. With
these rights, preferred stockholders could make it more difficult for a third
party to acquire us.
We are
also subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law. Under these provisions, if anyone becomes an
“interested stockholder,” we may not enter into a “business combination” with
that person for three years without special approval, which could discourage a
third party from making a takeover offer and could delay or prevent a change of
control. For purposes of Section 203, “interested stockholder” means,
generally, someone owning 15% or more of our outstanding voting stock or an
affiliate of ours that owned 15% or more of our outstanding voting stock during
the past three years, subject to certain exceptions as described in
Section 203.
We do not expect to pay cash
dividends on our common stock for the foreseeable future
.
We have
never paid cash dividends on our common stock and do not anticipate that any
cash dividends will be paid on the common stock for the foreseeable future. The
payment of any cash dividend by us will be at the discretion of our board of
directors and will depend on, among other things, our earnings, capital,
regulatory requirements and financial condition. Furthermore, the terms of our
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock directly limit our ability to pay cash dividends on our common
stock.
Securities analysts may not continue
to cover our common stock or may issue negative reports, and this may have a
negative impact on our common stock’s market price
.
There is
no guarantee that securities analysts will continue to cover our common stock.
If securities analysts do not cover our common stock, the lack of research
coverage may adversely affect our common stock’s market price. The trading
market for our common stock relies in part on the research and reports that
industry or financial analysts publish about our business or us. If one or more
of the analysts who cover us downgrades our stock, our stock price may decline
rapidly. If one or more of these analysts ceases coverage of our common stock,
we could lose visibility in the market, which in turn could cause our stock
price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of
2002, and a global settlement reached between the SEC, other regulatory analysts
and a number of investment banks in April 2003, may lead to a number of
fundamental changes in how analysts are reviewed and compensated. In particular,
many investment banking firms will now be required to contract with independent
financial analysts for their stock research. It may be difficult for companies
with smaller market capitalizations, such as our company, to attract independent
financial analysts that will cover our common stock, which could have a negative
effect on our market price.
The large number of holders and lack
of concentration of ownership of our common stock may make it difficult for us
to reach a quorum or obtain an affirmative vote of our stockholders at future
stockholder meetings
.
Our stock
is held in a large number of individual accounts. As a result, it may be
difficult for us to reach a quorum or obtain an affirmative vote of a majority
of our stockholders where either of those thresholds are measured based on the
total number of shares of our common stock outstanding. Difficulty in obtaining
a stockholder vote could impact our ability to complete any financing or
strategic transaction requiring stockholder approval or effect basic corporate
governance changes, such as an increase in the authorized number of shares of
our preferred stock and our common stock.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market
Information.
Our
Common Stock trades under the symbol “IW” on the American Stock
Exchange.
The
following table sets forth the high and low sales prices per share for our
Common Stock as reported by the American Stock Exchange for each quarter in 2007
and 2006:
|
2007 Fiscal Quarters
|
|
High
|
|
|
Low
|
|
|
First
Quarter
|
|
$
|
2.810
|
|
|
$
|
1.450
|
|
|
Second
Quarter
|
|
$
|
2.740
|
|
|
$
|
1.450
|
|
|
Third
Quarter
|
|
$
|
2.180
|
|
|
$
|
1.400
|
|
|
Fourth
Quarter
|
|
$
|
2.000
|
|
|
$
|
1.400
|
|
|
2006 Fiscal Quarters
|
|
High
|
|
|
Low
|
|
|
First
Quarter
|
|
$
|
2.540
|
|
|
$
|
1.350
|
|
|
Second
Quarter
|
|
$
|
2.560
|
|
|
$
|
1.580
|
|
|
Third
Quarter
|
|
$
|
2.300
|
|
|
$
|
1.110
|
|
|
Fourth
Quarter
|
|
$
|
2.250
|
|
|
$
|
1.200
|
|
There is
no public trading market for our preferred stock.
Holders.
As of
March 25, 2008, there were approximately 1,600 holders of record of our
Common Stock.
Dividends.
We have
never declared or paid dividends on our Common Stock and do not anticipate
paying any cash dividends on our shares of Common Stock in the foreseeable
future. We are obligated to pay cumulative cash dividends on shares of
Series B Preferred Stock from legally available funds at the annual rate of
$0.2125 per share, payable in two semi-annual installments of $0.10625 each,
which cumulative dividends must be paid prior to payment of any dividend on our
Common Stock. The holders of our Series C Preferred Stock are
entitled to receive cumulative dividends, at the option of the Company, payable
(i) in common stock upon conversion of the Series C Preferred Stock,
or (ii) in cash after the payment of cash dividends to the holders of our
Series B Preferred Stock at the rate of 8% per annum (as a percentage of
stated value per share). The holders of our Series D Preferred
Stock are entitled to receive cumulative dividends, at the option of the
Company, payable (i) in common stock upon conversion of the Series D
Preferred Stock, or (ii) in cash after the payment of cash dividends to the
holders of our Series B Preferred Stock at the rate of 8% per annum (as a
percentage of stated value per share).
As of
December 31, 2007, the Company had cumulative undeclared dividends of
approximately $9,000 relating to our Series B Preferred Stock,
approximately $234,000 relating to our Series C Preferred Stock, and
approximately 98,000 relating to our Series D Preferred Stock.
Repurchases.
We did
not repurchase any shares of our common stock during fiscal 2007.
Stock
Performance Graph.
The following performance graph and
related information shall not be deemed “soliciting material” or to be “filed”
with the Commission, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933 or Securities Exchange
Act of 1934 except to the extent that we specifically incorporate it by
reference into such filing.
The following performance graph
compares ImageWare Systems Inc.’s cumulative 5-year total shareholder return
relative to the cumulative total returns of the S&P 500 Index and the AMEX
Computer Technology Index. The graph tracks
the
performance of a $100 investment in our common stock and each of the referenced
indexes from December 31, 2002 through December 31, 2007. The
comparisons in the graph below are based on historical data and are not indented
to forecast the possible performance of our common stock.
|
|
|
Dec.
31, 2002
|
|
|
Dec.
31, 2003
|
|
|
Dec
31, 2004
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2006
|
|
|
Dec.
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ImageWare
|
|
$
|
100.00
|
|
|
$
|
98.36
|
|
|
$
|
99.67
|
|
|
$
|
64.26
|
|
|
$
|
55.74
|
|
|
$
|
50.16
|
|
|
S&P
500
|
|
$
|
100.00
|
|
|
$
|
126.38
|
|
|
$
|
137.75
|
|
|
$
|
141.88
|
|
|
$
|
161.20
|
|
|
$
|
166.89
|
|
|
AMEX
Computer Technology Index
|
|
$
|
100.00
|
|
|
$
|
142.87
|
|
|
$
|
143.54
|
|
|
$
|
144.12
|
|
|
$
|
158.04
|
|
|
$
|
189.26
|
|
PART
III
Item
10. Directors, Executive Officers, and Corporate Governance.
DIRECTORS
AND EXECUTIVE OFFICERS
DIRECTORS
The
following table sets forth information regarding our directors as of
April 1, 2008:
|
Name
|
|
Age
|
|
Principal Occupation/Position
Held With the Company
|
|
Mr. S.
James Miller, Jr.
|
|
54
|
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
|
Mr. John
Callan
|
|
61
|
|
Director
|
|
Mr. David
Carey
|
|
63
|
|
Director
|
|
Mr. Guy
Steven Hamm
|
|
60
|
|
Director
|
|
Mr. John
Holleran
|
|
81
|
|
Director
|
|
Mr. David
Loesch
|
|
63
|
|
Director
|
On
March 16, 2008, Mr. Patrick Downs, a member of our board of directors,
passed away. We have not yet filled the vacancy resulting from
Mr. Downs’ untimely passing.
S. James Miller, Jr.
has
served as our Chief Executive Officer since 1990 and Chairman of the Board since
1996. He also served as our President from 1990 until 2003. 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 Senior Vice President, General
Counsel, Corporate Secretary and Chairman/President of Oak Industries’ Pacific
Rim subsidiaries. He has a J.D. from the University of San Diego School of Law
and a B.A. from the University of California, San Diego.
John Callan
was appointed to
the Board in September 2000. Since February 2007, Mr. Callan has
served as Vice President, Strategy and Business Development at DHL Global Mail,
Americas. From March 2006 to February 2007, Mr. Callan served DHL
Global Mail as Vice President - Domestic Product Management. From 2001 to 2006,
Mr. Callan served as Principal of Ursa Major Associates, LLC, the logistics
strategy consulting firm he co-founded. From 1997 to 2002, he was an independent
business strategy consultant in the imaging and logistics fields. From 1995 to
1997, Mr. Callan served as Chief Operating Officer for Milestone Systems, a
shipping systems software company. From 1987 to 1995, he served as Director of
Entertainment Imaging at Polaroid Corporation. Mr. Callan is a graduate of
the University of North Carolina.
David Carey
was appointed to
the Board in February 2006. Mr. Carey is a former Executive Director
of the Central Intelligence Agency. Since April 2005, Mr. Carey has
served as Executive Director for Blackbird Technologies, which provides
state-of-the-art IT security expertise, where he assists the company with
business development and strategic planning. Prior to joining Blackbird
Technologies, Mr. Carey was Vice President, Information Assurance for
Oracle Corporation from September 2001 to April 2005. In addition,
Mr. Carey worked for the CIA for 32 years until 2001. During his career at
the CIA, Mr. Carey held several senior positions including that of
Executive Director, often referred to as the Chief Operating Officer, or
No. 3 person in the agency, from 1997 to 2001. Before assuming that
position, Mr. Carey was Director of the DCI Crime and Narcotics Center, the
Director of the Office of Near Eastern and South Asian Analysis, and Deputy
Director of the Office of Global Issues. Mr. Carey is a graduate of Cornell
University and the University of Delaware.
Guy Steven Hamm
was appointed
to the Board in October 2004. Mr. Hamm served Aspen Holding, a
privately held insurance provider, as CFO from December 2005 to
February 2007. In 2002, Mr. Hamm retired from PricewaterhouseCoopers,
where he was a national partner-in-charge of middle market. Mr. Hamm was
instrumental in growing the Audit Business Advisory Services (ABAS) Middle
Market practice at PricewaterhouseCoopers, where he was responsible for $300
million in revenue and more than 100 partners. Mr. Hamm is a graduate of
San Diego State University.
John Holleran
was appointed
to the Board in May 1996. Since 1974, Mr. Holleran has been a
management and investment consultant. Prior to consulting, Mr. Holleran
served as the Chief Financial Officer, Executive Vice President and Chief
Operating Officer of Southwest Gas Corporation. He served as Executive Vice
President of the Hawaii Corporation, a diversified holding company, and as
President and Chairman of Property Research Financial Corporation, a real estate
investment and syndication firm, from 1972 to 1974. Mr. Holleran has also
served as a director of Kilroy Industries, a national office building and office
park developer, as a director of Walker & Lee, a national full service
real estate firm, and as a director of NTN Communications, Inc., a company
engaged in the interactive television business. Mr. Holleran is a graduate
of Woodbury University.
David Loesch
was appointed to
the Board in September 2001 after 29 years of service as a Special
Agent with the Federal Bureau of Investigations (“FBI”). At the time of his
retirement from the FBI, Mr. Loesch was the Assistant Director in Charge of
the Criminal Justice Information Services Division of the FBI. Mr. Loesch
was awarded the Presidential Rank Award for Meritorious Executive in 1998 and
has served on the board of directors of the Special Agents Mutual Benefit
Association since 1996. He is also a member of the International Association of
Chiefs of Police and the Society of Former Special Agents of the FBI, Inc.
Mr. Loesch served in the United States Army as an Officer with the 101st
Airborne Division in Vietnam. He holds a Bachelor’s degree from Canisius College
and a Master’s degree in Criminal Justice from George Washington University.
Mr. Loesch is currently a private consultant on public safety and criminal
justice solutions.
EXECUTIVE
OFFICERS
The following table sets forth the
names, ages and positions for our executive officers and certain significant
employees not discussed above as of April 1, 2008:
|
Name
|
|
Age
|
|
Principal Position(s) Held With the Company
|
|
|
Mr. Wayne
Wetherell
|
|
55
|
|
Sr.
Vice President, Administration, Chief Financial Officer, Secretary and
Treasurer
|
|
|
Mr. Charles
AuBuchon
|
|
64
|
|
Vice
President, Business Development
|
|
|
Mr. David
Harding
|
|
38
|
|
Vice
President and Chief Technical Officer
|
|
Wayne Wetherell
has served as
our Senior Vice President, Administration and Chief Financial Officer since
May 2001 and additionally as our Secretary and Treasurer since
October 2005. From 1996 to May 2001, he served as Vice
President
of Finance and Chief Financial Officer. 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. degree in Management and an M.S. degree in Finance from San Diego
State University.
SIGINIFICANT
EMPLOYEES
Chuck AuBuchon
has served as
our Vice President, Business Development since January 2007. From 2004 to
2007 he served as Vice President, Sales. From 2003 to 2004, he served as
Director of North American Sales. From 2000 to 2003, Mr. AuBuchon was Vice
President Sales & Marketing at Card Technology Corporation, a
manufacturer of Card Personalization Systems, where he was responsible for
distribution within the Americas, Asia Pacific and EMEA (Europe, Middle East and
Africa) regions. From 1992 to 2000, Mr. AuBuchon held various sales
management positions, including Vice President Sales and Marketing, for Gemplus
and Datacard. Mr. AuBuchon is a graduate of Pennsylvania State
University.
David Harding
has served as
our Vice President and Chief Technology Officer since January 2006. Before
joining us, Mr. Harding was the Chief Technology Officer at IC
Solutions, Inc., where he was responsible for all technology departments
including the development and management of software development, IT and quality
assurance as well as their respective hardware, software and human resource
budgets from 2001 to 2003. He was the Chief Technology Officer at Thirsty.com
from 1999 to 2000, the Chief Technology Officer at Fulcrum Point
Technologies, Inc., from 1996 to 1999, and consultant to Access360, which
is now part of IBM/Tivoli, from 1995 to 1996.
COMPLIANCE
WITH FEDERAL SECURITIES LAWS
Section 16(a) of the
Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors
and executive officers, and persons who own more than 10% of a registered class
of our equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the company. Executive officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish us copies of all Section 16(a) forms they
file.
To our knowledge, based solely
upon review of the copies of such reports furnished to us during the fiscal year
ended December 31, 2007, no director, officer or beneficial holder of more
than 10% of any class of our equity securities failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year
CODE
OF ETHICS
The Company has adopted a
Code of Business Conduct and
Ethics
policy that applies to our directors and employees (including the
Company’s principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions). The Company intends to promptly disclose (i) the nature
of any amendment to this code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions and (ii) the nature of any
waiver, including an implicit waiver, from a provision of this code of ethics
that is granted to one of these specified individuals, the name of such person
who is granted the waiver and the date of the waiver on our website in the
future. A copy of our Code of Business Conduct and Ethics can be
obtained from our website at http://www.iwsinc.com.
THE
AUDIT COMMITTEE
The
Company’s Audit Committee of the Board of Directors consists of Guy Steven Hamm,
David Loesch and John Holleran. The Audit Committee operates pursuant to a
written charter. In accordance with the American Stock Exchange
listing standards, the charter addresses the purpose, duties and
responsibilities of the Audit Committee.
The Audit
Committee is directly responsible for the appointment, compensation, retention
and oversight of our independent registered public accountants. The Audit
Committee also monitors the integrity of the company’s financial statements and
the independence and performance of the independent registered public
accountants and reviews our financial reporting processes. The Audit Committee
reviews and reports to the Board of Directors the scope and results of audits by
the company’s independent registered public accountants and reviews other
professional services rendered by the company’s independent registered public
accountants. It reviews transactions between the company and our directors and
officers, the company’s policies regarding those transactions and compliance
with our Ethics Code and conflict of interest policies.
The Board
has determined that all members of the Audit Committee meet the American Stock
Exchange standards of independence and financial literacy, and the SEC’s
requirements with respect to independence of listed company audit
committee
members. The Board has determined that at least one member of the
Audit Committee, Guy Steven Hamm, meets the SEC’s definition of an “audit
committee financial expert”.
The Audit
Committee met four times during 2007.
Item
11. Executive Compensation.
COMPENSATION
DISCUSSION AND ANALYSIS
OVERVIEW
OF COMPENSATION PROGRAM AND PHILSOSPHY
Our compensation program is intended to
support the achievement of our specific annual and long-term operational and
strategic goals by attracting and rewarding employees for superior results. A
key objective of the program is to align executives’ interests with those of the
stockholders by rewarding performance above established goals, with the ultimate
objective of improving stockholder value.
The Compensation Committee of our Board
of Directors has responsibility for establishing, implementing and monitoring
adherence to the Company’s compensation philosophy. The Compensation Committee
seeks to ensure that the total compensation paid to our executive officers is
fair, reasonable and competitive.
The Compensation Committee evaluates
both performance and compensation in an effort to ensure that we maintain our
ability to attract and retain individuals of superior ability and managerial
talent in key positions and that compensation provided to key employees remains
competitive relative to the compensation paid to similarly situated executives
of our peer companies. To that end, the Compensation Committee believes
executive compensation packages we provide to our executive officers should
include both cash and stock-based compensation that rewards individual and
corporate performance as measured against established goals.
ROLE
OF EXECUTIVE OFFICERS IN COMPENSATION DECISIONS
The Compensation Committee makes all
compensation decisions for our executive officers. Regarding the establishment
of base salary levels payable throughout 2007 and cash and equity incentives in
respect of 2007 performance, our Chief Executive Officer, S. James Miller,
provided input and arranged for the Compensation Committee to have access to our
records and personnel for purposes of its deliberations. Our Sr. Vice President
Administration, Chief Financial Officer, Secretary and Treasurer, Wayne G.
Wetherell, also provided input to the Compensation Committee to this end. With
respect to compensation levels of executive officers in 2008 with respect to
2007 performance, S. James Miller reviewed the performance of each executive
officer (other than his own, which was reviewed by the Compensation Committee)
and provided such input and observations to the Compensation Committee. The
conclusions reached and recommendations based on these reviews, including with
respect to salary adjustments for 2008 for 2007 performance, were presented to
the Compensation Committee. The Compensation Committee can exercise its
discretion in modifying any recommended adjustments or awards to executive
officers.
SETTING
EXECUTIVE COMPENSATION
Based on the foregoing objectives, the
Compensation Committee has structured our annual and long-term incentive-based
cash and non-cash executive compensation in an effort to motivate our executive
officers to achieve the business goals set by us and reward them for achieving
such goals. In furtherance of these objectives, in 2005 the Compensation
Committee engaged Compensia, an outside consulting firm, to assess and evaluate
its total compensation program for our executive officers and provide the
Compensation Committee with relevant market data and recommendations to consider
when developing compensation packages for the executive officers. Compensia
provided market data for peer-group companies such as ActiveCard, Authentidate
Holding Corp., CAM Solutions, Cogent, Connetix, CSP, Identix, IPIX, Lasercard,
Loudeye, Merge Technologies, Raining Data, SAFLINK, Smith Micro Software, Vasco
Data, Viewpoint and Viisage Technology.
Management plays a significant role
with respect to the process of setting compensation for executive officers,
other than the Chairman and Chief Executive Officer, by:
|
|
·
|
providing performance
evaluations;
|
|
|
·
|
developing and recommending
targets for performance and objectives;
and
|
|
|
·
|
recommending salary levels,
incentives and equity
awards.
|
Management provides the Compensation
Committee and the Board of Directors with material for each Compensation
Committee meeting and the Chairman and Chief Executive Officer, at the
Compensation Committee’s request to provide:
|
|
·
|
background relative to strategic
objectives;
|
|
|
·
|
discussion relative to
performance evaluations of the executive officers;
and
|
|
|
·
|
compensation recommendations as
to executive officers (other than
himself).
|
In making compensation decisions, the
Compensation Committee compared each element of the executive’s total
compensation package with the research and recommendations of
Compensia.
The Compensation Committee believes
that we compete with many companies for top executive-level talent. Accordingly,
the Compensation Committee strives to implement compensation packages for our
executive officers that are competitive with total compensation paid to
similarly situated executives. Variations to this objective may occur as
dictated by the experience level of the individual and market factors. A
significant percentage of total compensation for our executive officers is
allocated to incentives as a result of the philosophy mentioned above.
Nevertheless, strictly speaking, there is no pre-established policy or target
for the allocation between either cash and non-cash or short-term and long-term
incentive compensation. Income from such incentive compensation is realized as a
result of our performance the individual’s performance, depending on the type of
award, compared to established goals.
2007
EXECUTIVE COMPENSATION COMPENENTS
For the fiscal year ended
December 31, 2007, the principal components of compensation for executive
officers were:
|
|
·
|
long-term equity incentive
compensation in the form of stock options and restricted
stock.
|
Base Salary.
We provide our executive
officers and other employees with a base salary to compensate them for services
rendered during the fiscal year. Base salary ranges for executive officers are
determined for each executive based on his or her position and responsibility by
using market data.
During its review of base salaries for
executive officers for 2007, the Compensation Committee primarily
considered:
|
|
·
|
market data provided by our
outside consultant and data published by independent third-party
sources;
|
|
|
·
|
internal review of the
executive’s compensation, both individually and relative to other
executive officers; and
|
|
|
·
|
individual performance and
responsibility of the
executive.
|
Salary levels for named executives not
under employment contracts are considered annually as part of our performance
review process as well as upon a promotion or other material change in job
responsibility. Merit-based increases to salaries of executive officers are
determined upon assessment of the individual’s performance and
responsibility.
Long-Term Equity Incentive
Compensation.
Our long-term incentive compensation program is designed to
recognize the executive’s scope of responsibilities, reward demonstrated
performance and leadership, motivate future superior performance, align the
interests of the executives with our stockholders and retain the executives
through the term of the awards. When making equity-award decisions, the
Compensation Committee considers market data, the grant size, the forms of
long-term equity compensation available to it under existing plans and the
status of awards granted in previous years. The amount of equity incentive
compensation granted in 2007 was based upon our strategic, operational and
financial performance overall and reflects the executives’ expected
contributions to our future success. Existing ownership levels are not a factor
in award determination, as the Compensation Committee does not want to
discourage executives from holding significant amounts of our
stock.
Effective January 1, 2006, we
adopted the requirements of Statement of Financial Accounting Standards
No. 123R,
Share-Based
Payment
(“SFAS 123R”), which requires companies to estimate the fair
value of share-based payment option awards on the date of grant using an
option-pricing model. The value of the awards that are ultimately expected to
vest are recognized as compensation expense over the requisite service periods
using the straight-line method. When determining the appropriate form of
incentive award (for example whether stock options, restricted stock, restricted
stock units, or stock appreciation rights, each of which our Amended and
Restated 1999 Stock Award Plan (the “1999 Plan”) permits, should be used) the
Compensation Committee’s goal is to weigh the cost of these grants with their
potential benefits as a compensation tool.
Retirement and Other Benefits.
All of our employees in the United States are eligible to participate in
the 401(k) Savings Plan (the “Savings Plan”). The Savings Plan is a
tax-qualified retirement savings plan pursuant to which all U.S. based
employees, including the named executive officers, are able to contribute. The
Savings Plan provides for annual contributions by us of 50% of employee
contributions not to exceed 8% of employee compensation. Participants
may contribute up to 100% of the annual contribution limitations determined
by the Internal Revenue Service. Employees are fully vested in their share of
our contributions after the completion of five years of
service.
Tax and Accounting
Implications.
As part of its role, the
Compensation Committee reviews and considers the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code of
1986, as amended (the “Code”), which provides that we may not deduct
compensation of more than $1,000,000 that is paid to certain individuals. To
qualify for deductibility under Section 162(m), compensation in excess of
$1,000,000 per year paid to the named executive officers at the end of such
fiscal year generally must be “performance-based” compensation as determined
under Section 162(m). The Compensation Committee generally intends to
comply with the requirements for full deductibility of executive compensation
under Section 162(m). However, the Compensation Committee will balance the
costs and burdens involved in such compliance against the value to us and our
stockholders of the tax benefits that we would obtain as a result, and may in
certain instances pay compensation that is not fully deductible if, in its
determination, such costs and burdens outweigh such benefits.
SUMMARY
COMPENSATION TABLE
The following table sets forth
information regarding the compensation of our Chief Executive Officer, our Chief
Financial Officer, the person who was, at December 31, 2007, one of our
most highly compensated executive officers during 2007, and two of our
significant employees who were not serving as executive officers at
December 31, 2007, collectively referred to as our named executive
officers.
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
Name and Principal Position
|
|
|
Year
|
|
|
Salary
|
|
|
Awards
|
|
|
Awards(1)(2)
|
|
|
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
James Miller, Jr.
Chairman of the Board
and Chief Executive
Officer
|
|
|
2007
|
|
|
$
|
314,791
|
|
|
$
|
126,119
|
(3)
|
|
$
|
52,325
|
|
|
$
|
12,244
|
(4)
|
|
$
|
505,479
|
|
|
|
|
|
2006
|
|
|
|
299,230
|
|
|
|
167,540
|
(3)
|
|
|
168,648
|
(5)
|
|
|
12,015
|
(6)
|
|
|
647,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
G. Wetherell
Senior Vice President
Administration, Chief
Financial Officer,
Secretary, and
Treasurer
|
|
|
2007
|
|
|
|
186,631
|
|
|
|
67,136
|
(7)
|
|
|
35,588
|
|
|
|
10,019
|
(8)
|
|
|
299,374
|
|
|
|
|
|
2006
|
|
|
|
177,022
|
|
|
|
75,702
|
(7)
|
|
|
91,079
|
(5)
|
|
|
—
|
|
|
|
343,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Willis (9)
Executive Vice
President Sales
|
|
|
2007
|
|
|
|
225,000
|
|
|
|
—
|
|
|
|
58,585
|
|
|
|
—
|
|
|
|
283,585
|
|
|
|
|
|
2006
|
|
|
|
229,917
|
|
|
|
—
|
|
|
|
100,780
|
(5)
|
|
|
—
|
|
|
|
330,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
AuBuchon
Vice President Business
Development
|
|
|
2007
|
|
|
|
155,581
|
|
|
|
—
|
|
|
|
62,439
|
|
|
|
—
|
|
|
|
218,020
|
|
|
|
|
|
2006
|
|
|
|
152,600
|
|
|
|
—
|
|
|
|
117,557
|
(5)
|
|
|
—
|
|
|
|
270,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding
Vice President and Chief
Technical Officer
|
|
|
2007
|
|
|
|
182,132
|
|
|
|
—
|
|
|
|
48,251
|
|
|
|
—
|
|
|
|
230,383
|
|
|
|
|
|
2006
|
|
|
|
138,107
|
|
|
|
—
|
|
|
|
36,052
|
(5)
|
|
|
—
|
|
|
|
174,159
|
|
|
(1)
|
|
All
option awards were granted under the 1999 Plan.
|
|
|
|
|
|
(2)
|
|
The
amounts reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2007, in
accordance with the provisions of SFAS 123R and thus may include
amounts from awards granted prior to 2007. We have elected to use the
Black-Scholes option-pricing model, which incorporates various assumptions
including volatility, expected life, and interest rates. We are required
to make various assumptions in the application of the Black-Scholes option
pricing model and have determined that the best measure of expected
volatility is based on the historical weekly volatility of our common
stock. Historical volatility factors utilized in our Black-Scholes
computations range from 64.4% to 98.5%. We have elected to estimate the
expected life of an award based upon the SEC approved “simplified method”
noted under the provisions of Staff Accounting Bulletin No. 107.
Under this formula, the expected term is equal to: ((weighted-average
vesting term + original contractual term)/2). The expected term used by us
as computed by this method ranges from 3.5 years to 6.1 years. The
interest rate used is the risk free interest rate and is based upon U.S.
Treasury rates appropriate for the expected term. Interest rates used in
our Black-Scholes calculations range from 2.7% to 4.6%. Dividend yield is
zero as we do not expect to declare any dividends on our common shares in
the foreseeable future. In addition to the key assumptions used in the
Black-Scholes model, the estimated forfeiture rate at the time of
valuation is a critical assumption. We have estimated an annualized
forfeiture rate of 10% for corporate officers, 4% for members of the Board
of Directors and 24% for all other employees. We review the expected
forfeiture rate annually to determine if that percent is still reasonable
based on historical experience.
|
|
|
|
|
|
(3)
|
|
Represents
the quarterly vesting of 124,162 restricted shares granted on
March 30, 2004, and the vesting of 109,700 restricted shares granted
on September 27, 2005 for Mr. Miller. The restricted shares
granted in September 2005 vest one-third after one year with the
remainder vesting ratably on a quarterly basis over two years ending
September 27, 2008.
|
|
|
|
|
|
(4)
|
|
Consists
of $9,000 in 401(K) matching contributions, $1,244 in life insurance
premiums and $2,000 in club membership.
|
|
|
|
|
|
(5)
|
|
The
amounts reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in
accordance with the provisions of SFAS 123R and thus may include
amounts from awards granted prior to 2006. Assumptions used in the
calculation of these amounts are included in Notes to the Consolidated
Financial Statements for the fiscal year ended December 31, 2006,
included in our annual report on Form 10-K filed with the SEC on
April 17, 2007.
|
|
|
|
|
|
(6)
|
|
Consists
of $8,800 in 401(K) matching contributions, $1,215 in life insurance
premiums and $2,000 in club membership.
|
|
|
|
|
|
(7)
|
|
Represents
the quarterly vesting of 80,281 restricted shares granted on
March 30, 2004 and the vesting of 52,600 restricted shares granted on
September 27, 2005. The restricted shares granted in
September 2005 vest one-third after one year with the remainder
vesting ratably on a quarterly basis over two years ending
September 27, 2008.
|
|
|
|
|
|
(8)
|
|
Consists
of $7,221 in 401(K) matching contributions, $798 in life insurance
premiums and $2,000 in club membership.
|
|
|
|
|
|
(9)
|
|
Mr. Willis
resigned from the Company on March 31,
2008.
|
2007
GRANTS OF PLAN-BASED AWARDS
The following table sets forth certain
information with respect to each grant of an award made to a named executive
officer in 2007 under our plans.
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
Number of
|
|
|
Base
|
|
|
Fair Value
|
|
|
|
|
|
|
Securities
|
|
|
Price of
|
|
|
of Stock
|
|
|
|
|
Grant
|
|
Underlying
|
|
|
Option
|
|
|
and Option
|
|
|
Name
|
|
Date
|
|
Options(1)
|
|
|
Awards
($/Sh)(2)
|
|
|
Awards(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
James Miller, Jr.
|
|
4/3/2007
|
|
|
18,000
|
|
|
$
|
2.49
|
|
|
$
|
37,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
Wetherell
|
|
4/3/2007
|
|
|
15,000
|
|
|
$
|
2.49
|
|
|
|
31,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
AuBuchon
|
|
4/3/2007
|
|
|
10,000
|
|
|
$
|
2.49
|
|
|
|
20,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Willis (4)
|
|
4/3/2007
|
|
|
20,000
|
|
|
$
|
2.49
|
|
|
|
41,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding
|
|
4/3/2007
|
|
|
25,000
|
|
|
$
|
2.49
|
|
|
|
51,800
|
|
(1) The
shares subject to each option vest over a three year period, with 33 1/3% of the
shares subject to each option vesting on each anniversary at the grant date. The
options expire ten years from the date of grant.
(2) The
exercise price is the closing price of our common stock on the date of
grant.
(3) The
fair value of our stock options is computed using the Black-Scholes valuation
model.
(4) Mr. Willis
resigned from the Company on March 31, 2008.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth
information regarding unexercised options, stock that has not vested and equity
incentive awards held by each of the named executive officers outstanding as of
December 31, 2007.
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
Option
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
|
|
Options:
|
|
|
Options:
|
|
|
Exercise
|
|
Option
|
|
Have Not
|
|
|
Have Not
|
|
|
|
|
|
|
|
|
|
#
|
|
|
Price
|
|
Expiration
|
|
Vested
|
|
|
Vested
|
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
Date
|
|
|
|
|
|
($)
|
|
|
S.
James Miller, Jr.
|
|
|
75,000
|
|
|
|
—
|
|
|
$
|
3.00
|
|
9/12/2011
|
|
|
27,423
|
(8)
|
|
$
|
41,957
|
|
|
|
|
|
25,000
|
|
|
|
—
|
|
|
$
|
1.97
|
|
5/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
2.40
|
|
10/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
75,001
|
(1)
|
|
|
24,999
|
|
|
$
|
2.62
|
|
8/16/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
82,277
|
(2)
|
|
|
27,423
|
|
|
$
|
2.36
|
|
9/27/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(3)
|
|
|
18,000
|
|
|
$
|
2.49
|
|
9/12/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
G. Wetherell
|
|
|
25,000
|
|
|
|
—
|
|
|
$
|
3.00
|
|
9/12/2011
|
|
|
13,149
|
(8)
|
|
$
|
20,118
|
|
|
|
|
|
10,000
|
|
|
|
—
|
|
|
$
|
1.97
|
|
5/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
2.40
|
|
10/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
(1)
|
|
|
15,000
|
|
|
$
|
2.62
|
|
8/16/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
39,451
|
(2)
|
|
|
13,149
|
|
|
$
|
2.36
|
|
9/27/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(3)
|
|
|
15,000
|
|
|
$
|
2.36
|
|
9/12/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Willis (4)
|
|
|
67,500
|
|
|
|
—
|
|
|
$
|
2.65
|
|
10/1/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
—
|
|
|
$
|
2.30
|
|
10/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
(1)
|
|
|
15,000
|
|
|
$
|
2.62
|
|
8/16/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
25,000
|
|
|
$
|
1.99
|
|
1/13/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(3)
|
|
|
20,000
|
|
|
$
|
2.36
|
|
9/12/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
AuBuchon
|
|
|
10,000
|
|
|
|
—
|
|
|
$
|
3.00
|
|
12/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
—
|
|
|
$
|
2.30
|
|
10/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
(6)
|
|
|
10,000
|
|
|
$
|
3.19
|
|
4/1/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
(1)
|
|
|
15,000
|
|
|
$
|
2.62
|
|
8/16/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
(5)
|
|
|
25,000
|
|
|
$
|
1.99
|
|
1/13/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(3)
|
|
|
10,000
|
|
|
$
|
2.36
|
|
9/12/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Harding
|
|
|
58,375
|
(7)
|
|
|
41,625
|
|
|
$
|
1.65
|
|
1/31/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(3)
|
|
|
25,000
|
|
|
$
|
2.36
|
|
9/12/2017
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These
options vest over three years with one third vesting 8/16/2006 and the
remainder vesting in equal quarterly installments
thereafter.
|
|
(2)
|
|
These
options vest over three years with one third vesting 9/27/2006 and the
remainder vesting in equal quarterly installments
thereafter.
|
|
(3)
|
|
These
options vest over three years with one third vesting 4/2/2008 and the
remainder vesting in equal quarterly installments
thereafter.
|
|
(4)
|
|
Mr. Willis
resigned from the Company on March 31, 2008.
|
|
(5)
|
|
These
options vest over three years with one third vesting 1/13/2007 and the
remainder vesting in equal quarterly installments
thereafter.
|
|
(6)
|
|
These
options vest over three years with one third vesting on each of 4/1/2006,
4/1/2007 and 4/1/2008.
|
|
(7)
|
|
These
options vest over three years with one third vesting 1/31/2007 and the
remainder vesting in equal quarterly installments
thereafter.
|
|
(8)
|
|
These
stock grants vest over three years with one third vesting 9/27/2006 and
the remainder vesting in equal quarterly installments
thereafter.
|
OPTION
EXERCISES AND STOCK VESTED
The
following table sets forth information regarding exercises of stock options and
vesting of stock for each of the named executive officers during
2007.
|
|
|
Stock Awards
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
Value
|
|
|
|
|
Acquired on
|
|
Realized
|
|
|
Name
|
|
Vesting
|
|
on Vesting
|
|
|
|
|
|
|
|
|
|
S.
James Miller, Jr.(1)
|
|
46,909
|
|
$
|
126,119
|
|
|
|
|
|
|
|
|
|
Wayne
G. Wetherell(2)
|
|
24,223
|
|
67,136
|
|
|
(1)
|
|
Represents
the quarterly vesting of 124,162 restricted shares granted on
March 30, 2004 and the vesting of 109,700 restricted shares granted
on September 27, 2005. The restricted shares granted in
September 2005 vest one-third after one year with the remainder
vesting ratably on a quarterly basis over two years ending
September 27, 2008.
|
|
|
|
|
|
(2)
|
|
Represents
the quarterly vesting of 80,281 restricted shares granted on
March 30, 2004 and the vesting of 52,600 restricted shares granted on
September 27, 2005. The restricted shares granted in
September 2005 vest one-third after one year with the remainder
vesting ratably on a quarterly basis over two years ending
September 27, 2008.
|
EMPLOYMENT
CONTRACTS
Employment
Agreement with S. James Miller, Jr.
On
October 1, 2005, we entered into an employment agreement with
Mr. Miller pursuant to which Mr. Miller will serve as President and
Chief Executive Officer. This agreement is for a three-year term ending
September 30, 2008. This agreement provides for annual base compensation in
the amount of $291,048, which amount will be increased based on cost-of-living
increases. Under this agreement, we will reimburse Mr. Miller for
reasonable expenses incurred in connection with our business. Under the terms of
the agreement, Mr. Miller will be entitled to the following severance
benefits if we terminate his employment without cause or in the event of an
involuntary termination: (i) a lump sum cash payment equal to twenty-four
months’ base salary; (ii) continuation of Mr. Miller’s fringe benefits
and medical insurance for a period of three years; and (iii) immediate
vesting of 50% of Mr. Miller’s outstanding stock options and restricted
stock awards. In the event that Mr. Miller’s employment is terminated
within six months prior to or thirteen months following a change of control
(defined below), Mr. Miller is entitled to the severance benefits described
above, except that 100% of Mr. Miller’s outstanding stock options and
restricted stock awards will immediately vest.
Employment
Agreement with Wayne Wetherell.
On October 1,
2005, 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 three-year term ending September 30, 2008. This
agreement provides for annual base compensation in the amount of $174,100, 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. Under the terms of the agreement, Mr. Wetherell will be entitled
to the following severance benefits if we terminate his employment without cause
or in the event of an involuntary termination: (i) a lump sum cash payment
equal to twelve months; (ii) continuation of Mr. Wetherell’s fringe
benefits and medical insurance for a period of three years; (iii) immediate
vesting of 50% of Mr. Wetherell’s outstanding stock options and restricted
stock awards. In the event that Mr. Wetherell’s employment is terminated
within six months prior to or thirteen months following a change of control
(defined below),
Mr. Wetherell
is entitled to the severance benefits described above, except that 100% of
Mr. Wetherell’s outstanding stock options and restricted stock awards will
immediately vest.
Change of Control
and Severance Benefits Agreement with Charles AuBuchon.
On
October 31, 2005, we entered into a Change of Control and Severance
Benefits Agreement with Mr. Charles AuBuchon, our Vice President of
Sales. This agreement has a three-year term, commencing on October 31,
2005. Subject to the conditions and other limitations set forth therein,
Mr. AuBuchon will be entitled to the following severance benefits if we
terminate his employment without cause prior to the closing of any change of
control transaction: (i) a lump sum cash payment equal to six months of
base salary; and (ii) continuation of Mr. AuBuchon’s health insurance
benefits until the earlier of six (6) months following the date of
termination, the date on which he is no longer entitled to continuation coverage
pursuant to COBRA or the date that he obtains comparable health insurance
coverage. In the event that Mr. AuBuchon’s employment is terminated
within the twelve months following a change of control, he is entitled to the
severance benefits described above, plus his stock options will immediately vest
and become exercisable. Mr. AuBuchon’s eligibility to receive severance
payments or other benefits upon his termination is conditioned upon him
executing a general release of liability.
Change of Control
and Severance Benefits Agreement with David Harding.
On May 21,
2007, we entered into a Change of Control and Severance Benefits Agreement with
Mr. David Harding, our Vice President and Chief Technical
Officer. This agreement has a three-year term, commencing on May 21,
2007. Subject to the conditions and other limitations set forth therein,
Mr. Harding will be entitled to the following severance benefits if we
terminate his employment without cause prior to the closing of any change of
control transaction: (i) a lump sum cash payment equal to six months of
base salary; and (ii) continuation of Mr. Harding’s health insurance
benefits until the earlier of six (6) months following the date of
termination, the date on which he is no longer entitled to continuation coverage
pursuant to COBRA or the date that he obtains comparable health insurance
coverage. In the event that Mr. Harding’s employment is terminated
within the twelve months following a change of control, he is entitled to the
severance benefits described above, plus his stock options will immediately vest
and become exercisable. Mr. Harding’s eligibility to receive severance
payments or other benefits upon his termination is conditioned upon him
executing a general release of liability.
For
purposes of each of the above-referenced agreements, termination for “cause”
generally means the executive’s commission of an act of fraud or similar conduct
which is intended to result in substantial personal enrichment of the executive,
conviction or plea of
nolo
contendere
to a felony, gross negligence or breach of fiduciary duty that
results in material injury to us, material breach of the executive’s proprietary
information agreement that is materially injurious to us, willful and material
failure to perform his duties as an officer or employee of ours or material
breach of his employment agreement and the failure to cure such breach in a
specified period of time or a violation of a material policy of ours that is
materially injurious to us. A “change in control” as used in these agreements
generally means the occurrence of any of the following events: (i) the
acquisition by any person or group of 50% or more of our outstanding voting
stock, (ii) the consummation of a merger, consolidation, reorganization, or
similar transaction other than a transaction: (1) in which substantially
all of the holders of our voting stock hold or receive directly or indirectly
50% or more of the voting stock of the resulting entity or a parent company
thereof, in substantially the same proportions as their ownership of the Company
immediately prior to the transaction; or (2) in which the holders of our
capital stock immediately before such transaction will, immediately after such
transaction, hold as a group on a fully diluted basis the ability to elect at
least a majority of the directors of the surviving corporation (or a parent
company); (iii) there is consummated a sale, lease, exclusive license, or
other disposition of all or substantially all of the consolidated assets of us
and our Subsidiaries, other than a sale, lease, license, or other disposition of
all or substantially all of the consolidated assets of us and our Subsidiaries
to an entity, 50% or more of the combined voting power of the voting securities
of which are owned by our stockholders in substantially the same proportions as
their ownership of the Company immediately prior to such sale, lease, license,
or other disposition; or (iv) individuals who, on the date the applicable
agreement was adopted by the Board, are Directors (the “Incumbent Board”) cease
for any reason to constitute at least a majority of the Directors;
provided
,
however
, that if
the appointment or election (or nomination for election) of any new Director was
approved or recommended by a majority vote of the members of the Incumbent Board
then still in office, such new member shall, for purposes of the applicable
agreement, be considered as a member of the Incumbent Board.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The
following tables summarize the potential payments to certain of our named
executive officers upon a termination of employment or a change in control. The
amounts shown in the tables are only estimates and apply the assumption that
employment terminated on December 31, 2007. The calculations of payments
related to equity reflect the closing price of our common stock on
December 31, 2007 on the AMEX. The amounts set forth below do not include
accrued obligations such as salary and other amounts payable with respect to
days previously worked, accrued vacation time and other accrued amounts that
were fully earned and vested as of December 31, 2007, and would be payable
in connection with the executive’s employment.
S. James
Miller, Jr.
The following table describes the potential payments
upon termination or a change in control for Mr. Miller, our Chief Executive
Officer.
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Executive Benefits and Payments
|
|
|
Voluntary
|
|
|
Not for Cause
|
|
|
Change in
|
|
|
Upon Termination(1)
|
|
|
Termination
|
|
|
Termination
|
|
|
Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
—
|
|
|
$
|
623,976
|
(2)
|
|
$
|
623,976
|
(2)
|
|
Equity
|
|
|
$
|
—
|
|
|
$
|
20,979
|
(3)(4)
|
|
$
|
41,957
|
(3)(4)
|
|
Fringe
Benefits
|
|
|
$
|
—
|
|
|
$
|
66,469
|
(5)
|
|
$
|
66,469
|
(5)
|
|
(1)
|
|
For
purposes of this analysis, we assumed Mr. Miller’s compensation is
based on his current base salary of $311,988.
|
|
|
|
|
|
(2)
|
|
Mr. Miller’s
cash severance benefit under an involuntary, good reason termination or a
termination due to a change in control is equal to two times annual
compensation.
|
|
|
|
|
|
(3)
|
|
Mr. Miller’s
equity severance benefit under an involuntary or good reason termination
is the immediate vesting of 50% of Mr. Miller’s outstanding stock
options and restricted stock awards. In the event that Mr. Miller’s
employment is terminated within six months prior to or thirteen months
following a change in control, Mr. Miller is entitled to the
immediate vesting of 100% of Mr. Miller’s outstanding stock options
and restricted stock awards.
|
|
|
|
|
|
(4)
|
|
This
amount was calculated from the unexercised unexercisable stock options and
unvested stock awards held by Mr. Miller on December 31, 2007.
The stock option award amount was calculated by multiplying the number of
securities underlying the unexercised unexercisable options by the
difference between the option price and the price per share of common
stock on the date of termination. The unvested stock award amount was
calculated by multiplying the number of unvested shares of stock by the
price per share on the date of termination.
|
|
|
|
|
|
(5)
|
|
Mr. Miller’s
fringe benefits consist of medical and life insurance for a period of
three years.
|
Wayne G.
Wetherell.
The following table describes the potential payments upon
termination or a change in control for Mr. Wetherell, our Sr. Vice
President Administration, Chief Financial Officer, Secretary and
Treasurer.
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Executive Benefits and Payments
|
|
|
Voluntary
|
|
|
Not for Cause
|
|
|
Change in
|
|
|
Upon Termination(1)
|
|
|
Termination
|
|
|
Termination
|
|
|
Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
—
|
|
|
$
|
186,660
|
(2)
|
|
$
|
186,660
|
(2)
|
|
Equity
|
|
|
$
|
—
|
|
|
$
|
10,059
|
(3)(4)
|
|
$
|
20,118
|
(3)(4)
|
|
Fringe
Benefits
|
|
|
$
|
—
|
|
|
$
|
70,517
|
(5)
|
|
$
|
70,517
|
(5)
|
|
(1)
|
|
For
purposes of this analysis, we assumed Mr. Wetherell’s compensation is
based on his current base salary of $186,660.
|
|
|
|
|
|
(2)
|
|
Mr. Wetherell’s
cash severance benefit under an involuntary, good reason termination or a
termination due to a change in control is equal to the amount of his
annual compensation.
|
|
|
|
|
|
(3)
|
|
Mr. Wetherell’s
equity severance benefit under an involuntary or good reason termination
is the immediate vesting of 50% of Mr. Wetherell’s outstanding stock
options and restricted stock awards. In the event that
Mr. Wetherell’s employment is terminated within six months prior to
or thirteen months following a change in control, Mr. Wetherell is
entitled to the immediate vesting of 100% of Mr. Wetherell’s
outstanding stock options and restricted stock awards.
|
|
|
|
|
|
(4)
|
|
This
amount was calculated from the unexercised unexercisable stock options and
unvested stock awards held by Mr. Wetherell on December 31,
2007. The stock option award amount was calculated by multiplying the
number of securities underlying the unexercised unexercisable options by
the difference between the option price and the price per share of common
stock on the date of termination. The unvested stock award amount
was calculated by multiplying the number of unvested shares of stock by
the price per share on the date of termination.
|
|
|
|
|
|
(5)
|
|
Mr. Wetherell’s
fringe benefits consist of medical and life insurance for a period of
three years.
|
Charles AuBuchon.
The following table describes the potential payments upon termination or
a change in control for Mr. AuBuchon, our Vice President Business
Development.
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Executive Benefits and Payments
|
|
|
Voluntary
|
|
|
Not for Cause
|
|
|
Change in
|
|
|
Upon Termination(1)
|
|
|
Termination
|
|
|
Termination
|
|
|
Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
—
|
|
|
$
|
77,500
|
(2)
|
|
$
|
77,500
|
(2)
|
|
Equity
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fringe
Benefits
|
|
|
$
|
—
|
|
|
$
|
13,868
|
(3)
|
|
$
|
13,868
|
(3)
|
|
(1)
|
|
For
purposes of this analysis, we assumed Mr. AuBuchon’s compensation is
based on his current base salary of $155,000.
|
|
|
|
|
|
(2)
|
|
Mr. AuBuchon’s
cash severance benefit under an involuntary, good reason termination or a
termination due to a change in control is equal to six months of annual
compensation.
|
|
|
|
|
|
(3)
|
|
Mr. AuBuchon’s
fringe benefits consist of medical and life insurance for a period of six
months.
|
David Harding.
The following table describes the potential payments upon termination or
a change in control for Mr. Harding, our Vice President and Chief Technical
Officer.
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
Executive Benefits and Payments
|
|
|
Voluntary
|
|
|
Not for Cause
|
|
|
Change in
|
|
|
Upon Termination(1)
|
|
|
Termination
|
|
|
Termination
|
|
|
Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
—
|
|
|
$
|
92,500
|
(2)
|
|
$
|
92,500
|
(2)
|
|
Equity
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fringe
Benefits
|
|
|
$
|
—
|
|
|
$
|
6,495
|
(3)
|
|
$
|
6
|
(3)
|
|
(1)
|
|
For
purposes of this analysis, we assumed Mr. Harding’s compensation is
based on his current base salary of $185,000.
|
|
|
|
|
|
(2)
|
|
Mr. Harding’s
cash severance benefit under an involuntary, good reason termination or a
termination due to a change in control is equal to six months of annual
compensation.
|
|
|
|
|
|
(3)
|
|
Mr. Harding’s
fringe benefits consist of medical and life insurance for a period of six
months.
|
Each of our non-employee directors
receives a monthly retainer of $2,000 for serving on the Board. Board members
who also serve on the Audit Committee receive additional monthly compensation of
$458.33 for the Chairman and $208.33 for the remaining members of the Audit
Committee. The members of the Board of Directors are also eligible for
reimbursement for their expenses incurred in attending Board meetings in
accordance with our policies. For the fiscal year ended December 31, 2007,
the total amounts paid to non-employee directors as compensation (excluding
reimbursable expenses) was $153,500.
Each of our non-employee directors are
also eligible to receive stock option grants under the 1999 Plan. Options
granted under the 1999 Plan are intended by us not to qualify as incentive stock
options under the Code.
The term of options granted under the
1999 Plan is 10 years. In the event of a merger of us with or into another
corporation or a consolidation, acquisition of assets or other change-in-control
transaction involving us, an equivalent option will be substituted by the
successor corporation, provided, however, that we may cancel outstanding options
upon consummation of the transaction by giving at least
thirty (30) days notice.
During the last fiscal year, we granted
30,000 options under the 1999 Plan to our non-employee directors. The fair
market value of the common stock underlying such options on the date of grant is
based on the closing sales price reported on AMEX for the date of each such
grant, as detailed in the following table:
|
Name (1)
|
|
Option
Awards
(number of
shares)
|
|
|
Exercise Price
Per Share
|
|
|
Fair Market Value
on Option Grant
Date (2)
|
|
|
|
|
|
|
|
|
|
|
|
John
Callan
|
|
|
5,000
|
|
|
$
|
2.49
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Downs(3)
|
|
|
5,000
|
|
|
|
2.49
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Holleran
|
|
|
5,000
|
|
|
|
2.49
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Loesch
|
|
|
5,000
|
|
|
|
2.49
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guy
Steven Hamm
|
|
|
5,000
|
|
|
|
2.49
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Carey
|
|
|
5,000
|
|
|
|
2.49
|
|
|
|
2.49
|
|
|
(1)
|
|
As
of December 31, 2007, no options had been exercised by non-employee
directors under any plans maintained by us.
|
|
|
|
|
|
(2)
|
|
The
fair market value of the common stock underlying such options on the date
of grant is based on the closing sales price reported on AMEX for the date
of each such grant.
|
|
|
|
|
|
(3)
|
|
Mr. Downs
passed away on March 16, 2008.
|
The
following table sets forth the compensation of our directors for the 2007 fiscal
year.
|
Name and Principal Position
|
|
Fees
Earned or
Paid in
Cash
|
|
|
Option
Awards(1)(2)(3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Callan
|
|
$
|
24,000
|
|
|
$
|
8,114
|
|
|
$
|
32,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Downs
|
|
|
24,000
|
|
|
|
9,620
|
|
|
|
33,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Holleran
|
|
|
26,500
|
|
|
|
8,114
|
|
|
|
34,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Loesch
|
|
|
26,500
|
|
|
|
9,670
|
|
|
|
36,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guy
Steven Hamm
|
|
|
28,500
|
|
|
|
5,828
|
|
|
|
34,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Carey
|
|
|
24,000
|
|
|
|
7,589
|
|
|
|
31,589
|
|
|
(1)
|
|
The
grant date per share fair value of options issued to Messrs. Callan,
Downs, Holleran, Loesch, Hamm and Carey in 2007 was
$1.54.
|
|
|
|
|
|
(2)
|
|
The
amounts reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2007, in
accordance with the provisions of SFAS 123R and thus may include
amounts from awards granted prior to 2007. We have elected to use the
Black-Scholes option-pricing model, which incorporates various assumptions
including volatility, expected life, and interest rates. We are required
to make various assumptions in the application of the Black-Scholes option
pricing model and have determined that the best measure of expected
volatility is based on the historical weekly volatility of our common
stock. Historical volatility factors utilized in our Black-Scholes
computations range from 64.4% to 98.5%. We have elected to estimate the
expected life of an award based upon the SEC approved “simplified method”
noted under the provisions of Staff Accounting Bulletin No. 107.
Under this formula, the expected term is equal to: ((weighted-average
vesting term + original contractual term)/2). The expected term used by us
as computed by this method ranges from 3.5 years to 6.1 years. The
interest rate used is the risk free interest rate and is based upon U.S.
Treasury rates appropriate for the expected term. Interest rates used in
our Black-Scholes calculations range from 2.7% to 4.6%. Dividend yield is
zero as we do not expect to declare any dividends on our common shares in
the foreseeable future. In addition to the key assumptions used in the
Black-Scholes model, the estimated forfeiture rate at the time of
valuation is a critical assumption. We have estimated an annualized
forfeiture rate of 10% for corporate officers, 4% for members of the Board
of Directors and 24% for all other employees. We review the expected
forfeiture rate annually to determine if that percent is still reasonable
based on historical experience.
|
|
|
|
|
|
(3)
|
|
The
aggregate number of stock option awards outstanding at the end of fiscal
2007 for each director were as follows: John Callan (37,535); Patrick
Downs (41,261); John Holleran (35,261); David Loesch (42,000); Guy Steven
Hamm (22,000); and David Carey
(15,000).
|
Item
12. Security Ownership Of Certain Beneficial Owners and Management and Related
Stockholder Matters.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information as of March 31, 2008, with respect to the
beneficial ownership of shares of our common stock by (i) each person known
by us to be the beneficial owner of more than five percent of our common stock ,
(ii) each director, (iii) each named executive officer and
(iv) all directors and executive officers as a group
.
|
|
|
|
|
|
|
|
|
Beneficial
Ownership(1)
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Number of
Shares
|
|
|
Percent of
Class (2)
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
S.
James Miller, Jr.(3)
|
|
|
694,442
|
|
|
|
3.7
|
|
|
John
Callan(4)
|
|
|
70,967
|
|
|
|
*
|
|
|
David
Carey(5)
|
|
|
13,340
|
|
|
|
*
|
|
|
G.
Steve Hamm(6)
|
|
|
17,424
|
|
|
|
*
|
|
|
John
Holleran(7)
|
|
|
29,355
|
|
|
|
*
|
|
|
David
Loesch(8)
|
|
|
43,679
|
|
|
|
*
|
|
|
Wayne
Wetherell(9)
|
|
|
325,180
|
|
|
|
1.8
|
|
|
William
Willis(10)
|
|
|
224,172
|
|
|
|
1.2
|
|
|
Charles
AuBuchon(11)
|
|
|
203,336
|
|
|
|
1.1
|
|
|
David
Harding (12)
|
|
|
83,425
|
|
|
|
*
|
|
|
Total
Shares Held By Directors and Executive Officers
|
|
|
1,705,320
|
|
|
|
8.7
|
|
|
5%
Stockholders:
|
|
|
|
|
|
|
|
|
|
Gruber &
McBaine Capital Management LLC 50
Osgood
Place San Francisco, CA(13)
|
|
|
4,249,916
|
|
|
|
22.4
|
|
|
Harvey
and Helen Kohn (14)
|
|
|
1,025,808
|
|
|
|
5.5
|
|
|
(1)
|
This
table is based our records and Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, we believe that each of the
stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Unless otherwise
indicated, the address for each listed stockholder is c/o ImageWare
Systems, Inc., 10883 Thornmint Road, San Diego, CA
92127.
|
|
(2)
|
The
percentages set forth below are based on 18,332,788 shares of common stock
outstanding as of March 31, 2008.
|
|
(3)
|
Mr. Miller
serves as the Chairman of our Board of Directors and our Chief Executive
Officer. Includes 84,680 shares held jointly with spouse and by sons and
389,085 options exercisable within 60 days of March 31,
2008.
|
|
(4)
|
Includes
30,967 options exercisable within 60 days of March 31,
2008.
|
|
(5)
|
Includes
8,340 options exercisable within 60 days of March 31,
2008.
|
|
(6)
|
Includes
17,424 options exercisable within 60 days of March 31,
2008.
|
|
(7)
|
Includes
28,693 options exercisable within 60 days of March 31,
2008.
|
|
(8)
|
Includes
34,679 options exercisable within 60 days of March 31,
2008.
|
|
(9)
|
Includes
188,834 options exercisable within 60 days of March 31,
2008.
|
|
(10)
|
Includes
224,172 options exercisable within 60 days of March 31,
2008.
|
|
(11)
|
Includes
183,336 options exercisable within 60 days of March 31,
2008.
|
|
(12)
|
Includes
83,425 options exercisable within 60 days of March 31, 2008
.
|
|
(13)
|
Based
on certain of our records and Schedule 13G filed with the SEC on
January 29, 2008. Includes 610,164 shares issuable upon exercise of
warrants.
|
|
(14)
|
Based
on Schedule 13G filed with the SEC on June 12, 2007. Includes 385,748
shares issuable upon exercise of
warrants.
|
The following table sets forth
additional information as of December 31, 2007, with respect to the shares
of common stock that may be issued upon the exercise of options and other rights
under our existing equity compensation plans and arrangements. The information
includes the number of shares covered by, and the weighted average exercise
price of, outstanding options and other rights and the number of shares
remaining available for future grants, excluding the shares to be issued upon
exercise of outstanding options and other rights.
Equity
Compensation Plan Information
|
Plan category
|
|
|
Number of securities
to be issued
upon exercise of
outstanding
options, warrants
and rights
|
|
|
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
|
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation
plans
approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
1994
Employee Stock Option
Plan
|
|
|
|
24,250
|
|
|
$
|
2.15
|
|
|
|
—
|
|
|
1999
Stock Award Plan amended
and
restated as of June 7, 2005
|
|
|
|
1,378,495
|
|
|
$
|
2.19
|
|
|
|
1,035,208
|
|
|
Equity
compensation
plans
not
approved
by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
Equity Incentive Plan
|
|
|
|
345,654
|
|
|
$
|
2.89
|
|
|
|
—
|
|
|
Total
|
|
|
|
1,748,399
|
|
|
$
|
2.33
|
|
|
|
1,035,208
|
|
DESCRIPTION
OF EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS.
2001
Equity Incentive Plan.
On September 12, 2001, our Board
of Directors adopted the 2001 Equity Incentive Plan (the “2001 Plan”). Under the
terms of the 2001 Plan, we may issue stock awards to our employees,
directors and consultants, and such stock awards may be given for
non-statutory stock options (options not intended to qualify as an “incentive
stock option” within the meaning of Section 422 of the Code), stock
bonuses, and rights to acquire restricted stock. The number of options issued
and outstanding and the number of options remaining available for future
issuance are shown in the table above.
The 2001 Plan is administered by the
Board of Directors or a Committee of the Board as provided in the 2001 Plan.
Options granted under the 2001 Plan shall not be less than 85% of the market
value of our common stock on the date of the grant, and, in some cases,
may not be less than 110% of such fair market value. The term of options
granted under the 2001 Plan as well as their vesting are determined by the Board
and to date, options have been granted with a ten-year term and vesting over a
three-year period. While the Board may suspend or terminate the 2001 Plan
at any time, if not terminated earlier, it will terminate on the day before its
tenth anniversary of the date of adoption. The Board has determined not to issue
any future awards under the 2001 Plan.
Item
13. Certain Relationships and Related Transactions and Director
Independence.
TRANSACTIONS
WITH RELATED PERSONS
On November 14, 2006, we entered
into a Securities Purchase Agreement with certain accredited investors (the
“Series C Investors”) pursuant to which we issued an aggregate of 2,300
shares of our Series C 8% Convertible Preferred Stock (the “Series C
Preferred Stock”) and issued to the Series C Investors warrants to purchase
up to an aggregate of 115,000 shares of the Company’s common stock, for
aggregate gross proceeds of $2,300,000 (the “Series C
Financing”).
On March 9, 2007, we entered into
a Securities Purchase Agreement with certain accredited investors (the
“Series D Investors”) pursuant to which we issued an aggregate of 1,500
shares of our Series D 8% Convertible Preferred Stock (the “Series D
Preferred Stock”) and issued to the Series D Investors warrants to purchase
up to an aggregate of 59,207 shares of our common stock, for aggregate gross
proceeds of $1,500,000 (the “Series D Financing”).
On September 25, 2007, we entered
into a Securities Purchase Agreement with certain accredited investors (the
“Investors”) pursuant to which we sold to the Investors an aggregate of
2,016,666 shares of our common stock, and issued to the Investors warrants (the
“September 2007 Investor Warrants”) to purchase up to an aggregate of
1,008,333 shares of our common stock, for aggregate gross proceeds of
approximately $3,000,000 (the “September 2007 Private
Placement”).
On March 12, 2008, we agreed to
reduce the price of the September 2007 Investor Warrants, which initially
had an exercise price of $1.67 per share, to an exercise price of $1.00 per
share, in consideration for their immediate exercise (the “Warrant Repricing”)
by the Investors who participated in the Warrant Repricing (the “Participating
Investors”). In addition, we also issued to the Participating
Investors new warrants to purchase up to an aggregate of 270,833 shares of our
common stock. We received aggregate gross proceeds of $541,666 from
the Warrant Repricing.
Gruber & McBaine Capital
Management, LLC and its affiliates, which include Lagunitas Partners, LP and
Gruber & McBaine International, beneficially own more than 10% of our
issued and outstanding common stock. J. Patterson McBaine, together with Jon D.
Gruber, exercises voting and investment control over the shares held by
Gruber & McBaine Capital Management, LLC, Lagunitas Partners, LP, and
Gruber & McBaine International.
Gruber & McBaine International
purchased 400 shares of Series C Preferred Stock and warrants to purchase
20,000 shares of common stock in the Series C Financing; 135 shares of
Series D Preferred Stock and warrants to purchase 5,328 shares of common
stock in the Series D Financing; and 60,000 shares of common stock and
warrants to purchase 30,000 shares of common stock in the September 2007
Private Placement.
Lagunitas Partners LP purchased 1,200
shares of Series C Preferred Stock and warrants to purchase 60,000 shares
of common stock in the Series C Financing; 440 shares of Series D
Preferred Stock and warrants to purchase 17,368 shares of common stock in the
Series D Financing; and 240,000 shares of common stock and warrants to
purchase 120,000 shares of common stock in the September 2007 Private
Placement.
J. Patterson McBaine purchased 400
shares of Series C Preferred Stock and warrants to purchase 20,000 shares
of common stock in the Series C Financing; 100 shares of Series D
Preferred Stock and warrants to purchase 3,947 shares of
common
stock in the Series D Financing; and 50,000 shares of common stock and
warrants to purchase 25,000 shares of common stock in the September 2007
Private Placement.
In addition to the employment
agreements with Messrs. Miller and Wetherell and the Change of Control and
Severance Benefits Agreements with Messrs. AuBuchon and Harding, we have
entered into indemnity agreements with certain officers and directors that
provide, among other things, that we will indemnify such officer or director,
under the circumstances and to the extent provided for therein, for expenses,
damages, judgments, fines and settlements he or she may be required to pay in
actions or proceedings which he or she is or may be made a party by reason of
his or her position as a director, officer or other agent of ours, and otherwise
to the fullest extent permitted under Delaware law and our Bylaws.
REVIEW,
APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
As provided in the charter of our Audit
Committee, it is our policy that we will not enter into any transactions
required to be disclosed under Item 404 of the SEC’s Regulation S-K unless the
Audit Committee or another independent body of our Board of Directors first
reviews and approves the transactions.
In addition, pursuant to our Code of
Ethical Conduct and Business Practices, all employees, officers and directors of
ours and our subsidiaries are prohibited from engaging in any relationship or
financial interest that is an actual or potential conflict of interest with us
without approval. Employees, officers and directors are required to provide
written disclosure to the Chief Executive Officer as soon as they have any
knowledge of a transaction or proposed transaction with an outside individual,
business or other organization that would create a conflict of interest or the
appearance of one.
Our Board of Directors has the
responsibility for establishing corporate policies and for our overall
performance, although it is not involved in day-to-day operations. As required
under the listing standards of AMEX, a majority of the members of a listed
company’s board of directors must qualify as “independent,” as affirmatively
determined by the Board. Consistent with these considerations, after review of
all relevant transactions or relationships between each director, or any of his
family members, and ImageWare, our senior management and our independent
auditors, our Board of Directors has affirmatively determined that all of our
directors are independent directors within the meaning of the applicable
AMEX
listing
standards, except for Mr. Miller, our Chairman of the Board and Chief
Executive Officer.
Item
14. Principal Accountant Fees and Services.
The following table represents
aggregate fees billed to the Company for the fiscal years ended December 31,
2007 and 2006 by Stonefield Josephson, Inc., the Company’s principal accountant
for the fiscal years ended December 31, 2007 and 2006:
|
|
|
Fiscal
Year Ended
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Audit
Fees
|
|
$
|
150,892
|
|
|
$
|
181,478
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit-Related
Fees
|
|
|
28,682
|
|
|
|
19,887
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Fees
|
|
|
22,821
|
|
|
|
—
|
|
|
Total
Fees
|
|
$
|
202,395
|
|
|
$
|
201,365
|
|
|
|
All
fees described above were approved by the Audit Committee of the Company’s
Board of Directors.
|
Pre-Approval
Policies and Procedures.
The Audit
Committee has adopted a policy and procedures for the pre-approval of audit and
non-audit services rendered by our independent auditor, Stonefield Josephson,
Inc. The policy generally pre-approves specified services in the defined
categories of audit services, audit-related services, and tax services up to
specified amounts. Pre-approval may also be given as part of the Audit
Committee’s approval of the scope of the engagement of the independent auditor
or on an
individual
explicit case-by-case basis before the independent auditor is engaged to provide
each service. The pre-approval of services may be delegated to one or more of
the Audit Committee’s members, but the decision must be reported to the full
Audit Committee at its next scheduled meeting.
Item
15. Exhibits
|
Exhibit
Number
|
|
Description
|
|
31.1
|
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act, promulgated pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act, promulgated pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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IMAGEWARE
SYSTEMS, INC.
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April 29,
2008
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By:
/s/
Wayne G. Wetherell
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Wayne
G. Wetherell
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Chief
Financial Officer
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