Re: 9/12/02 – [IGSTF] An Open Letter to Imagis Shareholders
Imagis
Technologies Inc.
Suite 1630
1075 W. Georgia Street
Vancouver, BC, Canada V6E 3C9
Tel: +1.604.684.2449 Fax: +1.604.684.4601
URL: www.imagistechnologies.com
September 12, 2002
AN OPEN LETTER TO IMAGIS SHAREHOLDERS:
“The Contrarian - Article: The perils of penny stocks - why investing in security technology isn't secure.” By Christopher Byron - dated August 5, 2002 and republished under the heading “Feds, face recognition, and a fishy fund” in the printed issue of September’s Red Herring.
This response is made on behalf of the Management, Board of Directors, staff, and shareholders of Imagis Technologies Inc. (“Imagis” or the “Company”) to the above referenced article. As detailed below, Imagis believes Mr. Byron's article contains certain factual inaccuracies, is flawed in its basic premise, and is defamatory to Imagis.
As a leading supplier of computerized arrest and booking technology to the law enforcement sector, we are particularly concerned with any damage to Imagis’ reputation resulting from Mr. Byron’s derogatory comments. Our company and shareholders need to set the record straight.
We wish to point out that Imagis has established a solid reputation in the law enforcement sector and has numerous installed sites with law enforcement agencies, including: several detachments of the Royal Canadian Mounted Police; the United Kingdom’s National Crime Squad; the Sheriff’s Department of Alameda County, California; the City of Juárez Police, Chihuahua, Mexico; and the sheriff’s department of Harris County, Texas.
Whilst we believe that the thrust of the innuendo in Mr. Byron’s article is entirely unwarranted, we wish to address his most egregious statements, so that a reader may have a balanced understanding of the views of the Company.
1. Mr. Byron states, “The Company claims to have more than 100 installations of its software in such places as police departments across the United States, Royal Canadian Mounted Police offices throughout Canada, and Toronto's Pearson International Airport.”
Mr. Byron could have verified that Imagis does not just “claim” to have over 100 installations; it actually does have well over 100 installations. In fact, the precise current number is 141. Instead, he chose to make the insinuation that the Company’s claim is not true. We suspect that Mr. Byron chose not to contact even a single one of our customers. Had he done so, he would have learned about their high level of satisfaction with our solutions.
We have been working hard to establish our customer base beyond the traditional law enforcement field to include a variety of security applications. These areas include airport security, access control, driver's licenses and passports, customs and immigration, and financial services. We have made progress in these areas by partnering with several notable companies. This includes partnering with Zixsys Inc., a subsidiary of SANYO Semiconductor Company, with whom we are developing a multi-layered biometric access control system for use at public and private facilities. Imagis has also partnered with OSI Systems Inc. to add biometric capabilities to its metal detectors, amongst other airport security initiatives.
In addition to partnerships with Zixsys and OSI Systems Inc., which have both been documented in the Company’s news releases, Imagis has over 45 business alliances worldwide that either provide local representation for the Company’s products or have/are developing applications based on the Company’s technologies. These business partners include Datacard Group, a leading US-based supplier of identity cards and Serco Group plc, a major security supplier in the United Kingdom.
It is our view that Mr. Byron's description of Imagis does not fairly present the true nature and extent of our business. That such would occur, given the public information available regarding Imagis through our own Web site, our filings with Canadian Securities regulators (available through www.SEDAR.com), via the US EDGAR service (at www.sec.info.com), and through our public media releases, is distressing and, in our view, indicative of the heavy-handed bias of the article.
2. "In fact, a close look at Imagis suggests that the company has already developed into a plaything for denizens of the penny stock world.”
Mr. Byron's reference implies that Imagis is a closely-held company whose stock price is being manipulated. Imagis is a widely-held company, with no entity owning more than 10 percent of its outstanding shares. Imagis estimates it has over 3,500 shareholders in both Canada and the United States holding 19,354,370 shares. It is hard to understand, given the widely-held nature of the Company’s stock and the lack of evidence cited in the balance of Mr. Byron's article, how this statement can be anything more than an unsubstantiated speculation by Mr. Byron. Insiders of Imagis collectively control approximately 17.5 percent of the Company’s shares. This fact we consider to be a mark of confidence in the Company. These insiders, should they ever determine to act in concert with one another, could exercise limited shareholder influence; however, such actions, should they occur, can be considered a clearly distinct and entirely appropriate function, and not at all indicative of manipulation of the share price of the Company. Again, the vast majority of Imagis’ shares are held by thousands of shareholders, and the Company would venture to opine that Imagis is perhaps one of the more widely-held companies listed on the TSX Venture Exchange (the “TSXV”).
3. "This isn't a market in which value, like cream, rises to the top. It's a world where prices tend to go up because someone is helping them up."
This statement appears as a statement of fact, but it is no more than a bald speculation by Mr. Byron. He does not appear to cite any evidence to support this claim. In its context, the statement implies that Imagis’ share price has been manipulated. This is simply untrue.
4. "Imagis has a typical background for a Canadian penny stock. The company was incorporated in the spring of 1998 as a 'blind pool' fund, in which speculators paid C$0.30 per share for 1.5 million shares of stock, giving the business C$450,000 with which to buy a company of some sort and set itself up in business."
Mr. Byron’s statement may be technically accurate in part, but clearly unfairly represents the history of the creation of the business of Imagis. Mr. Byron's description of the formation of Imagis, and the balance of the article implies that the Company was formed for the purpose of stock promotion rather than recognizing the long history of development of the underlying technology and Imagis' business. The TSXV’s Capital Pool program is designed precisely to encourage the growth of start up companies through the combination of venture capital with fledgling businesses.
5. "There were five original Imagis shareholders, with one of them – a fellow named Altaf Nazerali – apparently calling the shots. The five appear as founding shareholders in a number of similar deals, most of which are complex financial transactions that seem to end in offshore shell accounts."
It is our belief that the individuals referenced have never together been the founders of any “similar deals”, which we presume means venture capital start-ups and development companies. They have individually participated in the creation of several public companies, some of which have attained a fair measure of success. These companies have completed public and private financings and merger and acquisition transactions, and as part of those transactions, have dealt with a number of investment banks in both North America and Europe. Though Mr. Byron may consider them to be "complex", we understand that these transactions took the form of fairly typical financing transactions and all transactions were approved by the appropriate regulatory authorities. These five initial investors may have incorporated Imagis, but their initial aggregate shareholdings of 800,000 shares represented 35 percent of Imagis' outstanding shares after its IPO and only 12 percent of Imagis’ outstanding shares after the completion of the acquisition of Imagis Cascade and certain related transactions.
As far as “offshore shell company” accounts are concerned, we believe this to be a completely spurious comment as Mr. Byron has provided no supportive evidence. Imagis accesses capital from North America and Europe as its shares are listed in both jurisdictions. To the best of our knowledge, all entities that we deal with, whether they are registered or headquartered “offshore” or “onshore”, are completely legitimate and by no stretch of the imagination “shell” companies.
With respect to Mr. Nazerali “calling the shots”, Mr. Nazerali is only one of seven directors on the board and is not the chairman of the board. Mr. Nazerali is not a member of Imagis' management team, and since the acquisition of Imagis Cascade by Imagis and Mr. Drummond’s appointment as President and CEO, Mr. Nazerali has had absolutely no direct control over Imagis’ business operations other than in his capacity as a director and committee member of the Company.
6. "In any case, no sooner did Mr. Nazerali have Imagis up and running the following spring, then he invited Mr. Revell/... to join the company as an outside director. " "Within a year, Mr. Nazerali had elevated Mr. Revell to the position of chairman... "
This statement is simply not correct. Mr. Revell was introduced to Imagis’ President and CEO, Iain Drummond by an internationally-recognized law enforcement professional in Toronto in the spring of 1999. Mr. Revell initially became an advisor to the company and not an outside director. When the board determined that they should have an independent chairman, the directors unanimously nominated Mr. Revell as chairman effective January 31, 2000. He has since been elected as Chairman by the shareholders at successive annual general meetings.
7. "By year-end 2000, the company had issued...200,000 warrants to outside promoters in exchange for their stock-touting services.”
Imagis has never issued warrants to outside promoters in exchange for stock-touting services. The Company paid US$10,000 and issued 50,000 warrants with an exercise price of $4.00 per share to a NASD registered broker/dealer in connection with that broker/dealer providing corporate finance services inclusive of investment banking advisory services, reviewing business opportunities, and assisting in raising capital in the United States. This was in compensation for their legal expenses and corporate finance fees. We understand that such compensation is fairly standard and the compensation was approved by Imagis’ governing regulator. At no time was the broker/dealer retained to “tout” the company, nor did it ever do so. Furthermore, even if we were to give Red Herring the benefit of the doubt and correlate the word “touting” with raising capital as opposed to hyping the stock (which is what their article clearly imputes), we can advise that the broker/dealer did not raise any financing, nor did it ever attempt to do so. One should also note that the warrants expired unexercised, such that the total compensation of US$10,000 was hardly material.
Finally, perhaps if Mr. Byron compared our media release disclosures with those of many other companies in our sector, he would recognize that Imagis adopts a very conservative corporate disclosure policy, which is the antithesis of “touting”. The Company has always restricted media release disclosures to announcing installations or signed agreements, and have purposely not resorted to vague hype, unlike some other companies.
8. "That was nothing compared to what lay ahead. As 2001 unfolded, Imagis began pumping out an absolute avalanche of options, warrants, and unregistered stock. By the end of the year, 6 million shares of such unregistered paper were in the hands of more than 50 unnamed investors."
Imagis is a development company and raises capital through the sale of its securities. There is nothing untoward about that, and in fact, it is fairly standard for development companies to finance their growth in this manner.
Imagis has always issued its shares and convertible securities in compliance with applicable securities laws (in particular, those of the Province of British Columbia) and the rules and policies of applicable stock exchanges. Such distributions are permitted under Canadian private placement rules without the necessity of filing a prospectus or registration document in connection with the distribution. The names of investors are reported to the appropriate regulatory agency or otherwise made available for review. A simple search of the records at the British Columbia Securities Commission will reveal the names of all the investors. Imagis files quarterly and annual financial information with both applicable Canadian securities regulators and with the SEC, which report all changes in the Company’s capital structure specifically. This includes share issuances and option grants. The Company’s audited financial statements for the year-ended December 31, 2000, and December 31, 2001, show the issued and outstanding common shares as being 12,965,965 and 16,419,133, respectively. The number of shares issued in 2001 was 3,453,166 common shares, which is materially different from Mr. Byron's statement that six million shares were in the hands of 50 unnamed investors. Furthermore, all stock issuances were for cash consideration, all financings were priced in accordance with the rules and policies of the TSXV, and the Company raised approximately CDN$4 million to fund its operations in the process.
As far as granting options is concerned, again we point out that it is extremely common for development stage companies to attract employees and management staff by compensating them with stock options. Generally speaking, small technology companies such as Imagis cannot afford to pay large salaries to its staff and, therefore, use standard option plans to attract qualified personnel. Imagis’ staff count had been growing rapidly and its options allocations have correspondingly increased. Furthermore, disinterested shareholders have approved Imagis’ stock option plan at successive annual general meetings.
It is instructive to note that despite the fact many of the options have been well “into the money”; very few have actually been exercised. This we believe reflects on how strongly the directors, management, and employees feel about the business prospects of the Company.
9. "At that point, the mysterious Mr. Thomas made his appearance.... Both say they 'checked him out'.”
The above referenced paragraph and several others imply that the board and management of Imagis did not carry out any due diligence with respect to Mr. Thomas before entering into an advisory agreement with Pembridge or offering him a seat on Imagis' Board of Directors. This is not true. We performed background checks with three major investment banks in the US and Canada as well as with two law firms. The Pembridge Group originally approached Imagis through a referral by a major regional investment bank in the US that specializes in security and biometric companies. Before appointing Mr. Thomas to the board, Imagis received from him a completed Personal Information Form (as prescribed by the TSX Venture Exchange) and a Form 51-902F (as prescribed by the British Columbia Securities Commission). Each of these forms requires detailed information provided by the applicant and must be filed by each director and officer of a public company in British Columbia or any company listed on the TSXV. The level of disclosure required by each of these forms is extensive and must be provided under oath. The TSXV and the Commission reviewed Mr. Thomas’ applications.
10. “Mr. Revell and Mr. Drummond peeled off another 50,000 warrants at C$2.20 per share… and the value of his warrants spurted.”
We note that Mr. Byron omitted to mention that the warrants issued were to Pembridge Venture Partners, not Mr. Thomas, and have still not been exercised, which certainly debunks any insinuation that Mr. Thomas manufactured the buy out proposal to profit from the warrant grant. Perhaps Mr. Byron would be interested to know that unlike many major US companies that are plagued by high-profile corporate scandals, Imagis follows strict corporate governance procedures. This includes imposing trading blackouts at the appropriate times, such that if Mr. Byron were to do some further research, he would find that none of the directors, officers, employees with inside information, or any persons in a special relationship with the Company, traded in Imagis’ securities from the time the Pembridge proposal was announced to the time it was abandoned
11. “Mr. Thomas did not respond to several requests for an interview on these and related matters. Nor did he respond to a detailed list of questions that he requested be submitted in writing prior to an interview.”
This statement is simply not accurate. Mr. Thomas did receive questions from Mr. Byron and reviewed those questions with Mr. Drummond. Many of those questions did not seem to be relevant to the story Mr. Byron advised he was writing. Mr. Drummond answered the questions that appeared to be germane in writing on behalf of Mr. Thomas.
12. "As for Imagis’s [sic] actual business – forget it. Whatever the presumed merits of its software, the company's auditors flagged its financials with a 'going concern’ warning in March, and little has happened since to improve the outlook. Cash and short-term assets have tumbled dramatically since the start of the year, and though revenue is up on new software sales, losses continue to mount."
We take considerable exception to this statement. We have recently released our financial results for the six-month period ended June 30, 2002. Growth companies such as Imagis can have substantial changes in financial performance from quarter to quarter. The Company has made significant progress in improving its balance sheet and expanding its business year over year. The Company’s revenues for the six-month period were approximately 33 percent higher than the comparable period the previous year, and the Company expects this trend to continue. While the operating loss was higher for the period, this was due to increased staffing levels and travel, marketing, and administrative expenses incurred as the Company ramped up to attack the significant opportunities that are currently available. As referenced earlier, and publicly disclosed, Imagis has signed a licensing agreement with Zixsys, a subsidiary of SANYO Semiconductor, which has resulted in a licensing fee being paid to the Company. The Company has also completed a significant private placement and strategic relationship with OSI Systems Inc. In addition, the Company continues to sell its products to an ever-expanding number of law enforcement agencies around the world.
It is general knowledge that the expected boom in the use of biometrics has not as yet materialized; however, this does not imply that it will not do so in the future. In fact, the Company expects that many of the obstacles to the industry’s growth, including delays in obtaining federal funding and issues relating to incompatibility of disparate databases, are slowly being resolved. As such, we are more committed than ever to achieve our corporate goals, which include becoming a profitable company.
As far as our auditor’s comments are concerned, it is well known that disclosure rules in both the United States and Canada applicable to audited financial statements under Generally Accepted Accounting Principals (“GAAP”) require an auditor to note on the audited financials statements of any development stage company which is not yet profitable, or if there is insufficient working capital to fund at least one year’s operations (without raising additional capital), that there is a “doubt about the ability of the company to continue as a going concern” (the “Warning”). The Warning is routine and mandatory under GAAP.
Accordingly, Mr. Byron’s opinion is, in our view, both wrong and inflammatory.
As a member of the news media, Red Herring has a responsibility to publish accurate reports of events. In summary, we believe that Mr. Bryon’s article in its pervasive derogatory tone was manifestly unfair to the Company, its management, and most importantly, its shareholders. Stories that contain misstatements and/or libellous imputations can have serious adverse consequences for a company like Imagis. An attack on the Company that attempts to undermine its business is an attack on its shareholders. It is for that reason the Company has taken the step to sue Mr. Byron and Red Herring in order to have a court judge their motives and journalistic performance.
On Behalf of the Company’s Management and Board of Directors,
Iain Drummond
President & CEO
imagistechnologies.com |
