AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, VIA EDGAR ON
MARCH 27, 2002
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
BIO-KEY INTERNATIONAL, INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 3577 41-1741861
--------- ---- ----------
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
BIO-KEY INTERNATIONAL, INC.
1285 CORPORATE CENTER DRIVE
SUITE NO. 175
EAGAN, MINNESOTA 55121
(651) 687-0414
---------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS)
MR. JEFFRY R. BROWN
1285 CORPORATE CENTER DRIVE
SUITE NO. 175
EAGAN, MINNESOTA 55121
(651) 687-0414
---------------------------------------------------------
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
with a copy to:
VINCENT A. VIETTI, ESQUIRE
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
ELEVEN PENN CENTER, 14TH FLOOR
1835 MARKET STREET
PHILADELPHIA, PA 19103
(215) 665-3860
-------------------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
-------------------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement in the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum
Title of Each Class Amount to be Maximum Offering Aggregate Amount of
of Securities to be Registered Registered(1) Price Per Share(2) Offering Price(2) Registration Fee(2)
------------------------------ ------------- ------------------ ----------------- -------------------
common stock,
.01 par value 22,096,139(3) $0.81 $17,897,872.59 $1,646.61
(1) Represents shares of the Company's common stock which may be offered by
certain selling security holders.
(2) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the high and low sale prices
per share of the Company's common stock as reported on the OTC Bulletin
Board on March 20, 2002.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also includes additional shares of common stock
issuable upon stock splits, stock dividends or similar transactions.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED MARCH 27, 2002
PRELIMINARY PROSPECTUS
BIO-KEY INTERNATIONAL, INC.
16,484,765 shares of common stock
The 16,484,765 shares of common stock are being offered by the selling
security holders identified in this prospectus. The shares were issued by us in
private placement transactions. The selling security holders may sell all or a
portion of their shares on a best efforts basis through public or private
transactions at prevailing market prices or at privately negotiated prices.
We will not receive any part of the proceeds from sales of these shares
by the selling security holders.
Our common stock is traded on the OTC Bulletin Board under the symbol
"BKYI". The last reported sale price of our common stock on March 20, 2002 on
the OTC Bulletin Board was $.79 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this preliminary prospectus is March 27, 2002.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................3
USE OF PROCEEDS...............................................................9
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................10
DESCRIPTION OF BUSINESS......................................................16
MANAGEMENT...................................................................26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............33
DESCRIPTION OF SECURITIES....................................................35
THE OFFERING.................................................................37
SELLING SECURITY HOLDERS.....................................................38
PLAN OF DISTRIBUTION.........................................................40
INDEMNIFICATION OF DIRECTORS AND OFFICERS....................................41
LEGAL MATTERS................................................................41
EXPERTS......................................................................41
FINANCIAL STATEMENTS........................................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS AND FINANCIAL STATEMENTS
ABOUT BIO-KEY INTERNATIONAL, INC.
We are in the business of developing and marketing biometric
technologies. Biometrics is the science of analyzing specific human
characteristics which are unique to an individual in order to identify a
specific individual from a broader population. Examples of the unique biological
characteristics that can be used to identify an individual include fingerprints,
iris patterns, hand geometry, voice recognition and facial structure. Biometric
technology has only been used in limited applications for criminal apprehension
and forensics and has not gained widespread acceptance in any commercial or
consumer markets.
We develop and market fingerprint identification technology. Our
technology identifies a specific person from a broader population based on the
unique characteristics of his or her fingerprint. Our technology scans a
person's fingerprint and identifies a person within a few seconds without using
a password, key card, personal identification number or any other identifying
data. Fingerprint analysis is an accurate and reliable method to distinguish one
individual from another and is viewed as less intrusive than many other
biometric identification methods. We believe our fingerprint identification
technology will have a broad range of applications relating to information,
identity, network, access and personal security including:
* Securing Internet sites, Web pages and electronic transactions
* Prevention of identity and data theft
* Securing access to private networks
* Securing access to buildings and restricted areas
Our technology provides a reliable and secure user authentication
system for public and private computer networks. Web-key(TM), our web-based
biometric authentication solution, is designed to secure access to proprietary
information residing on remote servers which is transmitted via the Internet. It
is compatible with Oracle server software and new security features in
Microsoft's Internet Explorer Versions 5.5 SP2 and 6.0. Network authentication
is typically accomplished by using passwords. Since passwords can be lost,
transferred, stolen or forgotten, we believe our Web-key(TM) biometric solution
is a more secure method for verifying the identity of remote users and
eliminates the substantial administrative costs associated with tracking and
reissuing new passwords.
All fingerprint identification technologies require the use of an
optical reader to scan a person's finger. Rather than distributing integrated
products, we license our technology. To execute this plan, we have designed our
core software to integrate with virtually any finger reading device.
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1
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We have completed the development of our core software and are now
marketing potential applications to commercial and governmental markets. Our
primary targets are facility access control and computer network security. We
intend to license our technology to:
* Original equipment manufacturers systems integrators and
application developers to develop and market products and
applications which can then be sold to end users.
* Companies which distribute goods, service or software
applications over the Internet.
* Operators of private networks.
We are a development stage company and have only generated minimal
sales to date. Our principal executive offices are located at 1285 Corporate
Center Drive, Suite 175, Eagan, Minnesota 55121 and our telephone number is
(651) 687-0414.
THE OFFERING
This prospectus covers the public sale of up to 16,484,765 or more
shares of common stock to be sold by the selling stockholders identified in this
prospectus. Of this amount, 14,364,765 or more shares are issuable upon the
exercise or conversion of securities we issued to The Shaar Fund, Ltd. on
November 26, 2001. In this transaction, we obtained $1.065 million of funding
and converted approximately $4.6 million of short-term debt and other
obligations owed to The Shaar Fund into long-term secured convertible notes. The
remaining 2,120,000 shares covered by this prospectus are issuable upon exercise
of options and warrants we have previously issued to certain of our officers and
consultants.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT CERTAIN OF THE RISKS
OF INVESTING IN OUR COMMON STOCK, TOGETHER WITH OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS, BEFORE YOU DECIDE TO PURCHASE OUR COMMON STOCK.
BUSINESS AND FINANCIAL RISKS
WE ARE DEVELOPMENT STAGE COMPANY, HAVE GENERATED MINIMAL REVENUE, HAVE
SUSTAINED SUBSTANTIAL OPERATING LOSSES AND EXPECT LOSSES TO CONTINUE.
We were formed in 1993 and have yet to generate any significant
revenue. From inception through December 31, 2001, we have accumulated losses of
$18,339,455 and negative cash flow from operations of $13,915,623. As of
December 31, 2001, we had working capital of $392,533 and a negative net worth
of $3,896,999. Since our inception, we have focused almost exclusively on
developing our core technology and have not had any success marketing our
technology. In order to generate revenue, we will have to retain additional
marketing personnel and incur substantial marketing expenses. We can not assure
you that we will be able to secure these necessary resources, that a significant
market for our technology will develop or that we will be able to generate any
significant revenues. For these reasons we anticipate that net losses will
continue.
BASED ON OUR LIMITED WORKING CAPITAL, NEGATIVE NET WORTH AND
SUBSTANTIAL LOSSES, OUR AUDITORS HAVE RAISED SUBSTANTIAL DOUBT ABOUT OUR ABILITY
TO CONTINUE IN BUSINESS.
We have met our working capital requirements through financing
transactions involving the public or private placement of our securities. We do
not expect our current working capital to support our operations beyond August
2002 and we are in need of substantial additional capital to fund operations.
Since our inception, we have not generated any significant revenue and have
experienced substantial losses, including $2,283,774 during 2001. We also have
limited working capital and a negative net worth. As a result of these factors,
our independent auditors have included an explanatory paragraph in their opinion
for the year ended December 31, 2001 as to the substantial doubt about our
ability to continue as a going concern.
WE NEED SUBSTANTIAL ADDITIONAL FINANCING TO EXECUTE OUR BUSINESS PLAN
WHICH MAY NOT BE AVAILABLE.
We need substantial additional capital to expand our marketing and
sales efforts. Our current resources are insufficient to fund operations beyond
August 2002. We believe we need an additional $5,000,000 to $7,000,000 to
execute our business plan and support operations through 2003. Although The
Shaar Fund has committed to provide an additional $1,080,000 in incremental
monthly advances through August, 2002, this obligation is conditioned upon
events outside of our control, including the average trading price of our common
stock exceeding $1.00 per share during the month preceding any advance. For
these reasons, we are currently seeking to obtain additional financing through
the issuance of debt or equity securities on a negotiated private placement
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basis with institutional and accredited investors. We have not and can not
assure you that we will ever be able to secure any such financing on terms
acceptable to us. If we can not obtain such financing, we will not be able to
execute our business plan or continue operations.
OUR TECHNOLOGY HAS NOT GAINED MARKET ACCEPTANCE AND WE DO NOT KNOW
WHETHER A MARKET WILL DEVELOP FOR OUR TECHNOLOGY IN THE FORESEEABLE FUTURE.
Biometric technology has received only limited market acceptance,
particularly in the private sector. Our technology represents a novel security
solution and we have not generated any significant sales. Although recent
security concerns relating to identification of individuals has increased
interest in biometrics generally, it remains an undeveloped, evolving market.
Biometric based solutions compete with more traditional security methods
including keys, cards, personal identification numbers and security personnel.
Acceptance of biometrics as an alternative to such traditional methods depends
upon a number of factors including:
* the reliability of biometric solutions
* public perception regarding privacy concerns
* costs involved in adopting and integrating biometric solutions
For these reasons, we are uncertain whether our technology will gain
any acceptance in any commercial markets or that demand will be sufficient to
create a market large enough to produce any meaningful revenue or earnings. Our
future success depends upon business customers adopting biometrics generally,
and our solution specifically.
BIOMETRIC TECHNOLOGY IS A NEW APPROACH TO INTERNET SECURITY WHICH MUST
BE ACCEPTED IN ORDER FOR OUR WEB-KEY(TM) SOLUTION TO GENERATE ANY REVENUE.
Our Web-key(TM) authentication initiative represents a new approach to
Internet security which has not been adopted by any company which distributes
goods, content or software applications over the Internet. The implementation of
our WEB-Key(TM) solution requires the distribution and use of an optical reader
and integration of database and server side software Although we believe our
solution provides a higher level of security for information transmitted over
the Internet than existing traditional methods, unless business and consumer
markets embrace the use of an optical reader and believe the benefits of
increased accuracy outweigh implementation costs, our solution will not gain
market acceptance.
OUR SOFTWARE MAY CONTAIN DEFECTS WHICH WILL MAKE IT MORE DIFFICULT FOR
US TO ESTABLISH AND MAINTAIN CUSTOMERS.
Although we have completed the development of our core technology, it
has not been used by any business customer. Despite extensive testing during
development, our software may contain undetected design faults and software
errors, or "bugs" that are discovered only after it has been installed and used
by customers. Any such default or error in new or existing software or
applications could cause delays in delivering our technology or require design
modifications. These could adversely affect our competitive position and cause
us to lose potential customers or opportunities. Since our technology is
intended to be utilized to secure physical and electronic access, the effect of
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any such bugs or delays will likely have a detrimental impact on us. In
addition, given that biometric technology generally, and our technology
specifically, has not gained any meaningful acceptance in the market, any delays
would likely have a more detrimental impact on our business than if we were a
more established company.
WE HAVE NOT DEVELOPED ANY EFFECTIVE DISTRIBUTION CHANNELS FOR OUR
TECHNOLOGY.
We market our technology through licensing arrangements with:
* Original equipment manufacturers, systems integrators and
application developers which develop and market products and
applications which can then be sold to end users
* companies which distribute goods, services or software
applications over the Internet
* operators of private networks
Our success will depend upon the ability of these manufacturers to
effectively integrate and market reliable and affordable products which utilize
our technology and upon commercial entities adopting biometric solutions. While
we have commenced a significant marketing effort, we have not developed any
effective distribution channels and may not have the resources or ability to
sustain these efforts or generate any meaningful sales.
IN ORDER TO GENERATE REVENUE, WE ARE DEPENDENT UPON INDEPENDENT
ORIGINAL EQUIPMENT MANUFACTURERS, SYSTEMS INTEGRATORS AND APPLICATION DEVELOPERS
WHICH WE DO NOT CONTROL.
As a technology licensing company, we are dependent upon original
equipment manufacturers, systems integrators and application developers to
integrate our technology into products and technologies which they develop and
sell. Licensing revenue from our technology is dependent upon the success of
these third parties in developing and distributing products and applications
which incorporate our technology. We have no control over these licensees and
can not assure you that any of them will have the financial, marketing or
technical resources to successfully develop and distribute products or
applications acceptable to end users or generate any meaningful revenue for us.
These third parties may also offer the products of our competitors to end users.
WE FACE INTENSE COMPETITION AND MAY NOT HAVE THE FINANCIAL AND HUMAN
RESOURCES NECESSARY TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES WHICH MAY RESULT
IN OUR TECHNOLOGY BECOMING OBSOLETE.
The Internet, facility access control and information security markets
are subject to rapid technological change and intense competition. We compete
with both established biometric companies and a significant number of startup
enterprises as well as providers of more traditional methods of access control.
Most of our competitors have substantially greater financial and marketing
resources than we do and may independently develop superior technologies which
may result in our technology becoming less competitive or obsolete. We may not
be able to keep pace with this change. If we are unable to develop new
applications or enhance our existing technology in a timely manner in response
to technological changes we will be unable to compete in our chosen markets. In
5
addition, if one or more other biometric technologies such as voice, face, iris,
hand geometry or blood vessel recognition is widely adopted, it would
significantly reduce the potential market for our fingerprint identification
technology.
WE DEPEND ON OUR EXECUTIVE OFFICERS AND NEED ADDITIONAL MARKETING AND
TECHNICAL PERSONNEL TO SUCCESSFULLY MARKET OUR TECHNOLOGY. WE CAN NOT ASSURE YOU
THAT WE WILL BE ABLE TO RETAIN OR ATTRACT SUCH PERSONS.
A loss of one or more of our current officers could severely and
negatively impact our operations. We have employment contracts with Jeffry R.
Brown, our Chief Executive Officer, H. Donald Rosacker, II, our President, and
Mira LaCous, our Vice President of Technology. Although these employment
contracts do not prevent such persons from resigning, they do contain
non-compete clauses which are intended to prevent these persons from working for
a competitor within one year after leaving our Company. During the past 18
months we have also retained additional employees with expertise in developing,
marketing and selling software solutions. In order to successfully market our
technology, we will need to retain additional technology and marketing
personnel. The market for such persons remains highly competitive and our
limited financial resources will make it more difficult for us to recruit and
retain qualified persons.
WE CAN NOT ASSURE YOU THAT THE LIMITED INTELLECTUAL PROPERTY PROTECTION
FOR OUR CORE TECHNOLOGY PROVIDES A MEANINGFUL COMPETITIVE ADVANTAGE OR BARRIER
TO ENTRY AGAINST OUR COMPETITORS.
Our success and ability to compete is dependent in part upon
proprietary rights to our technology. We rely primarily on a combination of
patent, copyright and trademark laws, trade secrets and technical measures to
protect our propriety rights. We have filed a patent application relating to
both the optic technology and biometrics solution components of our technology
wherein several claims have been allowed. More recently, we filed a patent
application with respect to our VST(TM) (Vector Segment Technology), the core
algorithm of our biometric identification solution. We can not assure you that
any additional patents will be issued, or that, if issued, that we will have the
resources to protect any patent from infringement. Although we believe our
technology does not currently infringe upon patents held by others, we can not
assume you that such infringements do not exist or will not exist in the future,
particularly as the number of products and competitors in the biometric industry
segment grows.
RISKS RELATED TO OUR COMMON STOCK
WE HAVE ISSUED A SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE INTO
SHARES OF OUR COMMON STOCK WHICH WILL RESULT IN SUBSTANTIAL DILUTION TO THE
OWNERSHIP INTERESTS OF OUR EXISTING SHAREHOLDERS.
As of December 31, 2001, 18,183,427 shares of our common stock were
reserved for issuance upon exercise or conversion of the following securities:
* 9,023,278 upon exercise of outstanding stock options and
warrants.
6
* 809,951 shares upon exercise of options available for future
grant under our existing option plans.
* 1,333,333 shares upon conversion of our non interest
convertible debenture due September 30, 2003.
* 5,457,226 shares upon conversion of our secured convertible
note due September 30, 2003.
* 2,857,333 shares or more upon conversion of our outstanding
shares of Series B Convertible Preferred Stock. In the event
of a decline in the market price of our common stock we would
be required to issue an indeterminate number of additional
shares upon conversion of these preferred shares.
* 421,333 or more shares upon conversion of our 5% convertible
debenture due September 30, 2003. In the event of a decline in
the market price of our common stock we would be required to
issue an indeterminate number of additional shares upon
conversion of this debenture.
The exercise or conversion of these securities will result in a
significant increase in the number of outstanding shares and substantially
dilute the ownership interests of our existing shareholders. This prospectus
covers the public sale of 16,484,765 of these shares. In addition, the Shaar
Fund has agreed to provide an additional $1,080,000 through August, 2002 in
incremental monthly advances so long as certain conditions are satisfied. In the
event that advances are made, additional secured convertible notes will be
issued which will further dilute the ownership interest of our existing
shareholders.
THE TRADING PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE
ADDITIONAL FINANCING MAY BE ADVERSELY EFFECTED BY THE INFLUX INTO THE MARKET OF
THE SUBSTANTIAL NUMBER OF SHARES COVERED BY THIS PROSPECTUS.
This prospectus covers the public sale of 16,484,765 or more shares of
our common stock. This significant increase in the number of shares available
for public sale may have a negative impact on the trading price of our shares.
The Shaar Fund's obligation to provide $1,080,000 in incremental monthly
advances through August, 2002 is conditioned upon the average trading price of
our common stock exceeding $1.00 per share during the month preceding the
advance. To the extent that this influx of shares into the public market or
other factors reduce the trading price of our common stock to below $1.00, the
Shaar Fund would have no obligation to provide this financing and our ability to
raise this necessary financing would be significantly impaired. In the event
that advances are made, additional secured convertible notes will be issued. We
have agreed to register the public resale of the shares issuable upon conversion
of any notes issued which will further increase the number of share available
for public sale.
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" LIMITS THE
TRADING AND LIQUIDITY OF OUR COMMON STOCK.
Our common stock currently trades on the OTC Bulletin Board. Since our
common stock continues to trade below $5.00 per share, our common stock is
considered a "penny stock" and is subject to SEC rules and regulations which
impose limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction involving a
7
penny stock, of a disclosure schedule explaining the penny stock market and the
associated risks. Under these regulations, certain brokers who recommend such
securities to persons other than established customers or certain accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. These regulations have the effect of limiting the trading activity of
our common stock and reducing the liquidity of an investment in our common
stock.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid a dividend on our common stock. We
intend to retain earnings, if any, for use in the operation and expansion of our
business and, therefore, do not anticipate paying any dividends in the
foreseeable future.
THE TRADING PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The trading price of our shares has from time to time fluctuated widely
and in the future may be subject to similar fluctuations. The trading price may
be affected by a number of factors including the risk factors set forth in this
prospectus as well as our operating results, financial condition, announcements
of innovations or new products by us or our competitors, general conditions in
the biometrics and access control industries, and other events or factors.
Although we believe that approximately 15 registered broker dealers currently
make a market in our common stock, we can not assure you that any of these firms
will continue to serve as market makers or have the financial capability to
stabilize or support our common stock. A reduction in the number of market
makers or the financial capability of any of these market makers could also
result in a decrease in the trading volume of and price of our shares. In recent
years broad stock market indices, in general, and the securities of technology
companies, in particular, have experienced substantial price fluctuations. Such
broad market fluctuations may adversely affect the future-trading price of our
common stock.
MINNESOTA ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS OF OUR ARTICLES OF
INCORPORATION MAY DISCOURAGE ATTEMPTS TO EFFECT A CHANGE IN CONTROL OF OUR
COMPANY, WHICH MAY ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK.
We are governed by the provisions of Section 302A.673 of the Minnesota
Business Corporation Act ("MBCA"). In general, the law prohibits a public
Minnesota corporation from engaging in a "business combination" (with an
"interested shareholder") for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. "Business Combination"
includes mergers, share exchanges, asset sales, plan or proposal of liquidation
or dissolution, recapitalization, issuance and transfers of shares in excess of
5% or more of the Company's shares. "Interested Shareholder" means any person
who owns directly or indirectly 10% or more of a public corporation's
outstanding voting stock or an affiliate or associate of a public corporation
which owns, or within four years did own, 10% or more of the public
corporation's outstanding voting stock. These provisions regarding certain
business combinations under the MBCA could have the effect of delaying,
deferring, or preventing a change in control of the company or the removal of
existing management. We have no control over, and therefore cannot predict, what
effect these impediments to the ability of third parties to acquire control of
8
us might have on the market price of our common stock. In addition, we are
authorized to 5,000,000 shares of preferred stock which may be issued by our
Board of Directors on such terms and with such rights, preferences and
designations as the Board may determine. Depending upon the rights, preferences
and designations assigned to it, issuance of shares of preferred stock could
delay, deter or prevent a change in control of our company to the detriment of
our shareholders.
FORWARD LOOKING STATEMENTS
The words "may," "will," "expect," "anticipate," "believe," "continue,"
"estimate," "project," "intend," and similar expressions used in this prospectus
are intended to identify forward-looking statements within the meaning of
Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S.
Securities Exchange of 1934. You should not place undue reliance on these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. Many of these risks and
uncertainties are set forth in the "RISK FACTORS" section of this prospectus.
Should any of these risks or uncertainties materialize, or should any of our
assumptions prove incorrect, actual results may differ materially from those
included within the forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling security holders. We will receive the exercise price of certain warrants
and options held by certain of the selling security holders. We expect to use
the proceeds of any such sales for general working capital purposes.
MARKET FOR OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock currently trades on the OTC Bulletin Board under the
symbol "BKYI". The following table sets forth the range of high and low bid
prices per share of our common stock for each of the calendar quarters
identified below as reported by the OTC Bulletin Board. These quotations
represent inter-dealer prices, without retail mark-up, markdown or commission,
and may not represent actual transactions.
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2001: HIGH LOW
---- ---- ---
Quarter ended December 31, 2001 $1.07 $.15
Quarter ended September 30, 2001 .25 .13
Quarter ended June 30, 2001 .4375 .18
Quarter ended March 31, 2001 .4375 .2656
2000: HIGH LOW
---- ---- ---
Quarter ended December 31, 2000 $1.0625 $.2656
Quarter ended September 30, 2000 1.0469 .50
Quarter ended June 30, 2000 1.0625 .375
Quarter ended March 31, 2000 1.375 .8125
The last price of our common stock as reported on the OTC Bulletin
Board on March 20, 2002 was $.79 per share.
HOLDERS
As of March 19, 2001 the number of stockholders of record of our common
stock was 150. Based on broker inquiry conducted in connection with the
distribution of proxy solicitation materials in connection with our special
meeting of shareholders in 2002, we believe that there are approximately 1,900
beneficial owners of our common stock.
DIVIDENDS
We have not paid any cash dividends to date, and we have no intention
of paying any cash dividends on our common stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of our Board
of Directors and to certain limitations imposed under the Minnesota Business
Corporation Act. The timing, amount and form of dividends, if any, will depend
on, among other things, our results of operations, financial condition, cash
requirements and other factors deemed relevant by our Board of Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this prospectus are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth in "RISK FACTORS" and elsewhere in this prospectus. The
following should be read in conjunction with the audited financial statements of
the Company included elsewhere herein.
10
OVERVIEW
Historically, BIO-key International, Inc.'s (the "Company") goal was to
develop automated fingerprint identification products which were portable,
easily integrated with existing applications and affordable for mass
commercialization and distribution through Original Equipment Manufacturers
("OEM"s), distributors and to a lesser degree, system integrators in the
computer network, general access control and other markets. This included the
development of the SACcat and sixth generation IDME readers. During 1998 and
1999, the evolution of the Company's technology allowed it to shift from
providing biometric hardware to developing and licensing biometric
identification IT security and identity theft solution software.
These solutions are built around the advanced capabilities of the
Company's proprietary patent pending VST(TM) (Vector Segment Technology(TM))
algorithm. The Company has pioneered the development of high performance
one-against-many, automated, finger identification technology that can be used
without the aide of non-automated methods of identification such as a personal
identification (PIN), password, token, smart card, ID card, credit card,
passport, drivers license or other form of possession based or knowledge based
identification. This advanced BIO-key(TM) identification technology improves
both the accuracy and speed of finger-based biometrics and is the only finger
identification algorithm that has been certified by the International Computer
Security Association (ICSA).
Over the past two years, recognizing the growth in electronic commerce,
private networks and related security concerns, the Company has actively
positioned its technology for the licensing of a Web based biometric
authentication software solution to e-commerce and other companies conducting
business over the Internet. This integrated solution involves the licensing of
client and server based software to provide for reliable and cost effective user
authentication in connection with the processing of e-commerce transactions or
securing access to private networks.
The Company has completed the development of its core technology, has
commenced the marketing of its technology and expects to generate revenue from
licensing arrangements during 2002. A more complete description of the Company's
plan of operation is set forth below in the section captioned "DESCRIPTION OF
BUSINESS."
Although the Company has developed significant identification
technology, it has not gained any meaningful commercial acceptance and the
Company has only generated minimal revenue since inception. The Company did not
generate any revenue during 2000 or 2001. The Company's business model,
particularly the Web authentication initiative, represents a novel approach to
Internet and network security which as of the date of this prospectus has not
been adopted by any company conducting business over the Internet. Although
recent security concerns relating to the identification of individuals has
increased interest in biometrics generally, there can be no assurance that there
will be a demand for such a solution or that the Company will have the financial
or other resources necessary to successfully market such a software solution.
11
The Company believes its existing financial resources will only last
through August 2002. See "LIQUIDITY AND CAPITAL RESOURCES" below. Due to this
and other uncertainties, the Company's independent auditors have included an
explanatory paragraph in their opinion for the year ended December 31, 2001 as
to the substantial doubt about the Company's ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of its technologies and its ability to obtain
adequate financing, among other matters, as to which there can be no assurances.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000:
REVENUES
The Company had no revenue during 2001 or 2000. This was due to the
Company's decision to deploy substantially all human and capital resources to
executing its new business plan targeted at licensing biometric identification
IT security and identity theft solution software for Internet, intranet and
electronic commerce applications. As a result, the Company's limited resources
were used to refine its technology to develop the applications needed to execute
against this plan.
COSTS AND OTHER EXPENSES
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $534,402 to $1,318,465 during 2001 as compared
to $1,852,867 in 2000. Of the decrease, approximately $117,869 related to a
decrease in costs for administrative personnel, approximately $301,126 related
to a decrease in costs associated with the services of an administrative
consultant, approximately $256,212 related to a decrease in outside professional
service charges, approximately $58,909 related to a decrease in general
operating costs, and approximately $94,500 related to a decrease in the non-cash
accrual of penalties incurred for failing to file a registration statement
covering the public sale of common shares issuable upon conversion of the
Company's Series A Convertible Preferred Stock. These amounts were offset by an
increase of approximately $294,214 in sales and marketing costs associated with
the implementation of the Company's revised business plan. The Company expects
marketing expenses to increase as it continues to focus on generating revenue.
Research and Development. Research, development and engineering
expenses decreased $188,308 to $947,932 in 2001 as compared to $1,136,240 in
2000. Of the decrease, approximately $137,500 was due to a decrease in personnel
costs and approximately $102,315 was due to a decrease in general operation
expenses. These amounts were offset by an increase of approximately $51,507 for
services of outside programming sub-contractors.
12
Interest Expense. Interest expense increased $176,286 to $317,627 in
2001 as compared to $141,341 in 2000. The increase was due to an increase in
interest accrued on additional short term indebtedness of approximately
$1,370,000.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2001, the Company has federal net operating loss
carryforwards of approximately $18,155,000. The carryforwards expire between
2008 and 2021. Such net operating carryforwards may be limited in the future in
the event of a change in ownership of the Company as defined in the Internal
Revenue Code.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999:
REVENUES
The Company did not generate any revenue during the year ended December
31, 2000 resulting in a $157,970 decrease from the year ended December 31, 1999.
This decrease was due to the Company's decision to deploy substantially all
human and capital resources to executing its new business plan targeted at
Internet, intranet and electronic commerce security. As a result, the Company's
limited resources were used to refine its technology to develop the applications
needed to execute against the Company's revised business plan.
COSTS AND OTHER EXPENSES
Cost of product sales. The Company had no revenue during 2000 and,
therefore, did not incur any cost of product sales. During 1999, the Company
incurred cost of sales of $452,593 which was $294,623 in excess of 1999 revenue.
As set forth above, during 2000, the Company focused its resources exclusively
on the development of its technology.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $298,599 to $1,852,867 during 2000 as compared
to $2,151,466 in 1999. Of the decrease, approximately $341,000 related to a
decrease in costs for selling and administrative personnel, approximately
$360,000 related to a decrease in marketing expenses, approximately $235,000
related to a decrease in outside professional service charges, and approximately
$194,000 related to a decrease in general operating costs. These amounts were
offset by an increase in the non-cash accrual of penalties incurred for failing
to file a registration statement for the Company's Series A Convertible
Preferred Stock of approximately $498,000 and approximately $369,000 for costs
associated with the services of an administrative consultant, approximately
$200,000 of which consisted of non cash accrual of the fair value of options
issued in consideration of such services.
Research and Development. Research, development and engineering
expenses increased $279,553 to $1,136,245 in 2000 as compared to $856,692 in
1999. Of the increase, approximately $70,000 was due to an increase in personnel
costs, approximately $170,000 was due to an increase in costs associated with
the services of outside programming sub-contractors and the balance was due to
general operation expenses associated with increased development activity.
13
Additional Income. The Company did not generate any additional income
in 2000 as compared to $208,621 in 1999. Of the decrease, approximately,
$190,000 represented proceeds from the sale of the Company's interest in
Inter-con P/C, Inc. in 1999 with no comparable transaction in 2000.
Interest Expense. Interest Expense decreased $192,856 to $141,341 in
2000 as compared to $334,197 in 1999. Of the decrease, approximately $205,000
related to a decrease in the amortization of the fair market value of warrants
issued in financing transactions in 2000 as compared to 1999, $44,000 related to
a reduction in interest charges associated with a lower principal balance on the
convertible debenture as a result of conversions of such debenture during 1999
and 2000. These amounts were offset by a $57,000 increase in interest accrued on
short term indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during 2001 was $1,925,725, and
was principally due to operating losses. The operating losses were primarily
funded by cash on hand at December 31, 2000 and proceeds from the sale of
Company securities and unsecured short term financing.
Net cash provided by financing activities in 2001 was $2,394,500, which
consisted of the issuance of $1,370,000 principal amount of short term notes to
The Shaar Fund Ltd. (the "Fund") between January and November 2001 and
$1,024,500 realized from a recapitalization transaction with the Fund on
November 26, 2001.
Pursuant to the recapitalization transaction, the Company obtained
$1,065,000 of additional financing through the issuance of a secured convertible
promissory note (the "Secured Note"). All existing promissory notes payable to
the Fund together with all accrued and unpaid interest due thereon ($3,027,920)
were cancelled and converted into the Secured Note. The Secured Note is due
September 30, 2003, is secured by substantially all of the Company's assets,
including its intellectual property, accrues interest at the rate of 10% per
annum payable quarterly in arrears commencing September 30, 2002, may be prepaid
without penalty and is convertible into shares of common stock at a conversion
price of $.75 per share. The security interest terminates upon the Company
obtaining $5,000,000 of additional equity financing. In this transaction, the
Company received net cash proceeds of $1,024,500 after giving effect to offering
costs of $40,500.
The Fund has agreed to provide up to $1,080,000 of additional financing
in incremental monthly installments during the six month period commencing March
1, 2002. Any such funding will be provided pursuant to a secured promissory note
on the terms described above. The Fund's obligation to provide this financing is
conditioned upon:
14
* The Company being in compliance with all material obligations
under the November 26, 2001 funding agreement between the
parties, the Secured Note and debentures issued to the Fund
pursuant thereto, and the other agreements between the
parties.
* The continued truth and accuracy of the representations and
warranties of the Company set forth in the funding agreement.
* The average closing bid price of the Company's common stock
during the calendar month preceding the advance exceeding
$1.00 per share.
Provided the forgoing conditions are satisfied, funds are advanced upon ten (10)
business days written notice from the Company which notice shall be delivered
not earlier than the first business day of the month of the requested advance.
On or about March 15, 2002, the Company requested and received an advance in the
amount of $180,000. After the final advance has been made, the Company has
agreed to file a registration statement covering the public resale of the shares
of common stock issuable upon conversion of the secured promissory notes issued
against each advance.
Working capital increased $3,761,382 during 2001 to a surplus of
$392,533 on December 31, 2001 as compared to a deficit of $3,368,849 on December
31, 2000. This increase is principally due to an increase in cash of
approximately $466,000 (primarily from new borrowings less cash used in
operations of approximately $1,926,000), a decrease in short-term obligations of
approximately $1,999,000 (primarily due to the effects of the recapitalization
transaction), a decrease in accounts payable and accrued liabilities of
approximately $1,121,000 (primarily due to the effects of the recapitalization
transaction), and an increase in prepaid expenses of approximately $185,000.
Since January 7, 1993 (date of inception), the Company's capital needs
have been principally met through proceeds from the sale of equity and debt
securities.
The Company does not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.
As of the date of this prospectus the Company has minimal cash
resources and is in need of substantial additional capital to maintain
operations beyond August 2002. Management is seeking to obtain additional
financing through the issuance of additional debt or equity securities of the
Company on a negotiated private placement basis to institutional and accredited
investors. As of the date of this prospectus, the Company has not reached any
definitive agreement with any potential investor regarding the specific terms of
an investment in the Company. No assurance can be given that any form of
additional financing will be available on terms acceptable to the Company, that
adequate financing will be obtained to meet its needs, or that such financing
would not be dilutive to existing stockholders. Management believes it will need
$5,000,000 to $7,000,000 to execute its business plan and support operations
through 2003.
15
DESCRIPTION OF BUSINESS
GENERAL DESCRIPTION OF BUSINESS; MARKET
The Company was formed in 1993 and is in the business of developing and
marketing proprietary biometric technology and software solutions. Biometric
technology, the science of analyzing specific human characteristics which are
unique to each individual in order to identify a specific person from a broader
population, is an emerging technology. Examples of the unique biological
characteristics that can be used to identify an individual include fingerprints,
iris patterns, hand geometry, voice recognition and facial structure.
Fingerprint analysis is an accurate and reliable method to distinguish one
individual from another and is viewed as less intrusive than many other
biometric identification methods. As a result, fingerprint analysis has gained
the most widespread use for biometric identification. Biometric technology
represents a novel approach to identity verification which has only been used in
limited applications and has not gained widespread acceptance in any commercial
or consumer markets.
BIO-key has pioneered the development of high performance
one-against-many, automated, finger identification technology that can be used
without the aide of non-automated methods of identification such as a personal
identification number (PIN), password, token, smart card, ID card, credit card,
passport, drivers license or other form of possession based or knowledge based
identification.
This advanced BIO-key(TM) identification technology improves both the
accuracy and speed of finger-based biometrics and is the only finger
identification algorithm that has been certified by the International Computer
Security Association (ICSA). The Company's proprietary biometric technology
scans a person's fingerprint and identifies a person typically within a few
seconds without the use of any other identifying data. The Company believes that
its fingerprint identification technology will have a broad range of possible
applications relating to information security and access control, including:
* Securing Internet sites, Web pages and electronic transactions
* Securing access to private networks
* Securing access to buildings and restricted areas
The Company's initial business plan was to develop an integrated
fingerprint identification product consisting of the Company's core technology
embedded into an optical reader for mass commercialization and distribution. The
Company's current business plan is to:
* License its core technology to OEMs, systems integrators and
application developers to develop products and applications which
utilize the Company's core technology.
* License WEB-key(TM), its web-based biometric authentication solution.
To date, the Company has engaged in limited marketing of its technology and has
generated minimal sales, principally to the general access control and computer
network security markets.
16
MARKET OVERVIEW
Although recent security concerns relating to identification of
individuals has resulted in an increased interest in biometrics generally,
biometric technology has not gained widespread commercial acceptance. Biometric
based solutions compete with more traditional security methods such as keys,
cards, personal identification numbers and security personnel, as well as
competing biometric technologies including voice, face, iris, hand geometry and
blood vessel recognition. The market for business-to-business and
business-to-consumer transactions is substantial and continues to grow. Such
transactions are subject to fraud based on unauthorized persons gaining access
to confidential information. The Company believes that its biometric technology
provides a more reliable method for confirming the identity of persons in remote
locations than existing traditional methods.
Biometric technology is a novel approach to facility and digital
security. Acceptance of biometrics as an alternative to traditional security
methods depends upon a number of factors including:
* The reliability of biometric solutions
* Public perception regarding privacy concerns
* Costs involved in adopting and integrating biometric solutions
Commercial markets have been slow to accept biometrics as a viable alternative
to traditional security methods. Accordingly, the primary competition for
biometric technology has been the traditional security methods described above.
With respect to competing biometrics, each has its strength and weaknesses and
none has emerged as a market leader. Fingerprint identification is generally
viewed as inexpensive and non-intrusive, but also as less accurate. Iris
scanning is viewed as extremely accurate, but also as inconvenient to use and
expensive. Facial recognition has recently received substantial attention,
however, it suffers from accuracy limitations. In summary, the market for
biometric technology is undeveloped and evolving.
TECHNOLOGY
The Company was formed in 1993 for the purpose of developing an
automated fingerprint identification system. Since that time, the Company has
developed proprietary fingerprint identification technology consisting of the
following:
* VST(TM) (Vector Segment Technology), the patent pending core
algorithm which creates a mathematical representation of a
fingerprint based on its particular characteristics.
* Hardware and software which translates and standardizes the
image of the fingerprint for computer analysis ("Biometric
Solution").
* SDK (Developers Tool Kit), a biometric application development
tool which facilitates integration of the Company's technology
for vertical market applications.
17
Utilizing these technologies, the Company is continuing to develop
identification products and software solutions which are designed to assure that
only individuals comprising an approved fingerprint in an online or embedded
database are allowed access to an application through real time authentication
with an emphasis on Web based applications.
Vector Segment Technology. The Company's IT security solutions are
built around its patent pending VST(TM) (Vector Segment Technology) which
processes features of a live fingerprint. These features are reduced to a
mathematical representation unique to the individual. When a person seeking
access to a computer network or restricted area places his or her finger on a
reader, a new mathematical representation is generated which is compared to an
on-line database to determine whether it matches any mathematical representation
on file. If there is a match, the person is identified and given access to the
application, computer network, Web Site or restricted area. This can be
accomplished without the use of a key, password, user-Id, card, PIN number or
token. The actual fingerprint is not typically stored in the database for
commercial applications.
De-coupling of Technologies. In order to effectuate the Company's
evolution from a hardware provider to a licensor of software solutions, the
Company has modified its core Vector Segment Technology to make it easily
adaptable to scanners other than its proprietary 5th generation SACcat or 6th
generation IDME readers. In the past, the Company's identification algorithm had
required the use of its own high resolution reader technology to provide for
reliable one to many identification applications. The further development of the
Vector Segment Technology has allowed for the de-coupling of the core
identification algorithm from the reader technology allowing the algorithm to be
utilized with lower resolution and lower quality readers available from other
manufacturers. VST has expanded its hardware independence capabilities with
added scanner communications. The Company's finger identification technology is
now completely hardware independent and can be integrated with virtually any
finger reading devise. Enrollments or capture of an individual's biometric ID
can be done on one type of scanner and looked-up or identified for a match on
another type of scanner. This is a very unique capability in the biometric
market and allows the Company's software to be used and integrated with almost
any finger scanner hardware.
Identification Verses Verification Technology. Management believes that
the Company's Vector Segment Technology is superior to similar technologies
utilized by its competitors. Unlike many of the biometric technologies currently
available, the Company's technology can identify the fingerprint of an unknown
person by searching a database to determine whether the current scanned
mathematical representation matches any previously stored mathematical
representation. Most of the Company's fingerprint competitors simply verify that
the fingerprint image of a known person matches a previously stored copy or
model of that individual's fingerprint. By their very nature, such verification
systems require an additional item of data such as a PIN number or access card
to initially identify the user. Verification systems, therefore, do not
eliminate the need for cumbersome access cards, keys or PIN numbers and the
administrative costs associated with the distribution and replacement of such
data. By contrast, the Company's identification technology typically does not
require any identifying data other than a person's fingerprint. Based on the
foregoing, the Company believes that its identification technology provides it
with a meaningful competitive advantage in the marketplace. On April 27, 1998,
the Company's SACcat(TM) product earned the International Computer Association's
first and only fingerprint biometric identification certification.
18
CURRENT OFFERINGS
The following is a description of the status of each of the Company's
current offerings.
SDK. The Company's SDK, a software developers toolkit, will be BioAPI
compliant and can be deployed in both Internet and non-Internet applications
(single PC or local area network). The BioAPI is a consortium of companies,
including Intel and Compaq, seeking to establish a standard in the biometric
market. The BIO-key SDK also supports a fuller, lower level control interface
that may offer some integrators more control over their application interface.
WEB-key(TM). WEB-key is a biometric identification/authentication
solution designed to secure Web based applications through the use of a Web
based browser plug-in and a server side plug-in. WEB-key is designed to provide
security and identification assuring that a remote user is in fact who they say
they are without the need of a password, PIN, or smart card. WEB-key protects
personal information such as credit card, address, account numbers and other
private data by only disseminating such information upon the authorization of
the owner of such information as determined by such person's fingerprint.
BUSINESS STRATEGY
The Company's initial goal was to develop automated fingerprint
identification products which were portable, easily integrated with existing
applications and affordable for mass commercialization and distribution through
OEMs, distributors and to a lesser degree, system integrators in the computer
network, general access control and other markets. This included the development
of the SACcat and sixth generation IDME readers. During 1998 and 1999 the
Company pursued an OEM licensing program and in 2000 the Company developed
WEB-key an integrated Web based biometric authentication system.
The Company's current business plan, which continues to evolve,
consists of a threefold strategy of:
* continued development of technology
* licensing its core technology to OEMs, system integrators,
Internet service providers and software application developers
addressing industry-specific applications
* licensing its Web-based biometric authentication software
solution to e-commerce and Internet content companies to
secure Web based transactions and corporations to secure
private networks.
Although the Company has developed significant core identification
technology and readers, neither has gained any meaningful commercial acceptance,
the Company has only generated minimal revenue since inception and it has not
entered into any significant licensing arrangements. In addition, the Company's
business model, particularly the Web authentication initiative, represents a
19
unique approach to Internet security, requires the distribution and use of
additional peripheral hardware, namely an optical reader, and the integration of
client and server software. It has not been adopted by any company that conducts
business over the Internet. There can be no assurance that there will be a
demand for such a solution or that the Company will have the financial,
marketing and human resources necessary to successfully market such a software
solution.
Technology Development. Although management believes that the Company's
identification technology is one of the most advanced and discriminating
fingerprint technologies available on the market today, the markets in which the
Company competes are characterized by rapid technological change and evolving
standards. In order to maintain its position in the market, the Company will
continue to upgrade and refine its existing technologies. During 2002, the
Company will continue to focus on enhancing its identification technology for
large databases, Web based server authentication applications, including porting
to multiple platforms, and peer group reader technology. Successful development
of this solution will require additional financing to which there can be no
assurance.
WEB BASED BIOMETRIC AUTHENTICATION SOLUTION (WEB-KEY(TM)).
The Company's primary initiative is the licensing of WEB-key(TM), its
Web-based, Internet ready three tiered Internet application architecture
software security solution. The Company licenses WEB-key(TM) as an integrated
solution for securing e-commerce, e-business, and web-based transaction
applications, or as a systems developer kit (SDK) for integration into other
applications.
This initiative has involved transitioning the Company's technology to
focus on identification applications for large databases and Web based server
authentication applications, including porting to multiple platforms and peer
group reader technology. These efforts have resulted in the de-coupling of the
core identification algorithm from the reader technology providing for the
algorithm to be utilized with other readers available from other manufacturers.
The Company believes that the versatility provided by the de-coupling of the
identification algorithm and reader technology will facilitate the pursuit of
licensing Web based server authentication applications. Successful execution of
this initiative has also required the development of enhanced software to
provide an effective interface between client and server-based software. The
Company continues to refine this software.
The Web based server authentication application is an integrated
solution involving the distribution of readers and the licensing of client and
server based software to provide for reliable and cost effective user
authentication in connection with the processing of transactions over the
Internet. This solution is also intended to secure other Internet applications
such as restricting access to specific Web pages, specific information contained
on a Web-site or specific applications. The Company believes it has the
opportunity to be the first supplier of a reliable high performance electronic
identification and authorization solution which operates effectively without the
aid of a personal identification number or password supplied by the user.
20
Architecture. WEB-key provides an easy-to-use, high-performance and
secure method for granting users access via the Internet to proprietary
information residing on remote servers.
WEB-key consists of three basic components:
* a finger print scanner
* Vector Segment Technology processing software tightly and
securely integrated with a web browser
* an identification database residing on a web server.
The user simply logs-on a computer or application residing on a
computer using their fingerprint in lieu of a PIN number, password, user name or
smart card. WEB-key begins by processing a raster scan image which is enhanced
using WEB-key software integrated into the web browser. The image enhancing
employs a variety of proprietary techniques to improve accuracy and protect
against spoofing. The WEB-key software then converts the enhanced image into a
unique mathematical representation of the fingerprint using Vector Segment
Technology. An encrypted print model is generated for transmission across the
Internet to the central WEB-key registry. The WEB-key web server de-encrypts the
mathematical model which operates as an index key for searching the database for
a match. The web server matches the Vector Segment Technology BIO-key against a
database of registered users to obtain a match. If a match is found, the user is
allowed access to the protected content on a connected web server.
WEB-key provides a reliable and secure user authentication solution.
WEB-key takes advantage of new security features in Microsoft's Internet
Explorer versions 5.5 SP2 and 6.0, in addition to 1024 bit enhanced encryption
capabilities integrated with public/private key pairs. WEB-key has also been
integrated with Oracle9iRAC, which offers advanced speed, scalability, and
reliance to WEB-key's database tier. Additional tools and software based on VST
technology are under development.
Potential Market. The growth of electronic fingerprint identification
will be driven by the need for secure access to private applications and
proprietary databases residing on both private and public network
infrastructures. The scope of these opportunities include:
* corporations that increasingly rely upon the exchange and
distribution of proprietary information among staff using
intranet or other private networks
* business-to-business e-commerce among trading partners which
share confidential information on a secure basis
* business-to-consumer e-commerce where the e-commerce service
provider wants to restrict access to paying subscribers
Although electronic commerce has many benefits, the geographical
separation of buyers from sellers creates a significant problem arising from the
opportunity for fraud. Firewall and encryption software address important
aspects of security but do not address the fraud problem inherent in the
potential anonymity of a remote user. Corporate intranets are an equally
attractive and compelling market. Corporations increasingly rely upon intranet
infrastructure for the dissemination of proprietary business data throughout an
organization. Since access rights to different classes of data vary among
employees, password identification and authorization is integral to all
corporate networks.
21
The current solution to these issues is the association of passwords
and PIN numbers with individuals. This solution requires employees or users to
remember or retain a growing number of keys cards, passwords and PIN numbers and
employers or Internet companies to periodically change passwords and PIN numbers
to maintain their integrity. Since such information can be stolen or shared,
they provide no assurance that the user is actually who they claim to be.
WEB-key has been designed to address each of these concerns.
The Company believes that replacement of traditional passwords presents
a substantial market opportunity. Hamburg & Quist reports that approximately 150
million people use passwords to identify themselves to computer networks and the
Internet and that 35%-40% of all calls received by IT help desks involve
password issues at a cost of $100 per person per year resulting in enterprise
spending of $60 billion on password maintenance. The Company's technology could
virtually replace and eliminate the need for passwords at an estimated cost of
approximately $20 per person per year while providing a higher assurance of
identity security and user convenience. Government, aviation/transportation and
enterprise security present significant additional opportunities.
MARKETING AND DISTRIBUTION
The Company's marketing and distribution efforts consist of:
* Development of strategic alliances with technology leaders
* General promotion of biometric technology and the Company's
offerings
* Direct technology licensing efforts to, among others, OEMs,
application developers and operators of private network.
The Company's current marketing efforts are conducted primarily through
direct selling efforts of its Chief Executive Officer, President and other
marketing personnel to OEMs, application developers and operators of private
networks.
The Company attends and actively participates in various product
conferences and conventions in the technology and security industries to
generate market awareness of biometric technology generally and the Company's
offerings specifically. In this connection, in October 2000, the Company began a
collaborative presentation effort with Intel Corporation whereby the Company and
Intel created a proof-of-concept demonstration of the Company's WEB-key product.
The demonstration was created across the Intel IA32 and Itanium family processor
products and was first presented at the Intel Developer Forum (IDF) in February
2001. Proof of concept was presented at WinHec in Anaheim, California on March
25-27, 2001 and RSA in San Francisco, California during April 2001. Intel
continues to showcase the Company's biometric IT security solution as a lead
application for Intel's next generation Itanium Internet/e-business server and
as a solution working with Oracle 9i and Oracles database. Additionally the
WEB-key product has been presented in alliance with and part of Intel's exhibit
at the Oracle Open World in Berlin and San Francisco. Although the Company
intends to participate in events and other conferences with Intel, there can be
no assurances that Intel will continue to allow the Company to participate with
it at any such events or conferences.
22
From these efforts, the Company has been aggressively marketing its
WEB-key and SDK technology to leads generated from these shows, has entered into
evaluation license agreements and expects to begin to generate revenues from
these private sector activities later this year.
The Company has also entered into alliances and/or joint sales and
marketing agreements with Oracle, Intel, and Siebel Systems to develop and
implement new security systems utilizing the Company's technology for the
Federal Government. The events of September 11th have heightened the need for
securing data dissemination throughout and between government agencies and
automating the positive identification of personnel. The Company believes that
its finger identification technology coupled with the capabilities of its
alliance partners are the most advanced solutions capable of meeting these
needs.
The Company is targeting both Internet infrastructure companies and
large portal providers as licensees of its WEB-Key solution. On the Internet
infrastructure side, the Company is currently seeking to partner with Internet
server manufacturers, providers of database and data warehouse engine software,
horizontally positioned application engines, firewall solution providers and
peripheral equipment manufacturers. On the portal side, the Company is currently
targeting financial service providers such as credit and debit card
authorization and issuing institutions, Internet retailers, business-to-business
application service providers (ASPs) and corporate intranets.
COMPETITION
The markets for the Company's products and technologies are developing
and are characterized by intense competition and rapid technological change. No
assurance can be given that the Company's competitors will not develop new or
enhanced technologies that will offer superior price, performance or function
features or render the Company's products or technologies obsolete. As of the
date of this prospectus, the Company has yet to license its technology or
manufacture, market, or sell its products on a wide-scale commercial basis.
In addition to existing commonplace methods of restricting access to
facilities such as pass cards, PIN numbers, passwords, locks and keys, there are
numerous companies involved in the development, manufacture and marketing of
fingerprint biometrics products to government, law enforcement, prison and
consumer markets. These companies include, but are not limited to, Inc.,
PRINTRAK International, IDENTIX, Mytec Technologies, Inc., Safelink, Verdicom,
DigitalPersona and BioLink.
Most current automated fingerprint identification product sales have
been for government and law enforcement applications, which are typically priced
higher than the Company's products and licensing arrangements. Although most of
the companies specifically targeting consumer application markets have completed
the development of their products, biometric products and technologies have not
been widely accepted in the commercial markets.
23
With current non-biometric technologies the user must typically possess
a key, card, or bit of information such as a PIN number or password. These
systems are easily defeated by obtaining possession of the key, card, or
password, or by counterfeiting the key or card. The Company's biometric
technology is intended to replace such systems and substantially reduce the
related security breaches. Although biometric based "verification" systems can
identify a person and prevent unauthorized persons from entering into a
restricted area, such systems do not eliminate the need for PIN numbers, cards,
keys or tokens. By contrast, the Company's identification technology typically
does not require the use of any such additional identifier other than the
person's fingerprint and "identifies" rather than "verifies" the subject. The
Company believes that such end-user convenience creates a meaningful competitive
advantage for the Company. There can be no assurance, however, that the
Company's competitors will not develop similar or superior "identification"
technology, which could have a material adverse effect on the Company's
financial condition and results of operation. The Company will also be competing
for market share with other biometric technologies including hand geometry, iris
scanning, retinal scanning, and signature verification, as well as existing
lock/security/card technology.
Many of the Company's competitors have substantially greater financial
resources and experience in marketing Internet security applications than the
Company. In addition, the Company's WEB-key(TM) offering is a unique approach to
Internet security, requires the distribution and use of additional peripheral
hardware, namely an optical reader, and has not been adopted by any company
conducting business over the Internet. For these and other reasons, there can be
no assurance that the WEB-key(TM) solution will gain any meaningful market
acceptance or that the Company will be able to complete effectively in its
chosen markets.
INTELLECTUAL PROPERTY RIGHTS
The Company's technology consists of knowledge and information relating
to computer hardware and software which is used to create an automated process
of imaging a fingerprint, formatting the fingerprint for computer analysis, and
identifying and verifying the print relative to an existing database of
fingerprint information. The Optic Technology and the Company's Biometrics
Solution (STBS) and Vector Segment Technology are owned by the Company. The
Company has filed a patent application relating to both the Optic Technology and
Biometrics Solution (STBS) components of its technology wherein several claims
have been allowed. The Company has also filed a patent application with respect
to the Vector Segment Technology. There can be no assurance that any additional
patents will be issued, or that, if issued, the Company will have the resources
to protect any such issued patent infringement. Although the Company believes
that its technology does not infringe upon patents held by others, no assurance
can be given that such infringements do not exist.
Part of the Company's technology consists of software or hardware
implementations of software ("firmware"). The Company intends to take measures
to ensure copyright protection for its software and firmware releases prior to
distribution. Where possible, the firmware/software is serialized in an attempt
to ensure that only matched sets will function together. This provides both a
mechanism to combat cloning of the Company's products and a method for
standardizing products. The Company believes it has developed common law
trademark rights in the terms SACMan(TM), SACcat(TM), SAC_Remote(TM),
BIO_Key(TM), SACSecure(TM), SACcipher-, WEB-key(TM) and SACbook(TM) and has
filed federal trademark applications. The Company does not claim any additional
trademarks.
24
RESEARCH AND DEVELOPMENT
During fiscal years ended December 31, 2000 and 2001 the Company spent
approximately $1,136,000 and $948,000, respectively, on research and
development. The Company's limited customer base did not directly bear these
costs, which were principally funded through, outside sources of equity and debt
financing. During 2001, the Company's research and development effort will be
focused on the continued evolution of its Web based authentication solution and
furthering the VST algorithm and SDK.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations generally applicable to businesses.
However, in the event of any international sales or overseas manufacturing, the
Company would likely be subject to various domestic and foreign laws regulating
such exports and export activities.
ENVIRONMENTAL REGULATION
As of the date of this prospectus, the Company has not incurred any
material expenses relating to the compliance with federal, state or local
environmental laws and does not expect to incur any material expenses in the
foreseeable future.
EMPLOYEES AND CONSULTANTS
The Company currently employs ten (10) individuals on a full-time
basis; five (5) in engineering, research and development, three (3) in finance
and administration and two (2) in sales and marketing. The Company also utilizes
four (4) consultants who provide marketing, engineering and management services
to the Company. The Company anticipates retaining additional marketing personnel
within the next twelve (12) months to execute its business plan.
PROPERTY
The Company does not own any real estate. The Company conducts its
operations from leased premises in Eagan, Minnesota. The Company leases
approximately 6,000 square feet of space at 1285 Corporate Center Drive, Suite
No. 175 under a five-year lease, which terminates on August 31, 2004 and
currently provides for monthly rent of $3,325 which increases ratably over the
term of the lease to $3,610. The Company believes that its current facility is
adequate for the foreseeable future.
LITIGATION
The Company is not a party to any material pending legal proceeding nor
is it aware of any proceeding contemplated by any governmental authority
involving the Company.
25
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information regarding each of the
directors and executive officers of the Company.
--------------------------------------------------------------------------------
NAME AGE POSITIONS HELD
--------------------------------------------------------------------------------
Jeffry R. Brown 53 Chief Executive Office and Chairman of the Board
of Directors
--------------------------------------------------------------------------------
H. Donald Rosacker, II 40 President, Director
--------------------------------------------------------------------------------
Gary E. Wendt 60 Chief Financial Officer, Secretary and Director
--------------------------------------------------------------------------------
Jeffrey J. May 41 Director
--------------------------------------------------------------------------------
Mira K. LaCous 40 Vice President of Technology
--------------------------------------------------------------------------------
The following is a brief summary of the business experience of each of
the above-named individuals:
JEFFRY R. BROWN has served as Director of the Company since September
1999, as President of the Company from November 13, 2000 to July 1, 2001 and as
Chief Executive Officer since July 1, 2001. Between 1999 and July 2000, Mr.
Brown served as managing director for Chancellor Media Group, a division of AmFm
Media. From 1995 to 1999, Mr. Brown served as a marketing, promotion and
sponsorship consultant for such clients as Signature Sports, Born Information
Services and the JC Penney Company. As Senior Vice President Business
Development for Gage Marketing Group, LLC between 1992 and 1995, Mr. Brown
represented clients such as Proctor and Gamble, Paramount, RJ Reynolds, and
Frito Lay.
H. DONALD ROSACKER, II has served as the President and a Director of
the Company since August 1, 2001. Mr. Rosacker has primary responsibility for
the operations, sales and marketing functions of the Company. Between 1994 and
2000, Mr. Rosacker served as the President and Chief Executive Officer of
Tekmerchant.com/FlowersandGifts.com, a Minneapolis, Minnesota based e-commerce
company, where he managed the restructure of that company from a
business-to-consumer Internet company to a business-to-business technology
development company. Between 1992 and 1994, Mr. Rosacker served as President of
Mantech Corporation, a Minneapolis, Minnesota based software developer where he
managed the launch of advanced technology applications for the manufacturing
industry. Mr. Rosacker has in excess of 15 years of financial and marketing
management experience in start-up and emerging growth companies. Mr. Rosacker
earned a Bachelors degree in Computer Science from the University of Minnesota
in 1983.
GARY E. WENDT has served as the Chief Financial Officer and a Director
of the Company since its inception in 1993. Mr. Wendt has primary responsibility
for the Company's financial reports and administers accounting operations. From
1993 to 1994, Mr. Wendt was Treasurer and Chief Financial Officer of Esprit
26
Technologies, Inc., a computer manufacturer which produced high speed PCs
marketed primarily to government and industry in the Midwestern United States.
Mr. Wendt attended Metropolitan State University, North Hennepin Community
College, and the Academy of Accountancy where he was certified in public
accounting. Mr. Wendt is not a Certified Public Accountant.
JEFFREY J. MAY has served as a Director of the Company since October
29, 2001. Since 1997, Mr. May has served as the President of Gideons Point
Capital, a Tonka Bay Minnesota based financial consulting firm and angel
investor focusing on assisting and investing in start-up technology companies.
In 1983, Mr. May co-founded Advantek, Inc., a manufacturer of equipment and
materials which facilitate the automatic handling of semi-conductors and other
electrical components which was sold in 1993. Mr. May continued to serve as a
director and Vice-President of Operations of Advantek until 1997, at which time
it had over 600 employees and sales in excess of $100 million. Mr. May earned a
Bachelor of Science degree in Electrical Engineering from the University of
Minnesota in 1983.
MIRA K. LACOUS has served as Vice President of Technology and
Development of the Company since May 15, 2000. On November 20, 2001, Ms. LaCous
was appointed to serve as an executive officer of the Company. Ms. LaCous has
primary responsibility for all engineering and software development functions of
the Company. Ms. LaCous has over 15 years computer software design experience in
the areas of Voice Automation, Commercial Building Control, Information Scanning
and Internet Systems, and Internet Security Training. From 1997 until joining
the Company, she was employed by National Computer Systems, Inc. as Director
Software Development. Between 1997 and March 2000, Ms. LaCous acted as an
independent consultant serving such clients as TEL-line Systems and Security
Analysts. From 1989 to 1997 Ms. LaCous served as a Senior Project Manager with
The Trane Company. Ms. LaCous earned a Bachelors degree in Computer Science for
North Dakota State University.
DIRECTORS' TERMS OF OFFICE
Gary Wendt was elected as a director at the Company's 1998 Annual
Meeting of Shareholders to hold office for a term of one (1) year until his
successor is duly elected and qualified. Jeffry R. Brown, H. Donald Rosacker, II
and Jeffrey J. May were appointed by the Board of Directors to fill vacancies
created by the resignations or death of directors and to serve until the next
annual meeting of shareholders until their successors are duly elected and
qualified.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
ADVISOR TO BOARD OF DIRECTORS
On November 22, 2001, the Company retained Benjamin Netanyahu, the
former Prime Minister of Israel, to serve as a senior strategy advisor to the
Board of Directors for a term of ten (10) months. During the term, Mr. Netanyahu
is prohibited from consulting with other companies in the biometric
identification market.
DIRECTORS COMPENSATION
Directors who are also officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. The Company's 1996 stock
incentive plan provides for the grant of options to purchase 50,000 shares of
common stock to each non-employee director upon first being elected or appointed
to the Board of Directors.
27
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the U.S. Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), requires the Company's officers and directors and
persons who own more than ten percent (10%) of the Company's Common Stock to
file with the Securities and Exchange Commission ("SEC") initial reports of
ownership and reports of changes in ownership of the Company's Common Stock.
Such officers, directors and ten percent (10%) stockholders are also required by
applicable SEC rules to furnish the Company with copies of all forms filed with
the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on its
review of the copies of such forms received by it, or written representations
from such persons that no other reports were required for such persons, the
Company believes that during the fiscal year ended December 31, 2001, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and ten percent (10%) stockholders were satisfied in a timely fashion
except that Mira LaCous did not timely file a Form 3 upon being appointed to
serve as an executive officer of the Company.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to or accrued by the Company's Chief Executive Officer, and
all other executive officers of the Company during the fiscal years ended
December 31, 1999, 2000 and 2001:
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL FISCAL SECURITIES UNDERLYING
POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
-------- ---- --------- -------- ----------
Jeffry R. Brown, (1) 2001 144,000 -- 400,000
Chief Executive Officer 2000 18,000 -- 580,000
H. Donald Rosacker, II, (2) 2001 45,400 -- 400,000
President
Gary E. Wendt, 2001 92,427 -- --
Chief Financial Officer 2000 89,039 -- --
1999 100,274 -- 97,000
Mira LaCous, (3) 2001 99,984 340,000
Vice President of 2000 61,657 15,000 100,000
Technology and
Development
Barry M. Wendt, (4) 2001 119,463 -- --
Former Chief 2000 112,926 -- --
Executive Officer 1999 128,440 -- --
28
(1) Mr. Brown served as President of the Company from November 13, 2000
until July 1, 2001. Mr. Brown has served as the Chief Executive Officer
of the Company since July 1, 2001.
(2) Mr. Rosaker has served as President of the Company since August 1,
2001.
(3) Ms. LaCous has served as Vice President of Technology and Development
of the Company since May 15, 2000.
(4) Barry M. Wendt resigned as Chief Executive Officer of the Company on
July 1, 2001 and as Chairman of the Board of Directors on December 8,
2001. Includes $63,000 paid pursuant to a consulting agreement which
terminated January 31, 2002.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 2001
(Individual Grants)
The following table sets forth for the named executive officer
information regarding stock options granted to such officer during the 2001
fiscal year.
========================================================================================
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/Sh) DATE
----------------------------------------------------------------------------------------
Jeffry R. Brown 400,000(1) 31.25 .20 June 30, 2008
----------------------------------------------------------------------------------------
H. Donald Rosacker, II 400,000(2) 31.25 .20 July 31, 2008
----------------------------------------------------------------------------------------
Mira LaCous 340,000(3) 26.56 .46 November 19, 2008
========================================================================================
(1) Options to purchase 200,000 shares vested upon issuance with the
remainder vesting in equal monthly installments over a one year period.
(2) Options to purchase 60,000 shares vested upon Mr. Rosacker completing
90 days of employment with the Company (the "Initial Vesting Date")
with the remainder vesting in equal monthly installments over a three
year period commencing on the Initial Vesting Date. Options to purchase
300,000 shares were issued under the Company's 1999 Stock Option Plan.
(3) Options to purchase 75,000 shares vested upon issuance with the
remainder vesting in equal monthly installments over a three year
period commencing on the date of grant. Options to purchase 200,000
shares were issued under the Company's 1999 Stock Option Plan.
29
AGGREGATED OPTION EXERCISES IN THE
2001 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
The following table sets forth for each named executive officer,
information regarding stock options exercised by such officer during the 2001
fiscal year, together with the number and value of stock options held at 2001
fiscal year-end, each on an aggregated basis.
=======================================================================================================
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE(#) UNEXERCISABLE($)(1)
-------------------------------------------------------------------------------------------------------
Jeffry R. Brown -- -- 716,667/313,333 314,198/117,000
-------------------------------------------------------------------------------------------------------
Gary E. Wendt -- -- 144,280/29,100 5,601/1,746
-------------------------------------------------------------------------------------------------------
H. Donald Rosacker, II -- -- 88,332/311,668 64,482/227,518
-------------------------------------------------------------------------------------------------------
Mira LaCous -- -- 157,361/282,639 56,709/127,086
=======================================================================================================
(1) The last sales price of the Company's Common Stock as reported on the
OTC Bulletin Board on December 31, 2001 was $.93.
EMPLOYMENT AGREEMENTS
JEFFRY R. BROWN. On November 13, 2000, the Company entered into
two-year (the "Initial Term") employment agreement with Jeffry R. Brown to serve
as the President of the Company at an annual base salary of $144,000, and an
annual bonus payable at the discretion of the Board of Directors. In recognition
of the nearly full time attention Mr. Brown provided to the Company as a non
employee director, the agreement also provided for a $24,000 signing bonus. The
employment agreement will be renewed automatically for successive one year
periods unless the Company provides written notice of non-renewal at least three
months prior to the date employment would otherwise terminate. The employment
agreement contains standard and customary confidentiality, non-solicitation and
"work made for hire" provisions as well as a covenant not to compete which
prohibits Mr. Brown from doing business with any current or prospective customer
of the Company or engaging in a business competitive with that of the Company
during the term of his employment and for the one year period thereafter.
The agreement may be terminated by the Company at any time with or
without cause. In the event of termination without cause, Mr. Brown shall
continue to be paid his then current base salary for a period of nine months
from the date of such termination; and if the termination occurs during the
Initial Term, options to purchase the lesser of (A) one hundred fifty thousand
and three (150,003) shares of common stock; and (B) the number of shares of
common stock issuable upon the exercise of the remaining unvested options shall
vest immediately upon termination. Mr. Brown may terminate the employment
agreement if his current salary or benefits are reduced by more than 30%, in
which event Mr. Brown will continue to be paid his then current base salary for
a period of nine months from the date of such termination.
30
H. DONALD ROSACKER. On August 1, 2001, the Company entered into a one
year employment agreement with Mr. Rosacker to serve as the President of the
Company at an annual base salary of $108,000 and a bonus of up to 50% of his
base salary payable at the discretion of the Board of Directors. The agreement
automatically renews for an additional one year term unless written notice of
termination is received at least one month prior to the date it would otherwise
terminate. The agreement contains standard and customary confidentiality,
non-solicitation and "work made for hire" provisions as well as a covenant not
to compete which prohibits Mr. Rosacker from doing business with any current or
prospective customer of the Company or engaging in a business competitive with
that of the Company during the term of his employment and for the one year
period thereafter.
The agreement may be terminated by the Company at any time with or
without cause. In the event Mr. Rosacker is terminated without cause after
completing nine months of employment with the Company, Mr. Rosacker shall
continue to be paid his then current base salary for a period of nine months
from the date of such termination. Mr. Rosacker may terminate the agreement if
his current salary or benefits are reduced by more than 30%, in which event Mr.
Rosacker shall continue to be paid his then current base salary for a period of
two months from the date of such termination.
GARY E. WENDT. On May 10, 1996, the Company entered into a five-year
employment agreement with Gary E. Wendt to serve as the Chief Financial Officer
of the Company. The employment agreement was renewed for a one year term and
renews from year to year for consecutive one year terms unless written notice of
termination is received at least six months prior to the end of the renewal
term. The agreement provides for a base salary subject to an annual increase by
the Board of Directors and a bonus payable at the discretion of the Board of
Directors. Under the agreement, Mr. Wendt may be terminated only for "cause" as
that term is defined in the employment agreement.
The employment agreement contains standard and customary
confidentiality, "work made for hire" and non-solicitation provisions and
incorporates a Non-Competition Letter entered into in connection with his
employment. The Non-Competition Letter prohibits Mr. Wendt from competing with
the Company for a period of three years if the Company terminates employment for
cause and a period of two years if Mr. Wendt voluntarily terminates employment.
In the event of a termination without cause, or a "constructive termination",
which is defined to include an adverse change in Mr. Wendt's status or position
in the Company, a reduction of his base salary other than for austerity
purposes, or breach by the Company of any of its other contractual obligations
for other than austerity reasons, Mr. Wendt's non-competition obligations lapse
and he will receive severance in an amount equal to his base salary for two
years.
MIRA LACOUS. On November 20, 2001, the Company entered into a one year
employment agreement with Mira LaCous to serve as the Vice President of
Technology and Development of the Company at an annual base salary of $100,000
and a bonus of up to 50% of her base salary payable at the discretion of the
Board of Directors. Ms. LaCous has been employed by the Company since May 15,
2000. The agreement automatically renews for an additional one year term unless
31
written notice of termination is received at least one month prior to the date
it would otherwise terminate. The agreement contains standard and customary
confidentiality, non-solicitation and "work made for hire" provisions as well as
a covenant not to compete which prohibits Ms. LaCous from doing business with
any current or prospective customer of the Company or engaging in a business
competitive with that of the Company during the term of her employment and for
the one year period thereafter.
The agreement may be terminated by the Company at any time with or
without cause. In the event Ms. LaCous is terminated without cause after
completing one year of employment with the Company, Ms. LaCous shall continue to
be paid her then current base salary for a period of nine (9) months from the
date of such termination. Ms. LaCous may terminate the agreement if her current
salary or benefits are reduced by more than 30%, in which event Ms. LaCous shall
continue to be paid her then current base salary for a period of two months from
the date of such termination.
CHANGE IN CONTROL PROVISIONS
The Company's 1996 Stock Option Plan (as amended to date, the "1996
Plan") and 1999 Stock Option Plan (the "1999 Plan" and together with the 1996
Plan, the "Plans")) provide for the acceleration of the vesting of unvested
options upon a "Change in Control" of the Company. A Change in Control is
defined in the Plans to include (i) a sale or transfer of substantially all of
the Company's assets; (ii) the dissolution or liquidation of the Company; (iii)
a merger or consolidation to which the Company is a party and after which the
prior shareholders of the Company hold less than 50% of the combined voting
power of the surviving corporation's outstanding securities; (iv) the incumbent
directors cease to constitute at least a majority of the Board of Directors; or
(v) a change in control of the Company which would otherwise be reportable under
Section 13 or 15(d) of the Exchange Act.
In the event of a "Change In Control" both Plans provide for the
immediate vesting of all options issued thereunder. The 1999 Plan provides for
the Company to deliver written notice to each optionee under the 1999 Plan
fifteen (15) days prior to the occurrence of a Change In Control during which
all options issued under the 1999 Plan may be exercised. Thereafter, all options
issued under the 1999 Plan automatically expire. The 1996 Plan provides for all
options to remain exercisable for the remainder of their respective terms and
permits the Company to make a cash payment to the any or all optionees in
respect of any or all options equal to the difference between the exercise price
of such option and the fair market value of the Company's Common Stock
immediately prior to the Change In Control.
Options issued to executive officers outside of the Plans contain
change in control provisions substantially similar to those contained in the
1999 Plan.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Jeffry R. Brown, H.
Donald Rosacker II, Gary Wendt and Mira LaCous. See "EXECUTIVE COMPENSATION -
EMPLOYMENT AGREEMENTS."
OPTIONS GRANTED TO EXECUTIVE OFFICERS AND DIRECTORS
During 2000 and 2001, the Company granted non-qualified stock options
to purchase an aggregate of 2,160,000 shares of common stock to its executive
officers, 1,240,000 of which were issued under the Company's 1999 Stock
Incentive Plan. During 2001, the Company issued options to purchase 200,000
shares of common stock to Jeffrey J. May upon his appointment as a director of
the Company. All options were issued at exercise prices equal to the last sales
price of the Company's common stock as reported on the OTC Bulletin Board on the
date of grant, have terms of seven (7) years, and vest over a one to three year
period.
SURRENDER OF OPTIONS
On April 7, 2000 Barry M. Wendt surrendered options to purchase 218,920
shares of Common Stock and Benedict A. Wittig surrendered options to purchase
188,690 shares of Common Stock. Upon surrender, these options were cancelled by
the Company.
CONSULTING AGREEMENT WITH BARRY WENDT
In connection with Barry Wendt's resignation as the Chief Executive
Officer of the Company on July 1, 2001, the Company and Barry Wendt entered into
a consulting agreement pursuant to which Mr. Wendt served as a technology
advisor to the Company until January 31, 2002. Under the Consulting Agreement,
the Company paid consulting fees of $63,000 to Barry Wendt and reimbursed him
for out-of-pocket expenses.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 20, 2002, information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange Commission, has reason to believe may
be deemed the beneficial owners of more than five percent (5%) of the Company's
outstanding common stock. The following table also sets forth, as of such date,
the beneficial ownership of the Company's common stock by all officers and
directors, individually and as a group.
33
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS(1)
------------------------------------ ------------ -----------
Jeffry R. Brown 883,332(2) 6.5%
S285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
Gary E. Wendt 556,555(3) 4.3%
1285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
H. Donald Rosacker II 123,886(4) *
1285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
Jeffrey J. May 75,000(5) *
1285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
Mira LaCous 219,166(6) 1.7%
1285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
Barry M. Wendt 960,800 7.6%
c/o SAC Technologies, Inc.
1285 Corporate Center Drive
Suite No. 175
Eagan, MN 55121
Richard T. Fiskum 1,237,500 9.8%
28690 660th Avenue
Litchfield, MN 55355
N. Deanne Wittig and Richfield Bank & Trust Co., 1,237,500 9.8%
Co-Trustees under the Will dated October 23,
1998, The Qualified Property Marital Trust II
10264 Scarborough Circle
Bloomington, MN 55437
All officers and directors as a group 1,857,939 13.1%
(5) persons
---------------------
*Less than 1%
34
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations promulgated under the Securities Exchange Act of 1934 and,
accordingly, may include securities owned by or for, among others, the spouse
and/or minor children of an individual and any other relative who has the same
home as such individual, as well as, other securities as to which the individual
has or shares voting or investment power or which each person has the right to
acquire within 60 days through the exercise of options or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table has been
prepared based on 12,685,209 shares of common stock outstanding as of March 20,
2002.
(2) Consists of shares issuable upon exercise of options. Does not include
146,668 shares issuable upon exercise of options subject to vesting.
(3) Includes 151,555 shares issuable upon exercise of options. Does not include
21,825 shares issuable upon exercise of options subject to vesting.
(4) Consists of shares issuable upon exercise of options. Does not include
276,114 shares issuable upon exercise of options subject to vesting.
(5) Consists of shares issuable upon exercise of options. Does not include
125,000 shares issuable upon exercise of options subject to vesting.
(6) Consists of shares issuable upon exercise of options. Does not include
220,834 shares issuable upon exercise of options subject to vesting.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 60,000,000 shares of common stock,
$.01 par value per share, of which 12,685,209 are outstanding as of the date of
this prospectus.
Holders of common stock have equal rights to receive dividends when, as
and if declared by the Board of Directors, out of funds legally available
therefor. Holders of common stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company,
to share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
common stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Within the limits and restrictions provided in the Articles of
Incorporation, the Board of Directors has the authority, without further action
by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.01
par value per share, in one or more series, and to fix, as to any such series,
any dividend rate, redemption price, preference on liquidation or dissolution,
sinking fund terms, conversion rights, voting rights, and any other preference
or special rights and qualifications.
35
Series B Convertible Preferred Stock. The Board of Directors has
authorized the designation of 50,000 shares of preferred stock as "Series B
Convertible Preferred Stock" of which 21,430 are outstanding. The following
describes the material provisions of the Series B Preferred Stock (the "Series B
Shares") which are more fully set forth in the Certificate of Designation on
file with the Minnesota Secretary of State.
The Series B Shares provide for a 9% dividend payable semi-annually in
arrears. At the option of the Company, the dividends are payable in kind through
the issuance of additional shares of common stock valued at the conversion price
in effect on the date of such dividend. The Series B Shares are immediately
convertible, at the option of the holder, into shares of common stock at a
conversion price equal to the lesser of $.75 or a 22% discount to the average
closing bid prices of the Company's common stock during the five trading day
period prior to conversion. The Series B Shares are redeemable, in whole or in
part, at the option of the Company at 100% of face value ($100 per share)
provided that the Company's common stock is eligible for trading on the OTC
Bulletin Board and the shares issuable upon conversion are subject to an
effective registration statement. The Series B Shares contain anti-dilution and
conversion price adjustment provisions if certain events occur. Other than as
provided by applicable law, holders of the Series B Shares have no voting
rights.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The
Board of Directors does not anticipate paying cash dividends in the foreseeable
future as it intends to retain future earnings, if any, to finance the growth of
the business. The payment of future dividends will depend on such factors as
earnings levels, anticipated capital requirements, the operating and financial
condition of the Company and other factors deemed relevant by the Board of
Directors.
ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S ARTICLE OF INCORPORATION
Blank Check Preferred Stock. As described above, the Board of Directors
is authorized without further stockholder action, to designate any number of
series of preferred stock with such rights, preferences and designations as
determined by the board. Shares of preferred stock issued by the Board of
Directors could be utilized, under certain circumstances, to make an attempt to
gain control of the Company more difficult or time consuming. For example,
shares of preferred stock could be issued with certain rights that might have
the effect of diluting the percentage of common stock owned by a significant
stockholder or issued to purchasers who might side with management in opposing a
takeover bid that the Board of Directors determines is not in the best interest
of the Company and its stockholders. The existence of the preferred stock may,
therefore, be viewed as having possible anti-takeover effects.
36
TRANSFER AGENT
The transfer agent for the company's common stock is US Bank, 425
Walnut Street, CN-WN-06CT, Cincinnati, Ohio. 145202, (513) 632-5511.
THE OFFERING
On November 26, 2001, the Company completed a comprehensive
recapitalization transaction with The Shaar Fund Ltd. As a result of this
transaction, the Company converted approximately $4.6 million of short term debt
and accruals into long term convertible notes, obtained $1.065 million of
additional funding, and issued shares of its newly designated Series B
Convertible Preferred Stock in exchange for all of the issued and outstanding
shares of its Series A Convertible Preferred Stock and all accrued dividends and
interest due there on. A brief description of the convertible securities issued
to The Shaar Fund in this transaction are set forth below:
* A 5% convertible debenture in the principal amount of
$539,625.93 due September 30, 2003 which is convertible into
shares of common stock at a per share conversion price equal
to the lesser of $0.75 or a 22% discount to the average of the
closing bid prices of our common stock during the five (5)
trading days preceding conversion. The $216,000 principal
amount due under this debenture as of the date of this
prospectus is convertible into at least 288,000 shares of
common stock. In the event of a decline in the market price of
the Company's common stock, the Company will be required to
issue an indeterminate number of additional shares upon
conversion.
* A convertible debenture in the principal amount of $1,000,000
due September 30, 2003 which is convertible into shares of
common stock at a conversion price of $0.75 per share. The
principal amount of this debenture is convertible into
1,333,333 shares of common stock.
* A convertible secured note in the principal amount of
$4,092,920 due September 30, 2003 which is convertible into
shares of common stock at a conversion price of $0.75 per
share. The principal amount of this note is convertible into
5,457,226 shares of common stock.
* 21,430 shares of our series B Convertible Preferred Stock
which are convertible into shares of common stock at a per
share conversion price equal to the lesser of $0.75 or a 22%
discount to the average of the closing bid prices of our
common stock during the five (5) trading days preceding
conversion. The $2,143,000 face amount of these shares is
convertible into at least 2,857,333 shares of common stock. In
the event of a decline in the market price of the Company's
common stock, the Company will be required to issue an
indeterminate number of additional shares upon conversion.
* Warrants to purchase 4,000,000 shares of common stock at an
exercise price of $1.00 per share.
37
Although these securities may be converted into an aggregate of at
least 13,935,892 shares of common stock, the terms of these securities preclude
The Shaar Fund from exercising or converting such securities if such exercise or
conversion would result in it owning in excess of 4.99% of our common stock.
This prospectus covers the public resale of the shares issuable to The
Shaar Fund upon conversion or exercise of the securities described above or in
payment of dividends on the Series B Shares. This prospectus also covers the
public resale of an additional 2,120,000 shares issuable upon exercise of
options and warrants previously issued to certain officers and consultants to
the Company. These warrants and options have exercise prices ranging between
$.19 and $1.25 per share.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are
offering for sale 16,484,765 or more shares of common stock. All shares are
issuable upon convertible debt or equity securities previously issued to the
selling security holders in private placement transactions. 920,000 of these
shares are being offered by directors and officers of the Company.
The following table sets forth as of March 20, 2002:
* The number of shares being held of record or beneficially by
each selling security holder and any material relationship
between the Company and each selling security holder based
upon information currently available to the Company.
* The percentage ownership of each selling security holder prior
to the offering.
* The number of shares offered hereunder by each selling
security holder.
* The number of shares held of record or beneficially and the
percentage ownership of each selling security holder after the
offering. This calculation assumes that all shares are sold
pursuant to this offering and that no other shares of common
stock are acquired or disposed of by the selling security
holder prior to the termination of this offering.
38
Beneficial Ownership of Beneficial Ownership of
Selling Security Holder Selling Security Holder After
Prior to Offering(1) Offering(1)
----------------------- -----------------------------
Number of
Shares Offered
Name of Selling Security Holder Number Percent Hereby Number Percent
------------------------------- ------ ------- ------ ------ -------
The Shaar Fund Ltd.(2) 426,615(3) 4.99%(3) 14,364,765 426,615 1.65%
Benjamin Netanyahu(4) 418,000 3.19% 167,000 251,000 1.95%
Delta Logistics, Inc.(5) 50,000 * 50,000 -- --
Bruce Nordin(6) 390,000 2.19% 390,000 -- --
Aultimate Technology 400,000 3.1% 400,000 -- --
Marketing, Inc.(7)
James Braseth(8) 193,000 1.5% 193,000 -- --
Jeffry R. Brown(9) 883,332 6.5 680,000 203,332 1.6%
H. Donald Rosacker II(10) 123,886 100,000 13,886 *
Mira LaCous(11) 219,166 140,000 79,166 *
16,484,765
==========
* Represents less than 1% of the outstanding shares of common stock
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other
relative who has the same home as such individual, as well as, other
securities as to which the individual has or shares voting or
investment power or which each person has the right to acquire within
60 days through the exercise of options or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 12,685,209 shares of common stock
outstanding as of March 20, 2002.
(2) The Shaar Fund has been a principal shareholder of the Company. Since
June 1998, it has been the principal source of financing for the
Company.
(3) Does not include shares of common stock issuable upon conversion or
exercise, as applicable, of convertible debentures, notes, preferred
stock and warrants. See "THE OFFERING." The terms of these securities
preclude The Shaar Fund from exercising or converting such securities
if such exercise or conversion would result in it beneficially owning
in excess of 4.99% of the Company's common stock.
(4) Since on or about November 22, 2001, Mr. Netanyahu, the former of Prime
Minister of Israel, has served as Worldwide Strategy Advisor to the
Company's Board of Directors under the terms of a ten (10) month
consulting agreement.
(5) Delta Logistics, Inc. provided consulting services to the Company in
connection with the retention of Mr. Netanyahu.
(6) Mr. Nordin served as an executive management consultant to the Company
from November 1999 until May 16, 2001.
(7) On or about July 10, 2000, the Company purchased certain technology
from Aultimate Technology Marketing, Inc. in consideration for the
issuance of warrant to purchase 400,000 shares of Company common stock
at an exercise price of $1.00 per share.
(8) Mr. Braseth served as a consultant to the Company between September
1999 and December 2000.
(9) Mr. Brown is the Chief Executive Officer and Chairman of the Board of
Directors of the Company.
(10) Mr. Rosacker is the President and a Director of the Company.
(11) Ms. LaCous is the Vice President of Technology of the Company.
39
Under agreements with the selling security holders, we will pay all
offering expenses except the fees and expenses of any counsel and other advisors
that the selling security holders may employ to represent them in connection
with the offering and all brokerage or underwriting discounts or commissions
paid to broker-dealers in connection with the sale of the shares.
PLAN OF DISTRIBUTION
The selling security holders have not advised us of any specific plan
for distribution of the shares offered hereby, but it is anticipated that the
shares will be sold from time to time by the selling security holders or by
pledgees, donees, transferees or other successors in interest on a best efforts
basis without an underwriter. Such sales may be made on the OTC Bulletin Board,
any exchange upon which our shares may trade in the future, over-the-counter, or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. The shares may be sold
by one or more of the following:
* ordinary brokerage transactions and transactions in which the
broker solicits purchases;
* block trades in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
* purchases by a broker or dealer for its account pursuant to
this prospectus;
* in privately negotiated transactions;
* through a combination of any such methods of sale;
* in accordance with Rule 144 under the Securities Act, rather
than pursuant to this prospectus; or
* any other method permitted pursuant to applicable law.
The selling security holders may sell their shares directly to
purchasers or may use brokers, dealers, underwriters or agents to sell their
shares. Brokers or dealers engaged by the selling security holders may arrange
for other brokers or dealers to participate. Brokers or dealers may receive
commissions, discounts or concessions from the selling security holders, or, if
any such broker-dealer acts as agent for the purchaser of shares, from the
purchaser in amounts to be negotiated. The selling security holders do not
expect these commissions and discounts to exceed what is customary in the types
of transactions involved. Broker-dealers may agree with a selling security
holder to sell a specified number of shares at a stipulated price per share,
and, to the extent the broker-dealer is unable to do so acting as agent for a
selling security holder, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire shares as principal may thereafter resell the shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with
resales of the shares, broker-dealers may pay to or receive from the purchasers
of shares commissions as described above.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in the sale of the shares may be
deemed to be "underwriters" within the meaning of the U.S. Securities Act of
1933. In that event, any commissions received by broker-dealers or agents and
any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
40
From time to time the selling security holders may engage in short
sales, short sales against the box, puts and calls and other hedging
transactions in our securities, and may sell and deliver the shares in
connection with such transactions or in settlement of securities loans. These
transactions may be entered into with broker-dealers or other financial
institutions. In addition, from time to time to the extent permitted by existing
regulations, a selling security holder may pledge its shares pursuant to the
margin provisions of its customer agreements with its broker-dealer. Upon
delivery of the shares or a default by a selling security holder, the
broker-dealer or financial institution may offer and sell the pledged shares
from time to time.
The selling security holders have been advised that they are subject to
the prospectus delivery requirements of the U.S. Securities Act of 1933 and
subject to the applicable provisions of the U.S. Securities and Exchange Act of
1934, including without limitation, Rules 10b-5 and Regulation M there under.
We will not receive any proceeds from the sale of the shares. We will
pay the expenses of preparing this prospectus and the related registration
statement.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the personal liability of
the Company's officers and directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Minnesota Business Corporation Act. The Company's Bylaws also provide
for the Company to indemnify directors and officers to the fullest extent
permitted by the Minnesota Business Corporation Act.
The indemnification provisions described above would provide coverage
for claims arising under the Securities Act and the Exchange Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the Company's Articles of Incorporation, Bylaws, the Minnesota Business
Corporation Act, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
Certain legal matters, including the validity of the shares being
issued, will be passed upon for the company by Buchanan Ingersoll Professional
Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia,
PA 19103.
EXPERTS
The financial statements as of December 31, 2000 and 2001 and for each
of the three years in the period ended December 31, 2001 and for the period from
inception (January 7, 1993) through December 31, 2001 included in this
41
prospectus, have been audited by Divine, Scherzer & Brody Ltd., independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding the
Company's ability to continue as a going concern), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we filed with the
United States Securities and Exchange Commission. You should rely only on the
information provided in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Applicable SEC rules may require us
to update this prospectus in the future. This preliminary prospectus is subject
to completion prior to this offering.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statement or other information that we file with the
Commission at the Commission's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. These
Commission filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the
Commission at "http://www.sec.gov."
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission. The prospectus and any accompanying
prospectus supplement do not contain all of the information included in the
registration statement. We have omitted a few parts of the registration
statement according to the rules and regulations of the Securities and Exchange
Commission. For further information, we refer you to the registration statement,
including its exhibits and schedules. Statements contained in this prospectus
and any accompanying prospectus supplement about the provisions or contents of
any contract, agreement or any other document referred to are not necessarily
complete. For each of these contracts, agreements or documents filed as an
exhibit to the registration statement, we refer you to the actual exhibit for a
more complete description of the matters involved. You should not assume that
the information in this prospectus or any supplement is accurate as of any date
other than the date on the front of those documents. We do not intend to
distribute annual reports or audited financial statements to our shareholders.
This information may be found in our filings with the Securities and Exchange
Commission.
42
FINANCIAL STATEMENTS
The following financial statements of BIO-key International, Inc. (formerly SAC
Technologies, Inc.) are included herein at the indicated page numbers:
Page No.
--------
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 2000 and 2001 F-3
Statements of Operations - Years ended December 31, 1999, 2000 and 2001,
and January 7, 1993 (date of inception) through December 31, 2001 F-4
Statement of Stockholders' Deficit - Years ended December 31, 1999,
2000 and 2001, and January 7, 1993 (date of inception) through
December 31, 2001 F-5
Statements of Cash Flows - Years ended December 31, 1999, 2000 and 2001,
and January 7, 1993 (date of inception) through December 31, 2001 F-6
Notes to the Financial Statements - December 31, 1999, 2000 and 2001 F-7
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
BIO-key International, Inc.
We have audited the accompanying balance sheets of BIO-key International, Inc.,
formerly SAC Technologies, Inc. (a Minnesota corporation in the development
stage) as of December 31, 2000 and 2001 and the related statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 2001, and the period January 7, 1993 (date of
inception) through December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BIO-key International, Inc. as
of December 31, 2000 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, and the
period January 7, 1993 (date of inception) through December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which contemplate
continuation of the Company as a going concern. However, as discussed in Note A
to the financial statements, the Company is in the development stage and has not
generated significant revenues since inception, has suffered recurring losses
from operations and has a stockholders' deficit. These aforementioned issues,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from this uncertainty. Management's plans in regard to these
matters are also discussed in Note A.
/s/ Divine, Scherzer & Brody, Ltd.
Minneapolis, Minnesota
February 28, 2002
F-2
BIO-key International, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
ASSETS
December 31,
-----------------------------
2000 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 48,830 $ 514,970
Accounts receivable 9,118 --
Prepaid expenses 21,745 206,634
------------ ------------
Total current assets 79,693 721,604
EQUIPMENT, FURNITURE AND FIXTURES, less accumulated
depreciation 31,942 --
OTHER ASSETS 50,595 41,706
------------ ------------
$ 162,230 $ 763,310
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,400,000 $ --
Convertible debentures 598,455 --
Accounts payable 328,398 238,496
Accrued liabilities 1,121,689 90,575
------------ ------------
Total current liabilities 3,448,542 329,071
LONG-TERM OBLIGATIONS, net of discount -- 4,331,238
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock - authorized, 5,000,000 shares of $.01 par value
(liquidation preference of $100 per share):
Series A 9% Convertible; issued and outstanding, 19,875
as of December 31, 2000 199 --
Series B 9% Convertible; issued and outstanding, 21, 430
shares as of December 31, 2001 -- 214
Common stock - authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 9,966,724 and 12,528,469 shares,
respectively 99,667 125,285
Additional contributed capital 13,133,600 15,538,025
Deficit accumulated during the development stage (16,519,778) (19,560,523)
------------ ------------
(3,286,312) (3,896,999)
------------ ------------
$ 162,230 $ 763,310
============ ============
The accompanying notes are an integral part of these statements.
F-3
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
January 7,
1993 (date of
inception)
Years ended December 31, through
---------------------------------------------- December 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
Revenues
Product sales $ 57,970 $ -- $ -- $ 577,384
License fees 100,000 -- -- 100,000
Reimbursed research and development -- -- -- 284,506
Technical support and other services -- -- -- 429,885
------------ ------------ ------------ ------------
157,970 -- -- 1,391,775
Costs and other expenses
Cost of product sales 452,593 -- -- 1,736,895
Cost of technical support and other
services -- -- -- 237,317
Selling, general and administrative 2,151,466 1,852,867 1,318,465 11,431,134
Research, development and engineering 856,692 1,136,245 947,932 5,806,125
------------ ------------ ------------ ------------
3,460,751 2,989,112 2,266,397 19,211,471
------------ ------------ ------------ ------------
Operating loss (3,302,781) (2,989,112) (2,266,397) (17,819,696)
Other income (deductions)
Interest expense (334,197) (141,341) (317,627) (1,329,145)
Sundry 208,621 -- -- 509,136
------------ ------------ ------------ ------------
(125,576) (141,341) (317,627) (820,009)
------------ ------------ ------------ ------------
Loss before extraordinary gain (3,428,357) (3,130,453) (2,584,024) (18,639,705)
Extraordinary gain - troubled payable
reduction -- -- 300,250 300,250
------------ ------------ ------------ ------------
NET LOSS $ (3,428,357) $ (3,130,453) $ (2,283,774) $(18,339,455)
============ ============ ============ ============
Net loss $ (3,428,357) $ (3,130,453) $ (2,283,774) $(18,339,455)
Series A 9% convertible preferred stock
dividend and accretion (341,600) (307,225) (550,478) (1,199,303)
------------ ------------ ------------ ------------
Loss applicable to common stockholders $ (3,769,957) $ (3,437,678) $ (2,834,252) $(19,538,758)
============ ============ ============ ============
Basic and diluted loss per share
Net loss before extraordinary gain $ (.41) $ (.33) $ (.24) $ (2.72)
Extraordinary gain -- -- .03 .04
------------ ------------ ------------ ------------
Net loss (.41) (.33) (.21) (2.68)
Convertible preferred stock dividend and
accretion (.04) (.03) (.05) (.18)
------------ ------------ ------------ ------------
Loss applicable per common share $ (.45) $ (.36) $ (.26) $ (2.86)
============ ============ ============ ============
Weighted average number of shares used 8,308,093 9,589,304 10,928,311 6,832,110
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENT OF STOCKHOLDERS' DEFICIT
Series A 9% Convertible
Preferred Stock
---------------------------
Shares Amount
------------ ------------
Sale of common stock January 7, 1993 -- $ --
Sale of common stock January 7, 1993 at $.02 per share -- --
Redemption of director and officers common stock August 4, 1995 at $0 per share -- --
Sales of common stock August 4, 1995 through December 22, 1995 at $.17 through $.24
per share -- --
Redemption of common stock August 4, 1995 through December 22, 1995 at $.22 through $.24
per share -- --
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00
per share -- --
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs
of $124,663 -- --
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28,
1996 at $1.00 per share -- --
Exercise of stock options and warrants -- --
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs
of $1,039,668 -- --
Issuance of warrants on March 24, 1997 to purchase 25,000 shares of common stock at $3.00
per share -- --
Issuance of stock options on April 13, 1998 to purchase 100,000 shares of common stock at
$8.46 per share -- --
Fair market value of conversion feature on debenture issued June 30, 1998 -- --
Issuance of warrants on June 30, 1998 to purchase 350,000 shares of common stock
at $7.29 and $7.50 per share -- --
Issuance of stock options on April 1, 1998 and September 15, 1998 to purchase 423,000
shares of common stock at $3.00 to $6.42 per share -- --
Unearned compensation grant -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee terminations -- --
Other -- --
Net loss -- --
------------ ------------
Balance as of December 31, 1998 -- --
Sale of stock warrants during September 1999 to purchase 320,000 shares of common stock
at $.84 - $1.00 per share -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee termination -- --
Exercise of stock options -- --
Compensation element of stock option vesting to consultants -- --
Issuance of preferred stock and warrant, less offering costs of $74,461 13,125 131
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- --
Net loss -- --
------------ ------------
Balance as of December 31, 1999 13,125 131
Issuance of preferred stock and warrant, less offering costs of $16,481 6,750 68
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- --
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2000 19,875 199
Conversion of Series A preferred stock and cumulative dividends in arrears to common stock (1,431) (14)
Issuance of Series B preferred stock in exchange for Series A preferred stock and
dividends in arrears, less offering costs of $40,500 (18,444) (185)
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures and accrued interest to common stock -- --
Fair value of beneficial conversion feature on debenture -- --
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2001 -- $ --
============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Series B 9% Convertible
Preferred Stock
--------------------------
Shares Amount
------------ ------------
Sale of common stock January 7, 1993 -- $ --
Sale of common stock January 7, 1993 at $.02 per share -- --
Redemption of director and officers common stock August 4, 1995 at $0 per share -- --
Sales of common stock August 4, 1995 through December 22, 1995 at $.17 through $.24
per share -- --
Redemption of common stock August 4, 1995 through December 22, 1995 at $.22 through $.24
per share -- --
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00
per share -- --
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs
of $124,663 -- --
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28,
1996 at $1.00 per share -- --
Exercise of stock options and warrants -- --
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs
of $1,039,668 -- --
Issuance of warrants on March 24, 1997 to purchase 25,000 shares of common stock at $3.00
per share -- --
Issuance of stock options on April 13, 1998 to purchase 100,000 shares of common stock at
$8.46 per share -- --
Fair market value of conversion feature on debenture issued June 30, 1998 -- --
Issuance of warrants on June 30, 1998 to purchase 350,000 shares of common stock
at $7.29 and $7.50 per share -- --
Issuance of stock options on April 1, 1998 and September 15, 1998 to purchase 423,000
shares of common stock at $3.00 to $6.42 per share -- --
Unearned compensation grant -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee terminations -- --
Other -- --
Net loss -- --
------------ ------------
Balance as of December 31, 1998 -- --
Sale of stock warrants during September 1999 to purchase 320,000 shares of common stock
at $.84 - $1.00 per share -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee termination -- --
Exercise of stock options -- --
Compensation element of stock option vesting to consultants -- --
Issuance of preferred stock and warrant, less offering costs of $74,461 -- --
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- --
Net loss -- --
------------ ------------
Balance as of December 31, 1999 -- --
Issuance of preferred stock and warrant, less offering costs of $16,481 -- --
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- --
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2000 -- --
Conversion of Series A preferred stock and cumulative dividends in arrears to common stock -- --
Issuance of Series B preferred stock in exchange for Series A preferred stock and
dividends in arrears, less offering costs of $40,500 21,430 214
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures and accrued interest to common stock -- --
Fair value of beneficial conversion feature on debenture -- --
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2001 21,430 $ 214
============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Common Stock
--------------------------
Shares Amount
------------ ------------
Sale of common stock January 7, 1993 3,150,000 $ 31,500
Sale of common stock January 7, 1993 at $.02 per share 1,350,000 13,500
Redemption of director and officers common stock August 4, 1995 at $0 per share (270,000) (2,700)
Sales of common stock August 4, 1995 through December 22, 1995 at $.17 through $.24
per share 1,237,500 12,376
Redemption of common stock August 4, 1995 through December 22, 1995 at $.22 through $.24
per share (1,350,000) (13,500)
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00
per share -- --
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs
of $124,663 698,160 6,982
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28,
1996 at $1.00 per share 201,840 2,018
Exercise of stock options and warrants 73,367 733
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs
of $1,039,668 2,420,000 24,200
Issuance of warrants on March 24, 1997 to purchase 25,000 shares of common stock at $3.00
per share -- --
Issuance of stock options on April 13, 1998 to purchase 100,000 shares of common stock at
$8.46 per share -- --
Fair market value of conversion feature on debenture issued June 30, 1998 -- --
Issuance of warrants on June 30, 1998 to purchase 350,000 shares of common stock
at $7.29 and $7.50 per share -- --
Issuance of stock options on April 1, 1998 and September 15, 1998 to purchase 423,000
shares of common stock at $3.00 to $6.42 per share -- --
Unearned compensation grant -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee terminations -- --
Other -- --
Net loss -- --
------------ ------------
Balance as of December 31, 1998 7,510,867 75,109
Sale of stock warrants during September 1999 to purchase 320,000 shares of common stock
at $.84 - $1.00 per share -- --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee termination -- --
Exercise of stock options 26,000 260
Compensation element of stock option vesting to consultants -- --
Issuance of preferred stock and warrant, less offering costs of $74,461 -- --
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures 1,569,390 15,694
Net loss -- --
------------ ------------
Balance as of December 31, 1999 9,106,257 91,063
Issuance of preferred stock and warrant, less offering costs of $16,481 -- --
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures 860,467 8,604
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2000 9,966,724 99,667
Conversion of Series A preferred stock and cumulative dividends in arrears to common stock 670,445 6,704
Issuance of Series B preferred stock in exchange for Series A preferred stock and
dividends in arrears, less offering costs of $40,500 -- --
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures and accrued interest to common stock 1,891,300 18,914
Fair value of beneficial conversion feature on debenture -- --
Issuance of stock options and warrants to nonemployees -- --
Net loss -- --
------------ ------------
Balance as of December 31, 2001 12,528,469 $ 125,285
============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Deficit
accumulated
Additional during the
contributed development
capital stage
------------ ------------
Sale of common stock January 7, 1993 $ (22,750) $ (8,747)
Sale of common stock January 7, 1993 at $.02 per share 11,500 --
Redemption of director and officers common stock August 4, 1995 at $0 per share 2,700 --
Sales of common stock August 4, 1995 through December 22, 1995 at $.17 through $.24
per share 262,624 --
Redemption of common stock August 4, 1995 through December 22, 1995 at $.22 through $.24
per share (265,324) (29,350)
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00
per share 25,000 --
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs
of $124,663 566,515 --
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28,
1996 at $1.00 per share 178,990 --
Exercise of stock options and warrants 183,159 --
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs
of $1,039,668 6,196,132 --
Issuance of warrants on March 24, 1997 to purchase 25,000 shares of common stock at $3.00
per share 27,500 --
Issuance of stock options on April 13, 1998 to purchase 100,000 shares of common stock at
$8.46 per share 352,650 --
Fair market value of conversion feature on debenture issued June 30, 1998 525,000 --
Issuance of warrants on June 30, 1998 to purchase 350,000 shares of common stock
at $7.29 and $7.50 per share 432,000 --
Issuance of stock options on April 1, 1998 and September 15, 1998 to purchase 423,000
shares of common stock at $3.00 to $6.42 per share 237,500 --
Unearned compensation grant 408,920 --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee terminations (184,191) --
Other 22,210 --
Net loss -- (9,496,871)
------------ ------------
Balance as of December 31, 1998 8,960,135 (9,534,968)
Sale of stock warrants during September 1999 to purchase 320,000 shares of common stock
at $.84 - $1.00 per share 80,000 --
Unearned compensation amortization -- --
Unearned compensation reversal related to employee termination (42,920) --
Exercise of stock options 28,240 --
Compensation element of stock option vesting to consultants 36,100 --
Issuance of preferred stock and warrant, less offering costs of $74,461 800,408 --
Accretion of preferred stock beneficial conversion feature 285,000 (285,000)
Conversion of debentures 1,326,306 --
Net loss -- (3,428,357)
------------ ------------
Balance as of December 31, 1999 11,473,269 (13,248,325)
Issuance of preferred stock and warrant, less offering costs of $16,481 433,451 --
Accretion of preferred stock beneficial conversion feature 141,000 (141,000)
Conversion of debentures 541,396 --
Issuance of stock options and warrants to nonemployees 544,484 --
Net loss -- (3,130,453)
------------ ------------
Balance as of December 31, 2000 13,133,600 (16,519,778)
Conversion of Series A preferred stock and cumulative dividends in arrears to common stock 18,232 (24,922)
Issuance of Series B preferred stock in exchange for Series A preferred stock and
dividends in arrears, less offering costs of $40,500 240,520 (281,049)
Accretion of preferred stock beneficial conversion feature 451,000 (451,000)
Conversion of debentures and accrued interest to common stock 494,887 --
Fair value of beneficial conversion feature on debenture 113,000 --
Issuance of stock options and warrants to nonemployees 1,086,786 --
Net loss -- (2,283,774)
------------ ------------
Balance as of December 31, 2001 $ 15,538,025 $(19,560,523)
============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
Deferred
compensation
related to
stock options Total
------------- ------------
Sale of common stock January 7, 1993 $ -- $ 3
Sale of common stock January 7, 1993 at $.02 per share -- 25,000
Redemption of director and officers common stock August 4, 1995 at $0 per share -- --
Sales of common stock August 4, 1995 through December 22, 1995 at $.17 through $.24
per share -- 275,000
Redemption of common stock August 4, 1995 through December 22, 1995 at $.22 through $.24
per share -- (308,174)
Issuance of detachable warrants on May 17, 1996, in connection with bridge financing
arrangements, valued at $25,000, to purchase 100,000 shares of common stock at $1.00
per share -- 25,000
Sales of common stock during June and July, 1996 at $1.00 per share, less offering costs
of $124,663 -- 573,497
Conversion of bridge notes plus accrued interest of $1,841 to common stock on June 28,
1996 at $1.00 per share -- 181,008
Exercise of stock options and warrants -- 183,892
Sales of common stock in February and March 1997 at $3.00 per share, less offering costs
of $1,039,668 -- 6,220,332
Issuance of warrants on March 24, 1997 to purchase 25,000 shares of common stock at $3.00
per share -- 27,500
Issuance of stock options on April 13, 1998 to purchase 100,000 shares of common stock at
$8.46 per share -- 352,650
Fair market value of conversion feature on debenture issued June 30, 1998 -- 525,000
Issuance of warrants on June 30, 1998 to purchase 350,000 shares of common stock
at $7.29 and $7.50 per share -- 432,000
Issuance of stock options on April 1, 1998 and September 15, 1998 to purchase 423,000
shares of common stock at $3.00 to $6.42 per share -- 237,500
Unearned compensation grant (408,920) --
Unearned compensation amortization 167,839 167,839
Unearned compensation reversal related to employee terminations 184,191 --
Other -- 22,210
Net loss -- (9,496,871)
------------ ------------
Balance as of December 31, 1998 (56,890) (556,614)
Sale of stock warrants during September 1999 to purchase 320,000 shares of common stock
at $.84 - $1.00 per share -- 80,000
Unearned compensation amortization 13,970 13,970
Unearned compensation reversal related to employee termination 42,920 --
Exercise of stock options -- 28,500
Compensation element of stock option vesting to consultants -- 36,100
Issuance of preferred stock and warrant, less offering costs of $74,461 -- 800,539
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- 1,342,000
Net loss -- (3,428,357)
------------ ------------
Balance as of December 31, 1999 -- (1,683,862)
Issuance of preferred stock and warrant, less offering costs of $16,481 -- 433,519
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures -- 550,000
Issuance of stock options and warrants to nonemployees -- 544,484
Net loss -- (3,130,453)
------------ ------------
Balance as of December 31, 2000 -- (3,286,312)
Conversion of Series A preferred stock and cumulative dividends in arrears to common stock -- --
Issuance of Series B preferred stock in exchange for Series A preferred stock and
dividends in arrears, less offering costs of $40,500 -- (40,500)
Accretion of preferred stock beneficial conversion feature -- --
Conversion of debentures and accrued interest to common stock -- 513,801
Fair value of beneficial conversion feature on debenture -- 113,000
Issuance of stock options and warrants to nonemployees -- 1,086,786
Net loss -- (2,283,774)
------------ ------------
Balance as of December 31, 2001 $ -- $ (3,896,999)
============ ============
The accompanying notes are an integral part of this statement.
F-5
F-23
BIO-key International, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
January 7,
1993 (date of
inception)
through
Years ended December 31, December 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
Cash flows from operating activities
Net loss $ (3,428,357) $ (3,130,453) (2,283,774) $(18,339,455)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 58,650 47,315 31,942 242,913
Amortization
Unearned compensation 13,970 -- -- 193,333
Deferred financing costs 288,543 53,287 11,524 426,397
Intrinsic value of beneficial conversion feature of
convertible debenture 124,624 36,701 60,863 622,564
Allowance for doubtful receivables (158,000) -- -- --
Write-down of inventory 283,515 32,500 -- 916,015
Write-down of deferred financing costs 132,977 -- -- 132,977
Gain on sale of Inter-Con/PC, Inc. stock (190,000) -- -- (190,000)
Revenues realized due to offset of billings against a stock
repurchase -- -- -- (170,174)
Acquired research and development -- -- -- 117,000
Options and warrants issued for services and other 36,100 544,484 70,786 1,401,020
Other -- -- -- 34,684
Change in assets and liabilities:
Accounts receivable 189,371 4,213 9,118 --
Inventories 94,272 -- -- (916,015)
Prepaid expenses 78,755 21,375 (184,889) (206,634)
Accounts payable 60,156 (12,637) (89,902) 238,496
Accrued liabilities 215,394 679,892 448,607 1,581,256
------------ ------------ ------------ ------------
Net cash used in operating activities (2,200,030) (1,723,323) (1,925,725) (13,915,623)
Cash flows from investing activities
Capital expenditures (2,438) -- -- (242,913)
Proceeds from sale of Inter-Con/PC, Inc. stock 190,000 -- -- 190,000
Other (9,035) (12,518) (2,635) (41,706)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 178,527 (12,518) (2,635) (94,619)
Cash flows from financing activities
Net borrowings under short-term borrowing agreements 250,000 1,500,000 1,370,000 3,003,000
Issuance of convertible bridge notes -- -- -- 175,000
Issuance of convertible debentures and long-term notes -- -- 1,065,000 2,840,000
Issuance of warrants and convertible debentures discount 80,000 -- -- 830,000
Deferred financing costs -- -- -- (312,977)
Exercise of stock options and warrants 28,500 -- -- 190,799
Sale of common stock -- -- -- 7,093,832
Sale of preferred stock and assigned value of warrant 700,539 183,519 (40,500) 843,558
Redemption of common stock -- -- -- (138,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,059,039 1,683,519 2,394,500 14,525,212
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (962,464) (52,322) 466,140 514,970
Cash and cash equivalents, beginning of period 1,063,616 101,152 48,830 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 101,152 $ 48,830 $ 514,970 $ 514,970
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-6
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
BIO-key International, Inc., formerly SAC Technologies, Inc. (the
Company) is a development stage company incorporated on January 7, 1993
and has operations in Minneapolis, Minnesota and Las Vegas, Nevada. The
Company's goal is to develop and market advanced biometric fingerprint
technology solutions that provide fast, easy and highly secure personal
identification for online access to computers and networks. The
Company's fingerprint identification techniques can be used without the
aid of a personal identification number. The Company's target market
includes Internet application service providers, Internet based
retailers and other operators of private networks, and entities where
security and identification applications are required, including the
aviation industry.
Basis of Presentation
Broad commercial acceptance of the Company's technology is critical to
the Company's success and ability to generate revenues. The Company has
had no significant revenues to date, and has accumulated losses since
inception of approximately $18,339,000, of which approximately
$2,284,000 was incurred during 2001. As of December 31, 2001, there was
a stockholders' deficit of approximately $3,897,000.
The Company is in need of substantial additional capital. The Company
is currently considering various alternatives related to raising
additional capital including continued funding from an investment group
and new funding from other sources. No assurance can be given that any
form of additional financing will be available on terms acceptable to
the Company, that adequate financing will be obtained to meet its
needs, or that such financing would not be dilutive to existing
stockholders.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States,
which contemplate continuation of the Company as a going concern. The
matters described in the preceding paragraphs raise substantial doubt
about the Company's ability to continue as a going concern.
Recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon the Company
advancing beyond the development stage, which in turn is dependent upon
the Company's ability to obtain additional financing, meet its
financing requirements on a continuing basis, and succeed in its future
operations. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue in existence.
F-7
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
1. Revenue Recognition
Revenues from software licensing is recognized in accordance with
Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as
amended by SOP No. 98-9. Accordingly, revenue from software licensing
is recognized when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable.
2. Cash and Cash Equivalents
Cash equivalents consist of certificates of deposit and all other
liquid investments with original maturities of three months or less.
The Company maintains its cash balances in a financial institution in
Nevada. These balances are insured by the Federal Deposit Insurance
Corporation up to $100,000.
3. Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated services lives of three and
five years using the straight-line method. Equipment, furniture and
fixtures consisted of the following as of December 31:
2000 2001
------------ ------------
Equipment $ 206,363 $ 206,363
Furniture and fixtures 36,550 36,550
------------ ------------
242,913 242,913
Less accumulated depreciation 210,971 242,913
------------ ------------
$ 31,942 $ --
============ ============
4. Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising
expenses for the years ended December 31, 1999, 2000, 2001, and the
period January 7, 1993 (date of inception) through December 31, 2001
were approximately $63,000, $6,000, $1,000 and $216,000, respectively.
F-8
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
5. Research and Development Expenditures
All costs related to development of new products are charged to expense
as incurred. Such costs are required to be expensed until technological
feasibility and proven marketability of the product are established.
6. Basic and Diluted Loss per Common Share
Basic and diluted loss per share for all periods presented is computed
using the weighted average number of common shares outstanding. Basic
weighted average shares outstanding include only outstanding common
shares. Shares reserved for outstanding warrants, stock options or
convertible preferred stock are not considered because the impact of
the incremental shares is antidilutive.
7. Income Taxes
The Company provides for income taxes based on income reported for
financial reporting purposes. Certain charges to earnings differ as to
timing from those deducted for tax purposes; these relate primarily to
net operating loss carryforwards. The tax effect of these differences
are recorded as deferred income taxes.
8. Accounting for Stock-Based Compensation
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) in accounting for employee stock options. Under the
intrinsic value method, compensation expense is recognized only to the
extent the market price of the common stock exceeds the exercise price
of the stock option at the date of the grant.
In the future, if employees exercise certain nonstatutory stock
options, the Company may realize a tax benefit equal to the tax effect
on the difference between the strike price of the option and the fair
market value of the stock on the day of exercise. Tax benefits
realized, if any, by the Company will be credited to additional paid-in
capital. Similar accounting treatment is also given to any tax benefits
the Company may realize arising from employees making disqualifying
dispositions of incentive stock options.
F-9
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
9. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, the
reported amounts of receivables and expenses during the reporting
period, and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Estimates are used for such
items as valuation of deferred income taxes, conversion features of
convertible debentures and preferred stock, and stock options and
warrants outstanding.
NOTE B - OTHER ASSETS
Other assets consisted of the following as of December 31:
2000 2001
------------ ------------
Patents pending $ 22,948 $ 26,706
Security deposits 16,123 15,000
Other 11,524 --
------------ ------------
$ 50,595 $ 41,706
============ ============
NOTE C - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31:
2000 2001
------------ ------------
Penalties due investment group $ 763,625 $ --
Interest 256,071 42,509
Compensation 85,680 36,699
Other 16,313 11,367
------------ ------------
$ 1,121,689 $ 90,575
============ ============
As discussed further in Note F, the Company had accrued penalties
payable to an investment group for not timely filing a registration
statement in connection with the Company's issuance of its Series A
Preferred Stock. As discussed further in Note F, all accrued penalties
were converted into a long-term debenture in November 2001.
F-10
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE D - RECAPITALIZATION TRANSACTION.
On November 26, 2001, the Company completed a recapitalization
transaction (the Transaction) with an investment group (the Investor).
As a result of the Transaction, the Company converted approximately
$4.6 million of short-term debt and accruals into long-term convertible
notes and debentures, obtained $1.065 million of additional funding and
issued shares of its newly designated Series B 9% convertible preferred
stock in exchange for all of the issued and outstanding shares of its
Series A 9% convertible preferred stock and the cumulative dividends in
arrears due thereon. Additionally, the Investor forgave $300,250 of
previously accrued penalties which has been treated as an extraordinary
gain in 2001 in the accompanying financial statements. Under the terms
of the Transaction, the Investor agreed to provide up to $1.08 million
of additional financing in incremental monthly installments during the
six-month period commencing March 1, 2002, subject to certain
conditions being satisfied.
NOTE E - NOTES PAYABLE
Notes payable consisted of the following as of December 31:
2000 2001
------------ ------------
Notes payable to investment group with interest
at 10%; unsecured, converted to long-term in
2001 $ 1,400,000 $ --
============ ============
All of the above short-term notes were converted to a long-term note in
November 2001 as part of the Transaction discussed in Note D.
NOTE F - LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following as of December 31:
2000 2001
------------ ------------
Secured convertible note, 10% $ -- $ 4,092,920
Zero interest convertible debenture -- 1,000,000
Convertible debenture, 5% 598,455 316,000
Discounts assigned to fair values of conversion
feature and warrants -- (1,077,682)
------------ ------------
598,455 4,331,238
Less current maturities (598,455) --
------------ ------------
$ -- $ 4,331,238
============ ============
F-11
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE F - LONG-TERM OBLIGATIONS - CONTINUED
A summary of the Company's long-term notes and debentures issued as
part of the Transaction are as follows:
* SECURED CONVERTIBLE NOTE. Prior to the Transaction, the Company had
unsecured short-term notes from the Investor in the aggregate
principal amount of $2,770,000. The Investor converted this amount
and associated accrued interest of $257,920 together with additional
financing of $1,065,000 into a secured convertible note in the
principal amount of $4,092,920 (the Convertible Note). The
Convertible Note is due September 30, 2003 and accrues interest at
10%, payable quarterly commencing September 2002. The note is
convertible into shares of the Company's common stock at a
conversion price of $0.75 per share. The note is collateralized by
substantially all of the Company's assets.
In conjunction with the issuance of the Convertible Note, the
Company issued a warrant to the Investor to purchase 4,000,000
shares of common stock at $1.00 per share through November 26, 2006.
The Convertible Note was recorded net of a $1,016,000 discount
assigned to the fair value or the warrant. The value assigned to the
warrant is being amortized as interest expense over the twenty-two
month life of the Convertible Note.
* ZERO INTEREST CONVERTIBLE DEBENTURE. During the past two years, the
Company had accrued penalties under a previous registration rights
agreement with the Investor in the amount of $1,300,250. The
Investor agreed to reduce the penalty by $300,250 and converted the
balance into a convertible debenture in the principal amount of
$1,000,000. The debenture is due September 30, 2003 and bears a
stated interest rate of zero. The debenture is convertible into
shares of the Company's common stock at a conversion price of $0.75
per share. The $300,250 reduction in previously accrued penalties
has been treated as an extraordinary gain for 2001 in the
accompanying financial statements.
* 5% CONVERTIBLE DEBENTURE: A convertible debenture in the principal
amount of $539,625 was issued in exchange for the cancellation of an
outstanding 5% debenture in the principal amount of $418,000 plus
accrued interest of $121,625. The new convertible debenture is due
September 30, 2003 and accrues interest at 5%, payable quarterly
commencing in August 2002. The new debenture is convertible into
shares of the Company's common stock at a per share conversion price
equal to the lesser of $0.75 or a 22% discount to the average of the
closing price of the common stock for the five days preceding
conversion.
The new convertible debenture was recorded net of a $113,000
discount assigned to the fair value of the beneficial conversion
feature. The value assigned to the conversion feature is being
amortized as interest expense over the twenty-two month life of the
debenture in accordance with Emerging Issues Task Force (EITF) No.
00-27 and EITF No. 98-5.
Primarily all of the Company's interest expense was related to
obligations due the Investor.
F-12
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company operates a leased facility in Minnesota under a
non-cancelable operating lease that expires in August 2004. In addition
to base rent, the Company pays for property taxes, maintenance,
insurance, and other occupancy expense applicable to the leased
premises.
Minimum rental commitments of non-cancelable operating leases are
approximately as follows:
Year ending December 31, 2002 $ 40,000
Year ending December 31, 2003 42,000
Year ending December 31, 2004 29,000
-------------
$ 111,000
=============
Rental expense was approximately $124,000, $89,000, $70,000 and
$489,000 during 1999, 2000, 2001 and for the period January 7, 1993
(date of inception) through December 31, 2001, respectively.
Contingent Consultant Fees
In November 2001, the Company entered into an agreement with a
consultant and an associate. In addition to fixed fees, the agreement
requires contingent future consulting fees to be paid based on future
sales, if any, generated by introductions, as defined, made by the
consultant. The contingent fee is to be 2.19% of such sales, including
product sales, sale or licensing of technology, or sale of an equity
interest in the Company. The consultant and the associate have the
option to convert the contingent fees, if any, into shares of the
Company's common stock (but no more than 525,000 shares) at a
conversion price of $0.38 per share. The agreement expires in August
2002.
Employment Agreements
The Company has employment agreements with four individuals. The
employment agreements contain non-compete clauses that restrict the
employees from competing with the Company following a termination of
employment from the Company. In the event of termination, as defined,
the agreements provide each employee with severance payments. As of
December 31, 2001, the aggregate commitment was approximately $372,000.
F-13
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Litigation Settlements
During 1999, a former licensor of technology to the Company commenced
litigation claiming breach of contract. The Company filed a
counter-claim. In August 2001, the Company and the plaintiff reached a
settlement whereby both parties release each other from all claims, the
plaintiff agreed to deliver copies of certain software to the Company,
and the Company agreed to pay $50,000 to the plaintiff in various
installments through April 2002.
In July 2000, litigation was commenced against the Company alleging
breach of a licensing agreement and conversion of certain proprietary
technology. In August 2000, the Company and plaintiff reached a
settlement and entered into a new agreement whereby: a) ownership of
each of the parties' technologies was clarified; b) previously existing
contracts between the two parties were terminated; c) royalties or
payables due between the two parties were discharged; d) the Company
granted the plaintiff certain royalty-free rights and licenses to
manufacture and sell certain hardware devices; and e) the Company
granted the plaintiff certain other rights, including the right to
purchase certain inventory items at terms and prices similar to those
offered to other customers.
Future Public Offering Costs
In June 1998, the Company entered into an agreement with its
underwriter, whereby the underwriter agreed to waive all future rights
of first refusal to sell the Company's securities. In exchange for
this, the Company agreed to pay the underwriter $100,000, of which
$34,000 was paid at the closing of the sale of certain debentures and
$66,000 is due upon completion of a future public offering, if one
occurs.
NOTE H - STOCKHOLDERS' EQUITY
Issuance of Series B 9% Convertible Preferred Stock
In November 2001, the Company issued 21,430 shares of its newly
authorized Series B 9% convertible preferred stock (the Series B
Preferred Stock) in exchange for all 18,449 outstanding shares of its
Series A 9% convertible preferred stock (the Series A Preferred Stock)
and cumulative dividends in arrears of $281,049 due thereon.
The Series B Preferred Stock accrues dividends of 9% payable
semi-annually on June 15 and December 15 in cash, or at the option of
the Company, in additional shares of its common stock. As of December
31, 2001, cumulative dividends in arrears were approximately $10,000.
The Series B shares are redeemable at the option of the Company, so
long as the Company's common stock is eligible for quotation on the OTC
Bulletin Board and the shares issuable upon conversion are subject to
an effective registration statement. The Series B shares are
convertible into shares of the Company's common stock at a per share
conversion price equal to the lesser of $0.75 or a 22% discount to the
average closing price of the common stock for the five days preceding
conversion. The Series B shares have no voting rights.
F-14
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Issuance of Series B 9% Convertible Preferred Stock - Continued
The fair value assigned to the beneficial conversion feature of the
Series B shares was $451,000. The $451,000 is analogous to a dividend
and was immediately recognized as a return to the preferred stockholder
since the Series B shares are immediately convertible into common
stock.
The terms of a Registration Rights Agreement with the Investor require
the Company to file a registration statement with the SEC covering the
resale of any shares of common stock issuable upon any conversion of
the Series B Preferred Stock or convertible debt or the exercise of any
of the Investor's warrants. If the Company does not file the
registration statement with the SEC by March 31, 2002 or if such
registration statement is not declared effective by the SEC by May 30,
2002, the Company is required to pay a penalty to the Investor equal to
2% of the outstanding face value of the preferred stock.
Issuances of Series A 9% Convertible Preferred Stock
In July 1999, the Company issued to the Investor 13,125 shares of its
Series A 9% Preferred Stock. The face value of the preferred stock
issued was $1,312,500. In conjunction with the issuance of preferred
stock, the Company also issued to the Investor a warrant to purchase
131,250 shares of the Company's common stock at $1.196 per share
exercisable through June 2004. The Company received net cash proceeds
of $700,539 after giving effect to a $437,500 discount to the face
value of the Preferred Stock, offering costs of $74,461 and repayment
of a $100,000 note to the Investor.
The fair value assigned to the beneficial conversion feature of the
13,125 Series A shares was $285,000. The $285,000 fair value of the
conversion feature is analogous to a dividend and was immediately
recognized as a return to the preferred stockholder since the Series A
shares were immediately convertible into common stock.
In March 2000, the Company issued to the Investor 6,750 shares of its
Series A 9% Preferred Stock. The face value of the preferred stock was
$675,000. In conjunction with the issuance of the preferred stock, the
Company also issued to the Investor a warrant to purchase 67,500 shares
of common stock at $1.309 per share exercisable through March 2005. The
Company received net cash proceeds of $183,519 after giving effect to a
$225,000 discount to the face amount of the preferred stock, offering
costs of $16,481, and repayment of $250,000 of notes outstanding to the
Investor.
The fair value assigned to the beneficial conversion feature of the
6,750 Series A shares was $141,000. The $141,000 fair value of the
conversion feature is analogous to a dividend and was immediately
recognized as a return to the preferred stockholder since the Series A
shares were immediately convertible into common stock.
F-15
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Issuances of Series A 9% Convertible Preferred Stock - Continued
The Series A shares issued in 1999 are convertible into shares of
common stock at a conversion price equal to the lesser of: (a) $1.10,
or (b) a 22% discount to the average closing price of the Company's
common stock of the five days prior to conversion. The Series A shares
issued in 2000 are convertible into shares of common stock at a
conversion price equal to the lesser of (a) $1.169 or (b) a 22%
discount to the average closing price of the Company's common stock of
the five days prior to conversion. The conversion prices are subject to
adjustment in the event the Company issues additional common stock
options, warrants or other convertible securities without
consideration, or for consideration per share less than the effective
conversion price in effect on the date of issuance, as defined.
In conjunction with the issuance of the Series B Preferred Stock, all
previously issued shares of Series A Preferred Stock were retired and
canceled and became authorized but unissued shares of preferred stock.
F-16
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE H - STOCKHOLDERS' EQUITY - CONTINUED
Warrants
The Company has issued warrants to certain creditors, investors,
underwriters and consultants. A summary of warrant activity is as
follows:
Exercisable
Price per Expiration at December
Outstanding share date 31, 2001
------------ ------------ ------------ ------------
Balance, December 31, 1998 639,716 413,216
Granted in connection with
issuance of Series A
preferred stock 131,250 1.20 2004 131,250
Sold to outside investors 320,000 0.84-1.00 2002 320,000
Expired (92,500) 1.00-3.00 -- --
------------ ------------
Balance, December 31, 1999 998,466 864,466
Granted in connection with
issuance of Series A
preferred stock 67,500 1.31 2005 67,500
Granted to acquire software 400,000 1.00 2004 400,000
Granted to consultants 50,000 1.00 2005 50,000
------------ ------------
Balance, December 31, 2000 1,515,966 1,381,966
Granted in connection with 10%
secured convertible note
payable 4,000,000 1.00 2006 4,000,000
Granted to consultants 295,932 0.38-1.00 2006 295,932
------------ ------------
Balance, December 31, 2001 5,811,898 5,677,898
============ ============
Exercised through December
31, 2001 7,500
============
The estimated fair value of the warrants granted during 1999, 2000 and
2001 was $54,000, $220,500 and $1,171,000, respectively.
F-17
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE I - STOCK-BASED COMPENSATION
1996 Stock Option Plan
During 1996, the Board of Directors and stockholders of the Company
adopted the 1996 Stock Option Plan (the 1996 Plan). Under the 1996
Plan, 750,000 shares of common stock are reserved for issuance to
employees, officers, directors, and consultants of the Company at
exercise prices which may not be below 100% of fair market value for
incentive stock options and 50% for all others. The term of stock
options granted may not exceed ten years. Options issued under the Plan
vest pursuant to the terms of stock option agreements with the
recipients. In the event of a change in control, as defined, all
options outstanding vest immediately. The Plan terminates in May 2006.
1999 Stock Option Plan
During 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan (the 1999 Plan). The plan was not presented to
stockholders for approval and thus incentive stock options are not
available under the plan. Under the 1999 Plan, 2,000,000 shares of
common stock are reserved for issuance to employees, officers,
directors, and consultants of the Company at exercise prices which may
not be below 85% of fair market value. The term of nonstatutory stock
options granted may not exceed ten years. Options issued under the Plan
vest pursuant to the terms of stock option agreements with the
recipients. In the event of a change in control, as defined, all
options outstanding vest immediately. The Plan terminates in August
2009.
Non-Plan Stock Options
Periodically, the Company has granted options outside of the 1996 and
1999 Plans to various employees and consultants. In the event of change
in control, as defined, certain of the non-plan options outstanding
vest immediately.
F-18
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE I - STOCK-BASED COMPENSATION - CONTINUED
Summary of Option Information
Information summarizing option activity is as follows:
Number of shares Weighted
------------------------------------------------ Range of average
1996 1999 Non- exercise exercise
plan plan Plan Total prices price
--------- --------- --------- --------- -------------- ----------
Balance, December 31, 1998 474,334 -- 498,000 972,334 $ 1.00 - 10.75 $ 3.74
Granted 300,000 885,548 540,000 1,725,548 .50 - 1.00 .91
Exercised (26,000) -- -- (26,000) 1.00 - 1.13 1.10
Expired or canceled (278,009) -- -- (278,009) 1.13 - 10.75 3.74
--------- --------- --------- ---------
Balance, December 31, 1999 470,325 885,548 1,038,000 2,393,873 .50 - 10.75 1.73
Granted -- 400,000 850,000 1,250,000 .27 - 1.22 .74
Relinquished (185,610) (222,000) -- (407,610) .88 - .91 .89
Expired or cancelled (170,335) (446,879) (407,000) (1,024,214) .88 - 10.75 1.80
--------- --------- --------- ---------
Balance, December 31, 2000 114,380 616,669 1,481,000 2,212,049 .27 - 6.42 1.28
Granted 276,000 840,000 730,000 1,846,000 .19 - .46 .40
Expired or canceled -- -- (230,000) (230,000) .27 - .91 .54
--------- --------- --------- ---------
Balance, December 31, 2001 390,380 1,456,669 1,981,000 3,828,049 .19 - 6.42 .86
========= ========= ========= =========
Available for future grants,
December 31, 2001 266,620 543,331 NA 809,951
========= ========= ========= =========
Additional information regarding outstanding options as of December 31,
2001 is as follows:
Shares exercisable under
Shares under outstanding options outstanding options
-------------------------------------------------------------- -----------------------------
Weighted
Weighted average Weighted
average remaining average
Range of Number of exercise life Number exercise
exercise prices shares price (in years) exercisable price
--------------- ----------- ------------ ------------ ----------- -----------
$ .27 - .50 1,796,000 $ .30 6.3 1,156,000 $ .35
.63 - .97 1,353,049 .76 4.6 501,049 .76
1.00 - 3.00 626,000 2.22 1.6 626,000 2.22
3.22 - 6.42 53,000 6.12 5.7 53,000 6.12
F-19
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE I - STOCK-BASED COMPENSATION - CONTINUED
Summary Option Information - Continued
The weighted average fair value of options granted to employees and
directors during 1999, 2000 and 2001 were $0.84, $0.69 and $0.15 per
share, respectively. The fair value of each option grant is estimated
as of the date of the grant using the Black-Scholes option-pricing
model utilizing the same assumptions presented in the proforma
compensation disclosure section below.
During 1997 and 1998, options for 360,000 and 40,000 shares,
respectively, were granted to employees at per share exercise prices
less than the fair market value of the common stock at the date of
issuance. The difference between the option exercise price and
estimated fair value of common stock at the date of grant for these
options was $225,400 and $58,520, respectively, and has been reflected
as unearned compensation in the accompanying balance sheets and is
being recognized as expense over the vesting period of the grants. In
connection with certain employee terminations, $184,191 and $42,920 of
unearned compensation was reversed during 1997 and 1999, respectively,
with no resulting impact to the statement of operations.
During 1999, 2000 and 2001, options for 540,000, 570,000 and 276,000
shares, respectively, were granted to consultants and strategic
partners. The estimated fair value of the options granted to
consultants and strategic partners which vested during each year were
$147,875, $323,984 and $1,387,000, respectively.
Proforma Compensation Disclosure
The Company has adopted Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" (SFAS No. 123) which
encourages, but does not require, a fair-value based method of
accounting for employee stock options. As permitted under SFAS 123, the
Company has continued to account for employee stock options using the
intrinsic value method outlined in APB 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation expense has been recognized
by the Company for its stock options granted to employees or directors.
F-20
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE I - STOCK-BASED COMPENSATION - CONTINUED
Proforma Compensation Disclosure - Continued
If compensation expense for the stock options granted had been
determined based on the fair value at the grant dates consistent with
the method of SFAS No. 123, the Company's proforma net loss and
proforma loss per share would have been as follows:
January 7,
1993 (date of
inception)
Years ended December 31, through
---------------------------------------------- December 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
Net loss
As reported $ (3,428,357) $ (3,130,353) $ (2,283,774) $(18,339,455)
Proforma (3,760,357) (3,313,353) (2,480,774) (18,536,455)
Loss applicable to
common stockholders
As reported $ (3,769,957) $ (3,437,678) $ (2,834,252) $(19,538,758)
Proforma (4,101,957) (3,620,578) (3,031,252) (19,735,758)
Basic and diluted loss per
common share
As reported $ (.45) $ (.36) $ (.26) $ (2.86)
Proforma (.49) (.38) (.28) (2.89)
In determining the proforma compensation cost of the options granted,
the fair value of each grant was estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions used to
determine the fair value of each grant included the following weighted
average assumptions:
1999 2000 2001
------------ ------------ ------------
Risk free interest rate 6.30 % 5.00 % 3.50 %
Expected life of options (in years) 4.00 4.00 3.00
Expected dividends -- -- --
Volatility of stock price 187 % 1,655 % 175 %
F-21
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE J - INCOME TAXES
Deferred taxes are due to income tax credits and net operating loss
carryforwards, and to the temporary differences between the carrying
values of certain assets and liabilities for financial reporting and
income tax purposes. Significant components of deferred taxes are as
follows at December 31:
2000 2001
------------ ------------
Short-term items:
Allowances for doubtful receivables $ -- $ --
Accrued compensation 46,000 13,000
Accrued penalties 272,000 --
Accrued interest 91,000 --
Long-term items:
Depreciation and other $ 10,000 --
Accrued interest -- 15,000
Income tax credits 97,000 112,000
Net operating loss carryforwards 5,205,000 6,726,000
------------ ------------
Less valuation allowances (5,721,000) (6,866,000)
------------ ------------
$ -- $ --
============ ============
A valuation allowance equal to the full amount of the deferred tax
asset has been recorded due to the uncertainty of realization of the
deferred tax assets due to the development stage nature and operating
loss history of the Company. The valuation allowance could be reduced
or eliminated based on future earnings and future estimates of taxable
income. Similarly, income tax benefits related to stock options
exercised have not been recognized in the financial statements.
The Company has federal and Minnesota net operating loss carryforwards
of approximately $18,155,000 and $9,330,000, respectively, as of
December 31, 2001. These operating losses expire between 2008 and 2021.
Net operating loss carryforwards may be subject to the limitations
under Section 382 of the Internal Revenue Code due to changes in the
equity ownership of the Company.
F-22
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE K - RELATED PARTY TRANSACTIONS
In addition to the transactions with the Investor discussed in Notes D,
E, F and H, a summary of significant related party transactions is as
follows:
January 7,
1993 (date of
inception)
Years ended December 31, through
------------------------------------- December 31,
1999 2000 2001 2001
---------- --------- ---------- ----------
Sales to:
Stockholder $ 10,000 $ -- -- $ 629,000
Entity partially owned by
Company -- -- -- 209,000
Entity related to underwriter
and holder of options -- -- -- 244,900
Purchase of optics technology from
stockholder -- -- -- 117,000
Purchase of component parts from
entity owned by stockholder and
director -- -- -- 308,800
Rent, assembly, and design
services purchased from affiliate -- -- -- 77,000
Equipment purchased from stockholder -- -- -- 5,000
Payment for development services and
other from entity related to
underwriter and holder of options 138,600 -- -- 138,600
Sale of investment to director 190,000 -- -- 190,000
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS
The Statement of Financial Accounting Standards Board No. 107
"Disclosures about Fair Value of Financial Instruments" (SFAS 107)
requires disclosure of the estimated fair value of an entity's
financial instruments. Such disclosures, which pertain to the Company's
financial instruments, do not purport to represent the aggregate net
fair value of the Company. At December 31, 2000 and 2001, the carrying
value of all material financial instruments, for which it is
practicable to estimate the fair value, approximated fair value because
of the short maturity of those instruments.
F-23
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE M - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
January 7,
1993 (date of
inception)
Years ended December 31, through
-------------------------------------- December 31,
1999 2000 2001 2001
---------- ---------- ---------- ----------
Cash paid for:
Interest $ -- $ -- $ -- $ 28,544
Noncash Financing Activities:
Conversion of short-term notes,
accrued interest and
penalties into long-term
notes and debentures -- -- 4,567,546 4,567,546
Conversion of convertible
debentures, bridge notes, and
accrued interest into common
stock 1,342,000 550,000 513,801 2,584,968
Accretion of preferred stock
beneficial conversion feature 285,000 141,000 451,000 877,000
Issuance of Series B preferred
stock in exchange for Series
A preferred stock and
cumulative dividends in
arrears, thereon -- -- 281,049 281,049
Issuance of common stock in
exchange for Series A
preferred stock and
cumulative dividends in
arrears, thereon -- -- 24,922 24,922
Issuance of preferred stock
effected through
reduction of debt 100,000 250,000 -- 350,000
Unearned compensation
reversal related to
employee terminations 42,920 -- -- 227,111
Common stock repurchases
offset by a reduction in
amounts billed to Jasper
for research and
development -- -- -- 170,174
Offset deferred offering costs
against proceeds of
initial public offering,
and other -- -- -- 159,021
F-24
BIO-key International, Inc.
(a Corporation in the Development Stage)
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE N - RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified
to conform to the 2001 presentation. These reclassifications had no
effect on the previously reported net loss or stockholders' deficit.
NOTE O - EVENTS OCCURRING SUBSEQUENT TO DECEMBER 31, 2001
In February 2002, the Company's shareholders approved amendments to its
articles of incorporation which increased the number of authorized
shares of common stock from 20,000,000 to 60,000,000 and changed the
Company's name from SAC Technologies, Inc. to BIO-key International,
Inc. Also in February 2002, the Investor converted $100,000 of the 5%
Convertible Debenture into 156,740 shares of the Company's common
stock.
F-25
16,484,765 SHARES
[LOGO]
BIO-KEY INTERNATIONAL, INC.
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
MARCH 27, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act generally
provides for the indemnification of directors, officers or employees of a
corporation made or threatened to be made a party to a proceeding by reason of
the former or present official capacity of the person against judgments,
penalties and fines (including attorneys' fees and disbursements) if such
person, among other things, has not been indemnified by another organization,
acted in good faith, received no improper personal benefit and with respect to
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful.
As permitted under the Minnesota Business Corporation Act, the Articles
of Incorporation of the Company provide that directors shall have no personal
liability to the Company or to its shareholders for monetary damages arising
from breach of the director's duty of care in the affairs of the Company. The
Minnesota Business Corporation Act does not permit elimination of liability for
breach of a director's duty of loyalty to the Company or with respect to certain
enumerated matters, including payment of illegal dividends, acts not in good
faith and acts resulting in an improper personal benefit to the director. The
By-Laws of the Company provide that the Company shall indemnify any person, who
was or is a party to a proceeding by reason of the fact that he is or was a
director, officer, employee or agent of the Company against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the Company, in accordance with and
to the full extent permitted by, the Minnesota Business Corporation Act.
Reference is made to Item 28 for the undertakings of the Registrant
with respect to indemnification of liabilities arising under the Securities Act
of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
SEC Registration Fee........................... $ 1,646.61
Printing and Engraving......................... 3,000
Accountants' Fees and Expenses................. 25,000
Legal Fees and Expenses........................ 25,000
Total.......................................... $54,646.61
==========
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
1. Between May 11, 1999 and November 25, 2001, the Company issued an
aggregate of 3,854,861 shares of common stock to The Shaar Fund Ltd. upon
conversion of $2,082,000 principal amount and $100,000 accrued interest under a
5% Convertible Debenture due June 30, 2001 issued to The Shaar Fund in a private
placement transaction completed on or about June 30, 1998. These securities were
sold to one (1) accredited investor in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation of any kind and without payment of underwriting discounts
or commissions to any person.
2. On July 9, 1999, the Company issued 13,125 shares of its Series A
Convertible Preferred Stock and a warrant to purchase 131,250 shares of common
stock to The Shaar Fund Ltd. in consideration of gross cash proceeds of
$875,000. These securities were issued to one (1) accredited investor in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
3. In September, 1999, the Company sold warrants to purchase 320,000
shares of the Company's Common Stock at an exercise price of $.86 per share in
consideration of gross cash proceeds of $80,000 These securities were issued to
a limited number of accredited investors in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof directly by the Company without engaging in any advertising
or general solicitation of any kind and without payment of underwriting
discounts or commissions to any person.
4. On March 17, 2000, the Company issued 6,750 shares of its Series A
Convertible Preferred Stock and a warrant to purchase 67,500 shares of common
stock to the Shaar Fund Ltd. in consideration of gross cash proceeds of
$450,000. These securities were issued to one (1) accredited investor in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
5. On June 13, 2000, the Company issued a warrant to purchase 50,000
shares of common stock at an exercise price of $1.00 per share to a technology
company in consideration of services rendered to the Company. These securities
were issued in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person.
II-2
6. On July 10, 2000, the Company issued warrants to purchase 400,000
shares of common stock at an exercise price of $1.00 per share to Aultimate
Technology Marketing Inc. to acquire certain technology. These securities were
issued in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person.
7. On September 29, 2000, the Company issued options to purchase
100,000 shares of common stock at an exercise price of $1.00 per share to an
administrative consultant in consideration of services rendered to the Company.
These securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
directly by the Company without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.
8. On April 23, 2001, the Company issued warrants to purchase 26,250
shares of common stock at an exercise price of $.33 per share to a consultant in
consideration of services rendered to the Company. These securities were issued
in a private placement transaction exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof directly by the Company
without engaging in any advertising or general solicitation of any kind and
without payment of underwriting discounts or commissions to any person.
9. Between on or about November 15, 1999 and April 15, 2001, the
Company issued options to purchase an aggregate of 390,000 shares of common
stock to an executive management consultant to the Company in consideration of
services rendered to the Company. These securities were issued in a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
10. Between October 12, 2001 and November 13, 2001, the Company issued
an aggregate of 670,445 shares of common stock to the Shaar Fund Ltd. upon
conversion of 1,431 shares of the Company's Series A Convertible Preferred Stock
and payment of cumulative dividends in arrears due thereon and interest due on
such dividends. These securities were issued to one (1) accredited investor in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
11. On November 26, 2001, the Company issued a 5% convertible debenture
in the principal amount $539,625, a non-interest convertible debenture in the
principal amount of $1,000,000, a secured convertible in the principal of
$4,092,920, 21,430 shares of Series B Convertible B Preferred Stock and warrants
to purchase 4,000,000 shares of common stock to The Shaar Fund Ltd in
consideration of the conversion of $3,567,546 of outstanding indebtedness,
conversion of 18,449 shares of Series A Convertible Stock together with all
accrued dividends and interest due thereon, and gross cash proceeds of
$1,065,000. These securities were issued to one (1) accredited investor in a
II-3
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
12. Between July 22, 1996 and March 15, 2002, the Company issued
options under its 1996 Stock Incentive Plan to directors, executive officers,
employees and consultants of the Company to purchase shares of common stock at
exercise prices equal to the last sales price of the Company's common stock on
the date of grant, of which 390,380 remain outstanding These securities were
issued in a private placement transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person.
13. Between September 1, 1999 and January 4, 2002, the Company issued
options under its 1999 Stock Incentive Plan to directors, executive officers,
employees, and consultants of the Company to purchase shares of common stock at
exercise prices equal to the last sales price of the Company's common stock on
the date of grant, of which 1,516,669 remain outstanding. These securities were
issued in a private placement transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person.
14. Between March 24, 1997 and March 15, 2002, the Company issued
options to purchase an aggregate of 2,048,380 shares of common stock to
executive officers of the Company. These securities were issued in private
placement transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation of any kind and without
payment of underwriting discounts or commissions to any person.
15. On November 22, 2001, the Company issued options and warrants to
purchase an aggregate of 500,000 shares of common stock at an exercise price of
$.3832 per share to certain consultants, including Benjamin Netanyahu, the
former Prime Minister of Israel, in consideration of services rendered to the
Company, 276,000 of which were issued under the Company's 1996 Option Plan.
Under the terms of its agreement with the consultants the Company is obligated
to pay additional fees to them based on sales generated as a result of their
efforts. At Mr. Netanyahu's option, these fees are convertible into up to
575,000 shares of common stock at a conversion price of $.3832 provided that
such issuance does not cause Mr. Netanyahu to beneficially own in excess of
4.99% of the Company's outstanding common stock.
These securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
directly by the Company without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.
16. Between November 27, 2001 and February 6, 2002, the Company issued
an aggregate of 623,050 shares of common stock to The Shaar Fund Ltd. upon
conversion of $323,626 principal amount and $175 of accrued interest due under
the Company's 5% Convertible Debenture due September 30, 2003. These securities
were issued to one (1) accredited investor in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof directly by the Company without engaging in any advertising
or general solicitation of any kind and without payment of underwriting
discounts or commissions to any person.
II-4
17. On December 1, 2001, the Company issued warrants to purchase 27,000
shares of common stock at an exercise price of $1.00 per share to a government
relations consultant in consideration of services rendered to the Company. These
securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
directly by the Company without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.
18. On March 20, 2002, the Company issued warrants to purchase 168,000
and 25,000 shares of common stock at exercise prices of $1.00 and $1.20 per
share, respectively, in settlement of a dispute with a former consultant of the
Company. These securities were issued in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation of any kind and without payment of underwriting discounts
or commissions to any person.
ITEM 27. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REGISTRATION STATEMENT:
-------------------- -------------------------------------------- -----------------------------------------------
Exhibit No. Exhibit Method of Filing
-------------------- -------------------------------------------- -----------------------------------------------
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1 to
Incorporation the Registrant's Registration Statement on
SB-2, File No. 333-16451 filed February 14,
1997 (the "Registration Statement")
-------------------- -------------------------------------------- -----------------------------------------------
3.2 Amended and Restated Bylaws Incorporated by reference to Exhibit 3.2 to
the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
3.3 Certificate of Amendment to Amended and Incorporated by reference to Exhibit 3.3 to
Restated Articles of Incorporation the Registrant's Report on Form 10-QSB for
the quarter ended March 31, 1999
-------------------- -------------------------------------------- -----------------------------------------------
3.4 Certificate of Designation of Series A 9% Incorporated by reference to Exhibit 3.4 to
Convertible Preferred Stock the Registrant's Current Report on Form 8-K
dated July 8, 1999
-------------------- -------------------------------------------- -----------------------------------------------
3.5 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.5 to
Designation of Series A 9% Convertible the Registrant's Annual Report on Form 10-KSB
Preferred Stock for the fiscal year ended December 31, 1999
(the "1999 10-KSB")
-------------------- -------------------------------------------- -----------------------------------------------
3.6 Certificate of Designation of Series B 9% Incorporated by reference to Exhibit 3.6 to
Convertible Preferred Stock the Registrants Current Report on Form 8-K
dated November 26, 2001 (the "2001 8-K")
-------------------- -------------------------------------------- -----------------------------------------------
3.7 Amendment to the Amended and Restated Filed herewith
Articles of Incorporation filed February
28, 2002
-------------------- -------------------------------------------- -----------------------------------------------
II-5
-------------------- -------------------------------------------- -----------------------------------------------
4.1 Specimen of Common Stock Certificate Incorporated by reference to Exhibit 4.1 to
the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
5.1 Opinion on Legality To be filed by Amendment
-------------------- -------------------------------------------- -----------------------------------------------
10.1 SAC Technologies, Inc. 1996 Stock Option Incorporated by reference to Exhibit 10.1 to
Plan the Registration Statement
-------------------- -------------------------------------------- -----------------------------------------------
10.2 Employment Agreement by and between Gary Incorporated by reference to Exhibit 10.5 to
E. Wendt and the Company dated as of May the Registration Statement
10, 1996 (with Non-Competition Letter
effective May 10, 1996 Attached as Exhibit
A)
-------------------- -------------------------------------------- -----------------------------------------------
10.3 Amendment No. 1 to the SAC Technologies, Incorporated by reference to Exhibit 10.23 to
Inc. 1996 Stock Option Plan the 1999 10-KSB
-------------------- -------------------------------------------- -----------------------------------------------
10.4 SAC Technologies, Inc. 1999 Stock Option Incorporated by reference to Exhibit 10.24 to
Plan the 1999 10-KSB
-------------------- -------------------------------------------- -----------------------------------------------
10.5 Employment Agreement dated November 3, Incorporated by reference to Exhibit 10.25 to
2000 by and between the Registrant and the Registrant's Quarterly Report on Form
Jeffry R. Brown 10-QSB for quarter ended September 30, 2000
(the "September 30, 2000 10-QSB")
-------------------- -------------------------------------------- -----------------------------------------------
10.6 Option to Purchase 280,000 shares of Incorporated by reference to Exhibit 10.26 to
Common Stock issued to Jeffry R. Brown the September 30, 2000 10-QSB
-------------------- -------------------------------------------- -----------------------------------------------
10.7 Non-Qualified Stock Option Agreement Under Incorporated by reference to Exhibit 10.27 to
the Registrant's 1999 Stock Option Plan to the September 30, 2000 10-QSB
purchase 300,000 shares of Common Stock
issued to Jeffry Brown
-------------------- -------------------------------------------- -----------------------------------------------
10.8 Consulting Agreement dated July 1, 2001 by Incorporated by reference to Exhibit 10.28 to
and between the Registrant and Barry M. the June 30, 2001 10-QSB
Wendt
-------------------- -------------------------------------------- -----------------------------------------------
10.9 Option to purchase 400,000 shares of Incorporated by reference to Exhibit 10.29 to
common stock issued to Jeffrey R. Brown the June 30, 2001 10-QSB
-------------------- -------------------------------------------- -----------------------------------------------
10.10 Employment Agreement dated August 1, 2001 Incorporated by reference to Exhibit 10.30 to
by and between the Registrant and H. the June 30, 2001 10-QSB
Donald Rosacker II
-------------------- -------------------------------------------- -----------------------------------------------
10.11 Funding Agreement by and between the Incorporated by reference to Exhibit 10.31 to
Registrant and The Shaar Fund dated the November 20, 2001 8-K
November 26, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.12 Registration Rights Agreement by and Incorporated by reference to Exhibit 10.32 to
between The Shaar Fund dated November 26, the November 20, 2001 8-K
2001
-------------------- -------------------------------------------- -----------------------------------------------
II-6
-------------------- -------------------------------------------- -----------------------------------------------
10.13 Exchange Agreement by and between the Incorporated by reference to Exhibit 10.33 to
Registrant and The Shaar Fund dated the November 20, 2001 8-K
November 26, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.14 Secured Note Due September 30, 2003 Incorporated by reference to Exhibit 10.34 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.15 Restated 5% Convertible Debenture Due Incorporated by reference to Exhibit 10.35 to
September 30, 2003 the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.16 No Interest Debenture Due September 30, Incorporated by reference to Exhibit 10.36 to
2003 the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.17 Warrant Incorporated by reference to Exhibit 10.37 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.18 Security Interest Provisions Incorporated by reference to Exhibit 10.38 to
the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
10.19 Employment Agreement by and between the Incorporated by reference to Exhibit 10.39 to
Registrant and Mira LaCous dated November the November 20, 2001 8-K
20, 2001
-------------------- -------------------------------------------- -----------------------------------------------
10.20 Option to Purchase 140,000 Shares of Incorporated by reference to Exhibit 10.40 to
Common Stock issued to Mira LaCous the November 20, 2001 8-K
-------------------- -------------------------------------------- -----------------------------------------------
23.1 Consent of Divine, Scherzer & Brody, Ltd. Filed herewith
-------------------- -------------------------------------------- -----------------------------------------------
23.2 Consent of Buchanan Ingersoll Professional To be filed by Amendment
Corporation
-------------------- -------------------------------------------- -----------------------------------------------
25.1 Power of Attorney (included in the Filed herewith
signature page to the Registration
Statement)
-------------------- -------------------------------------------- -----------------------------------------------
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement which, individually or together,
represent a fundamental change in the information in the registration statement;
and (iii) include any additional or changed material information on the plan of
distribution.
2. For the purpose of determining liability under the Securities Act of
1933, as amended, treat each post-effective amendment as a new registration
statement relating to the securities offered, and the offering of such
securities at that time to be the initial bona fide offering thereof.
II-7
3. To file a post-effective amendment to remove from registration any
of the securities being registered which remain unsold at the termination of the
offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action, suit
or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has reasonable grounds to believe that it meets all of the
requirements for filing SB-2 and authorized this registration statement to be
signed on its behalf in the City of Eagan, State of Minnesota, on March 27,
2002.
BIO-KEY INTERNATIONAL
By: /s/ Jeffrey R. Brown
--------------------
Jeffry R. Brown,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints JEFFRY R. BROWN his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement and any related Registration Statements filed
pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/s/ H. Donald Rosacker, II March 27, 2002
--------------------------
H. Donald Rosacker, II President, Director
/s/ Gary E. Wendt Chief Financial Officer, March 27, 2002
-------------------------- Principal Accounting Officer
Gary E. Wendt
/s/ Jeffrey J. May March 27, 2002
--------------------------
Jeffrey J. May Director
EXHIBIT INDEX
--------------------------------------------------------------------------------
Exhibit No. Exhibit Method of Filing
--------------------------------------------------------------------------------
3.7 Amendment to the Amended and Restated Filed herewith
Articles of Incorporation filed February 28,
2002
--------------------------------------------------------------------------------
23.1 Consent of Divine, Scherzer & Brody, Ltd. Filed herewith
--------------------------------------------------------------------------------
25.1 Power of Attorney (included in the signature Filed herewith
page to the Registration Statement)
--------------------------------------------------------------------------------