<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-93131
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMAGEWARE SYSTEMS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
CALIFORNIA 7373 33-0224167
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
Incorporation or Organization)
</TABLE>
10883 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(858) 673-8600
(Address and telephone number of principal executive offices and principal place
of business)
S. JAMES MILLER, JR., PRESIDENT
IMAGEWARE SYSTEMS, INC.
10883 THORNMINT ROAD
SAN DIEGO, CALIFORNIA 92127
(858) 673-8600
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
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<S> <C>
ROBERT G. COPELAND, ESQ. THOMAS P. PALMER, ESQ.
DENNIS J. DOUCETTE, ESQ. Tonkon Torp LLP
Luce, Forward, Hamilton & Scripps LLP 1600 Pioneer Tower
600 West Broadway, Suite 2600 888 SW Fifth Avenue
San Diego, California 92101 Portland, Oregon 97204
(619) 699-2517 (503) 802-2018
(619) 645-5322 (fax) (503) 972-3718 (fax)
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SECURITY(1) PRICE FEE
<S> <C> <C> <C> <C>
Units, each consisting of(2)....... 2,156,250 $10.00 $21,562,500 $5,693
(i) one share of common stock,
and............................ 2,156,250 -- -- --
(ii) one warrant to purchase one
share of common stock.......... 2,156,250 -- -- --
Representatives' warrants(3)....... 181,339 -- -- --
Units issuable upon exercise of
representatives' warrants, each
consisting of.................... 181,339 $12.00 $2,176,068 $575
(i) one share of common stock,
and............................ 181,339 -- -- --
(ii) one warrant to purchase one
share of common stock.......... 181,339 -- -- --
Common stock issuable upon exercise
of warrants, including warrants
underlying representatives'
warrants(4)...................... 2,337,589 $15.00 $35,063,835 $9,257
Total.............................. $58,802,403 $15,525
Previously filed................... $47,175,000 $12,455
Amount due......................... $11,627,403 $3,070
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(2) Includes 281,250 units which Paulson Investment Company, Inc., the
representative of the underwriters, has the option to purchase to cover
over-allotments, if any.
(3) In connection with the sale of the units, ImageWare Systems, Inc. will issue
to the representatives' warrants to purchase, in the aggregate, up to
181,339 units.
(4) Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered such additional shares and warrants as may be issuable pursuant
to the anti-dilution provisions of the public warrants and the
representatives' warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
PRELIMINARY PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
DATED MARCH 15, 2000
1,875,000 UNITS
[LOGO]
This is an initial public offering of units by ImageWare Systems, Inc. Each
unit consists of one share of common stock and one redeemable public warrant to
purchase one share of common stock. We expect that the initial public offering
price will be between $8 and $10 per unit. Prior to this offering, there has
been no public market for our securities. We have filed an application to list
the units, common stock and public warrants on The American Stock Exchange under
the symbols "IW.U," "IW" and "IW.WS."
The common stock and warrants will trade only as a unit for at least
30 days following this offering. Paulson Investment Company, Inc. will then
determine when the units separate, after which the common stock and the public
warrants will trade separately.
INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
<TABLE>
<CAPTION>
PER UNIT TOTAL
-------- -----------
<S> <C> <C>
Initial public offering price............................... $ . $
Underwriting discounts and commissions...................... $ . $
Proceeds to ImageWare Systems, Inc.......................... $ . $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The underwriters will purchase the units on a firm commitment basis. We have
granted Paulson Investment Company, Inc. the option for a period of 45 days to
purchase up to an additional 281,250 units to cover over-allotments.
PAULSON INVESTMENT COMPANY, INC.
I-BANKERS SECURITIES, INC.
The date of this prospectus is , 2000.
<PAGE>
[artwork]
WE HAVE THE FOLLOWING REGISTERED TRADEMARKS:
IMAGEWARE-REGISTERED TRADEMARK-, C.R.I.M.E.S.-REGISTERED TRADEMARK-, SUSPECT
ID-REGISTERED TRADEMARK-, VEHICLE ID-REGISTERED TRADEMARK-, IMAGE
WIZARD-REGISTERED TRADEMARK-, PEOPLE POSTCARDS-REGISTERED TRADEMARK- AND
MORPHWIZARD-REGISTERED TRADEMARK-. WE ALSO HAVE THE FOLLOWING UNREGISTERED
TRADEMARKS: CRIME CAPTURE SYSTEM-REGISTERED TRADEMARK-, FACE ID-TM-, CRIME
LAB-TM-, CRIME WEB-TM-, FACE INVESTIGATE-TM- AND FORCE FIELD 2000-TM-.
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
We develop, sell and support a suite of modular software products that is
used by law enforcement and public safety agencies to manage criminal history
records. Our software systems and associated hardware allow our customers to
quickly capture, archive, search, retrieve and share digital photographs and
criminal history records. Our products are currently being used by government
agencies such as the New York City Police Department, the Los Angeles County
Sheriff's Department, the Arizona Department of Public Safety, the Montreal
Police Department and law enforcement agencies in Minneapolis, Portland,
Seattle, Indianapolis and Orlando.
The National Institute of Justice estimated in 1998 that there were
approximately 60 million criminal history records and that this number is
increasing by more than 20 million per year. Police, sheriffs, FBI officials,
airport police and many others all have a need to quickly access criminal
records to identify criminal suspects and offenders by visual descriptions. Many
law enforcement booking systems are still merely an inefficient file of paper
records which cannot be accessed quickly or from a remote location. In many
places, witnesses still flip through books of photographs to try to identify a
suspect. In light of these inefficiencies and the large number of criminal
records, many agencies are turning to new technologies to increase their ability
to quickly access these records to identify, locate and arrest criminal
suspects.
To take advantage of the growing law enforcement market for digital imaging
technology, we have developed a suite of modular software products known as the
Crime Reduction, Image Management and Enhancement System, or "C.R.I.M.E.S." The
C.R.I.M.E.S. system consists of the following software modules, which may also
be purchased individually: The Crime Capture System, Face ID, Suspect ID, Crime
Lab and Vehicle ID. To date, our products have been used by more than 450
customers.
THIS OFFERING
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<S> <C>
Securities offered........................... 1,875,000 units. Each unit consists of one
share of common stock and one public warrant
to purchase an additional share of common
stock.
The common stock and public warrants will
trade only as a unit for at least 30 days
following this offering. Paulson Investment
Company, Inc. will then determine when the
units separate, after which the common stock
and the public warrants will trade
separately.
Public warrants.............................. The public warrants included in the units
will be exercisable commencing 30 days after
the offering. During the first year after the
offering, the exercise price of a public
warrant will be 120% of the initial public
offering price of the units. Commencing one
year after the offering, the exercise price
will be 150% of the initial public offering
price of the units. The public warrants
expire five years after completion of the
offering.
</TABLE>
1
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<S> <C>
We have the right, commencing six months
after the closing of the offering, to redeem
the public warrants at a redemption price of
$0.25 per public warrant. If the average
closing bid price of the common stock equals
or exceeds 200% of the initial public
offering price of the units for ten
consecutive trading days, we may give notice
of redemption on the next day and redeem the
public warrants 30 days later.
Common stock outstanding after this 3,036,802 shares
offering...................................
Use of proceeds.............................. Repayment of debt, sales and marketing,
research and development and working capital.
Proposed American Stock Exchange symbols
Common stock............................... IW
Units offered in this offering............. IW.U
Public warrants included in the units...... IW.WS
</TABLE>
The number of shares of common stock outstanding after this offering is
based on 1,161,802 shares outstanding as of February 29, 2000. This number
assumes no exercise of the over-allotment option and does not include an
aggregate of 2,969,152 shares of common stock that may become outstanding as
follows:
- approximately 88,314 shares of common stock issuable upon voluntary
conversion of all of the outstanding shares of Series B preferred stock
plus accrued but unpaid dividends thereon;
- 276,611 shares of common stock issuable upon exercise of stock options
outstanding as of February 29, 2000, with a weighted average exercise
price of $6.37;
- 328,662 shares of common stock issuable upon exercise of warrants
outstanding as of February 29, 2000, with a weighted average exercise
price of $9.34;
- 37,887 shares of common stock issuable upon conversion of convertible
notes outstanding as of February 29, 2000;
- 1,875,000 shares of common stock issuable upon exercise of the public
warrants; and
- 362,678 shares of common stock issuable upon exercise of the
representatives' warrants and the public warrants underlying the
representatives' warrants.
HISTORICAL INFORMATION REGARDING OUR SECURITIES HAS BEEN ADJUSTED TO REFLECT
A 5.275-TO-1 REVERSE STOCK SPLIT EFFECTED ON NOVEMBER 29, 1999. EXCEPT AS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVER-ALLOTMENT OPTION OR THE REPRESENTATIVES' WARRANTS. REFERENCES TO "US,"
THE "COMPANY" OR "IMAGEWARE" INCLUDE IMAGEWARE SYSTEMS, INC. AND OUR
WHOLLY-OWNED SUBSIDIARY, XIMAGE CORPORATION, UNLESS OTHERWISE INDICATED.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1998 1999
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Product................................................... $ 2,708,856 $ 4,276,201
Maintenance............................................... 1,307,286 1,404,709
License and other......................................... 220,175 210,567
----------- -----------
4,236,317 5,891,477
Cost of Revenues
Product................................................... 1,354,920 1,896,916
Maintenance............................................... 1,065,740 862,816
----------- -----------
Gross margin................................................ 1,815,657 3,131,745
----------- -----------
Operating, general and administrative expenses.............. 2,265,312 2,531,079
Sales and marketing expenses................................ 960,246 1,024,224
Research and development expenses........................... 831,034 1,150,914
Depreciation and amortization............................... 988,838 1,096,484
----------- -----------
5,045,430 5,802,701
----------- -----------
Loss from operations...................................... (3,229,773) (2,670,956)
----------- -----------
Interest expense, net....................................... 204,287 363,638
----------- -----------
Loss before income taxes.................................. (3,434,060) (3,034,594)
----------- -----------
Provision for income taxes.................................. -- --
----------- -----------
Net loss.................................................. $(3,434,060) $(3,034,594)
=========== ===========
Net loss per common share................................... $ (4.08) $ (3.07)
=========== ===========
Basic and diluted weighted average shares................... 861,875 1,016,399
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED
BALANCE SHEET DATA: ----------- -----------
<S> <C> <C>
Cash........................................................ $ 156,063 $ 8,933,929
Net intangible assets....................................... 2,346,557 2,346,557
Total assets................................................ 5,909,587 14,687,453
Total current liabilities................................... 7,655,440 3,320,480
Notes payable, net of current portion....................... 924,542 --
Total liabilities........................................... 8,579,982 3,320,480
Total shareholders' equity (deficit)........................ (2,670,395) 11,366,973
</TABLE>
The as adjusted balance sheet data reflects:
(1) the receipt of $14,365,675 as the estimated net proceeds from the sale of
1,875,000 units offered by us in this offering at an assumed initial public
offering price of $9.00 per unit (the midpoint of the assumed $8-$10 range),
after deducting underwriting discounts and commissions and estimated
offering expenses; and
(2) the planned use of the net proceeds of the offering.
3
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS BEFORE PURCHASING ANY UNITS. THE FOLLOWING RISKS COULD MATERIALLY
HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND COULD RESULT IN
A DECREASE IN THE TRADING PRICE OF OUR UNITS, COMMON STOCK OR PUBLIC WARRANTS OR
IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT RECURRING LOSSES TOTALLING APPROXIMATELY
$19,300,000 AND EXPECT TO INCUR LOSSES IN THE FUTURE.
As of December 31, 1999, we had an accumulated deficit of $19,285,627 and a
shareholder's deficit of $2,670,395, and we expect to incur losses in the
future. We expect to continue to incur significant sales and marketing, research
and development, and general and administrative expenses. As a result, we will
need to generate significant revenues to achieve profitability and may never
achieve profitability.
WE SUBSTANTIALLY DEPEND ON SALES OF OUR CRIME CAPTURE SYSTEM.
We derived approximately 89% of our product revenue in 1999 from sales of
our booking products. A decrease in the price of or demand for the Crime Capture
System, or its failure to achieve broad market acceptance, would significantly
harm our business, financial condition and operating results.
WE DEPEND UPON A SMALL NUMBER OF LARGE SYSTEM SALES COSTING FROM $300,000 TO
$600,000 AND MAY FAIL TO ACHIEVE ONE OR MORE LARGE SYSTEM SALES IN THE FUTURE.
In the past two years, we have derived a substantial portion of our revenues
from a small number of sales of large, relatively expensive systems, typically
ranging in price from $300,000 to $600,000. As a result, if we fail to receive
orders for these large systems in a given sales cycle on a consistent basis, our
business, financial condition and operating results could be significantly
harmed. Further, our quarterly results are difficult to predict because we
cannot predict in which quarter, if any, large system sales will occur in a
given year. As a result, we believe that quarter-to-quarter comparisons of our
results of operations are not a good indication of our future performance. In
some future quarters our operating results may be below the expectations of
securities analysts and investors, in which case the market price of our common
stock may decrease significantly.
OUR LENGTHY SALES CYCLE MAY CAUSE US TO EXPEND SIGNIFICANT RESOURCES FOR AS LONG
AS ONE YEAR IN ANTICIPATION OF A SALE, YET WE STILL MAY FAIL TO COMPLETE THE
SALE.
When considering the purchase of a large computerized booking system, a
government agency may take as long as a year to evaluate different systems and
obtain approval for the purchase. If we fail to complete a sale, we will have
expended significant resources and received no revenue in return. Generally,
agencies consider a wide range of issues before committing to purchase our
products, including product benefits, ability to operate with their current
systems, product reliability and their own budget constraints. While potential
customers are evaluating our products and before they place an order with us, we
may incur substantial selling costs and expend significant management effort to
accomplish a sale.
4
<PAGE>
MOST OF OUR CUSTOMERS ARE GOVERNMENT AGENCIES THAT ARE SUBJECT TO UNIQUE
POLITICAL AND BUDGETARY CONSTRAINTS AND HAVE SPECIAL CONTRACTING REQUIREMENTS
WHICH MAY AFFECT OUR ABILITY TO OBTAIN NEW GOVERNMENT CUSTOMERS.
Most of our customers are government agencies. These agencies often do not
set their own budgets and therefore have little control over the amount of money
they can spend. In addition, these agencies experience political pressure that
may dictate the manner in which they spend money. Due to political and budgetary
processes and other scheduling delays that may frequently occur relating to the
contract or bidding process, some government agency orders may be canceled or
substantially delayed, and the receipt of revenues or payments may be
substantially delayed. In addition, future sales to government agencies will
depend on our ability to meet government contracting requirements, certain of
which may be onerous or impossible to meet, resulting in our inability to obtain
a particular contract. Common requirements in government contracts include
bonding requirements, provisions permitting the purchasing agency to modify or
terminate at will the contract without penalty, provisions requiring us to
remain liable to the agency for unlimited losses relating to year 2000
malfunctions, and provisions permitting the agency to perform investigations or
audits of our business practices.
OUR PRODUCTS HAVE NOT YET ACHIEVED BROAD MARKET ACCEPTANCE, AND OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS MAY BE ADVERSELY AFFECTED IF WE ARE
UNABLE TO ACHIEVE SUCH ACCEPTANCE.
We intend to offer our products to a broader segment of the law enforcement
and public safety markets as well as the security market. The failure of our
products to achieve broad acceptance among law enforcement officials and
security personnel would have a negative effect on our business, financial
condition and operating results. We have not yet had significant sales in any
markets. The acceptance of our products and systems may be adversely affected by
their relatively high cost and the reluctance of agencies or corporations to
adopt new technology.
WE MAY FAIL TO CREATE NEW APPLICATIONS FOR OUR PRODUCTS AND ENTER NEW MARKETS,
WHICH MAY AFFECT OUR FUTURE SUCCESS.
We believe our future success depends in part on our ability to develop and
market our technology for applications other than booking systems for the law
enforcement market. If we fail in these goals, our business strategy and ability
to generate revenues and cash flow would be significantly impaired. We
anticipate our technology may be developed to create digital databases of facial
images and picture identification cards for employees of large corporations. We
also intend to develop software to fully integrate our products with the
Internet. While we intend to expend significant resources to develop new
technology, the development of new technology cannot be predicted and we cannot
guarantee we will succeed in these goals.
WE RELY ON SYSTEMS INTEGRATORS TO MANAGE CERTAIN OF OUR LARGE PROJECTS AND, IF
THESE COMPANIES DO NOT PERFORM ADEQUATELY, WE MAY LOSE BUSINESS.
We are a subcontractor to certain systems integrators who manage large
projects incorporating our systems, particularly in foreign countries. We cannot
control these companies and they may decide not to promote our products or to
price their services in such a way as to make it unprofitable for us to continue
our relationship with them. Further, they may fail to perform under agreements
with their customers, in which case we might lose sales to these customers. If
we lose our relationships with these companies, our business, financial
condition and operating results could be significantly harmed.
5
<PAGE>
WE RELY ON A LICENSE OF TECHNOLOGY FROM VISIONICS, INC., AND THIS LICENSE MAY BE
TERMINATED IN THE FUTURE.
We depend on a licensing arrangement with Visionics, Inc. for technology
related to the search engine used in our systems. Our present licensing
arrangement with Visionics expires in July 2001. If Visionics becomes unable or
unwilling to continue to license us this technology or renew the terms of this
license, we will have to identify or develop acceptable alternative sources of
this technology, which could take up to nine months or longer. Any significant
interruption in our ability to identify and contract with alternative providers
of similar technology or develop our own search engine would result in delivery
delays, which could harm our customer relationships and our business and
reputation.
WE DO NOT HAVE U.S. OR FOREIGN PATENT PROTECTION FOR SEVERAL OF OUR PRODUCTS AND
A COMPETITOR MAY BE ABLE TO REPLICATE OUR TECHNOLOGY.
Our business is based in large part on our technology and our success
depends in part on our ability and efforts to protect our intellectual property
rights. If we do not adequately protect our intellectual property, our business,
financial condition and operating results will be seriously harmed. We do not
have patent protection for several of our products, including the Crime Capture
System. Our Crime Capture System is based upon proprietary technology. The
technology used in our Suspect ID, Crime Lab and Vehicle ID products is
protected by patents, copyrights and various trade secret protections afforded
to us by law.
We license certain elements of our trademarks, trade dress, copyright and
other intellectual property to third-parties. We attempt to ensure that our
rights in our trade names and the quality of third party uses of our names are
maintained by these third parties. However, these third parties may take actions
that could significantly impair the value of our intellectual property and our
reputation and goodwill. We also license our technology to Atlus Co., Ltd. Atlus
has the right to sublicense our technology and to use our technology to compete
with us. If Atlus chooses to use our technology to compete with us, our
business, financial condition and operating results could be significantly
harmed.
In addition, international intellectual property laws differ from country to
country. Any foreign rights we have in our technology are limited by what has
been afforded to us under the applicable foreign intellectual property laws.
Also, under the laws of certain foreign jurisdictions, in order to have
recognizable intellectual property rights, we may be required to file
applications with various foreign agencies or officials to register our
intellectual property. Although we do have a patent application pending in
Japan, we do not currently have corresponding foreign registrations pending or
issued for all our technology. Accordingly, our ability to operate and exploit
our technology overseas could be significantly hindered.
UNDETECTED YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR OPERATIONS.
There may be undetected Year 2000 problems with our internal systems, our
products or our customers' computer systems. In the event any of our products
are not Year 2000 compliant, we may be liable to certain customers for breach of
our Year 2000 representations and warranties that appear in many of our customer
agreements, which could have a material adverse effect on our business, results
of operations and financial condition. The Force Field 2000 product, which we
acquired in our acquisition of XImage Corporation, was found not to be Year 2000
compliant. Consequently, we created a Year 2000 compliance update to the Force
Field 2000 software, which has been installed on all of our customers' systems.
As of February 29, 2000, we were not aware of any Year 2000 compliance problems
with our products.
In addition, we acquire off-the-shelf products from third parties, such as
computer hardware. We use these products in the internal operations of our
business and we provide these products to
6
<PAGE>
customers in conjunction with our software products. Further, government
agencies and other of our customers may use computer systems and products that
are not Year 2000 compliant and which may disrupt the performance of our
products. The failure of any of these products or systems to be Year 2000
compliant could significantly disrupt our business and impair our ability to
generate revenues and cash flows. As of February 29, 2000, only one customer
reported to us any problem with its own computer system that affected the
performance of our products. The problem has been corrected.
RISKS RELATED TO THIS OFFERING
YOU WILL SUFFER IMMEDIATE AND SIGNIFICANT DILUTION OF YOUR INVESTMENT AND MAY
EXPERIENCE FURTHER DILUTION IN THE FUTURE.
We anticipate that the initial public offering price of the units will be
substantially higher than the net tangible book value per share of our common
stock after this offering. As a result, you will incur immediate dilution of
approximately $5.92, or 66%, in net tangible book value for each share of our
common stock included in the units you purchase. You will be subject to further
dilution upon the exercise of outstanding options and warrants and conversion of
our Series B preferred stock.
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING SHAREHOLDERS COULD DECREASE THE
TRADING PRICE OF OUR COMMON STOCK AND CAUSE US TO EXPEND SIGNIFICANT RESOURCES
TO REGISTER SUCH STOCK.
Sales of a large number of shares of our common stock in the public markets
after this offering, or the potential for such sales, could decrease the trading
price of our common stock and could impair our ability to raise capital through
future sales of our common stock. Upon completion of this offering, there will
be 3,036,802 shares of our common stock outstanding. The 1,875,000 shares of
common stock sold in this offering and the 1,875,000 shares of common stock
reserved for issuance upon exercise of the public warrants sold in this offering
are all freely tradeable without restrictions or further registration under the
Securities Act of 1933, unless such shares are purchased by our "affiliates," as
that term is defined in the Securities Act of 1933.
An additional 2,969,152 shares of common stock are either currently
outstanding or may become outstanding upon exercise or conversion of options,
warrants or convertible securities currently outstanding or sold in this
offering. All of these shares may be sold in the future subject to compliance
with securities laws and various lock-up agreements to which certain of these
shares are subject. The lock-up agreements prohibit the sale in the public
market of certain shares for either six months or one year following the
completion of this offering.
Moreover, although substantially all of the holders of registration rights
have waived such registration rights, for at least six months following the
completion of this offering, holders of securities convertible or exercisable,
as of February 29, 2000, into 63,864 shares of common stock may have rights
under certain circumstances to require us to register the shares within the next
12 months. If such holders exercise such registration rights, we could be
required to expend considerable resources to register such shares, and sales of
these shares in the public market could decrease the trading price of our common
stock and impair our ability to raise capital.
CERTAIN OF OUR OFFICERS AND AFFILIATES WILL PERSONALLY BENEFIT FROM THE USE OF
THE PROCEEDS OF THIS OFFERING.
Several of our officers have personally guaranteed loans made to us by
Imperial Bank and have also made loans to us directly. We intend to use some of
the proceeds of this offering to pay our debt to Imperial Bank in full, in which
case the guarantees will be released. In addition, we intend to use $1,250,000
to repay a loan in that amount from the president of Atlus Co., Ltd., a Japanese
corporation, which beneficially owns approximately 31% of our outstanding stock.
7
<PAGE>
SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS AND
DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO GENERATE
REVENUE, INCOME AND CASH FLOW. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS,"
"ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," "CONTINUE,"
"OUR FUTURE SUCCESS DEPENDS," "SEEK TO CONTINUE" OR THE NEGATIVE OF THESE TERMS
OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU
SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED UNDER
"RISK FACTORS." THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
FROM ANY FORWARD-LOOKING STATEMENT. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE
FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER,
NEITHER WE NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THESE STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS PROSPECTUS TO CONFORM THESE
STATEMENTS TO ACTUAL RESULTS.
8
<PAGE>
USE OF PROCEEDS
We estimate that the gross proceeds from the sale of the 1,875,000 units
that we are selling in this offering will be $16,875,000, or $19,406,250 if
Paulson Investment Company, Inc. exercises its over-allotment option in full. We
estimate that the net proceeds from the offering will be approximately
$14,365,675, or $16,657,925 if Paulson Investment Company, Inc. exercises its
over-allotment option in full. These estimates are based on an assumed public
offering price of $9.00 per unit. The estimated net proceeds of $14,365,675
represents gross proceeds of $16,875,000 less the following commissions, fees
and expenses related to the offering:
- $1,265,625 underwriters' discount;
- $337,500 Paulson Investment Company, Inc.'s expense allowance;
- $59,906 in registration fees, NASD fees and listing fees of The American
Stock Exchange;
- $200,000 in accounting fees and expenses;
- $300,000 in legal fees and expenses;
- $65,000 in legal fees and other expenses related to state securities law
compliance;
- $170,000 in printing fees and expenses;
- $85,000 for directors and officers insurance;
- $1,250 in transfer agent fees and expenses; and
- $25,044 in miscellaneous expenses.
We expect to allocate the net proceeds of the offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT APPROXIMATE PERCENTAGE
OF NET PROCEEDS OF NET PROCEEDS
------------------ ----------------------
<S> <C> <C>
Repayment of Debt...................................... $ 3,088,500 22%
Accrued Liabilities and Dividends...................... 2,500,000 17%
Accounts Receivable and Inventories.................... 2,250,000 16%
Sales and Marketing.................................... 1,500,000 10%
Research and Development............................... 1,500,000 10%
Working Capital and General Corporate Purposes......... 3,527,175 25%
----------- ---
TOTAL:............................................... $14,365,675 100%
</TABLE>
Repayment of debt includes debt incurred and debt assumed with respect to
the XImage acquisition and the subsequent consolidation of the ImageWare and
XImage operations. Also included is debt incurred to provide working capital to
enable the company to maintain operations and fulfill customer orders over the
last two years.
The debt we intend to repay includes:
- short term notes in the aggregate amount of $1,050,000 at an interest rate
of prime plus 2%;
- short term notes in the aggregate amount of $258,500 at an interest rate
of 10%;
- a $1,250,000 short term note at an interest rate of 10%, payable to the
president of Atlus Co., Ltd., a Japanese corporation which beneficially
owns approximately 31% of our common stock;
- a $500,000 short term note at a variable interest rate, initially 9%; and
- a $30,000 short term note at an interest rate of prime.
9
<PAGE>
Payment of accrued liabilities and dividends includes miscellaneous accrued
expenses and payments of approximately:
- $375,525 in past legal fees incurred in connection with private
placements, litigation, our acquisition of XImage Corporation and
protection of intellectual property;
- $294,300 in deferred compensation and accrued interest assumed in
connection with our acquisition of XImage Corporation;
- $548,774 in past due payroll and sales taxes;
- $126,920 in royalty obligations;
- $387,244 in accumulated interest on debt;
- $191,137 of accumulated but unpaid dividends on our Series B preferred
stock as of February 29, 2000; and
- $576,100 for accounts payable.
Approximately $2,250,000 of the net proceeds from the offering will be used
to invest in accounts receivable and inventories as a result of our anticipated
sales growth.
Approximately $1,500,000 will be used for sales and marketing related to the
hiring of additional field personnel and the development and implementation of
strategies to expand into the private security market and international markets
for our products. We plan to increase the amount of time our sales force spends
calling on prospective customers and increase our participation in state and
regional trade shows. We also plan to update our collateral sales material and
place targeted advertising in relevant trade publications.
Approximately $1,500,000 will be used for research and development related
to the development of the wireless and Internet capabilities of our products,
the development of our "real time" facial recognition applications and the
continuing enhancement of the technical performance of our products. We are in
the process of increasing our research and development staff by approximately
40%. In order to meet our planned 2000 releases of the CrimeWeb products and
real time facial recognition products.
Pending such uses of the proceeds from the offering, we intend to invest the
net proceeds in interest-bearing, investment grade securities.
The foregoing discussion is merely an estimate based on our current business
plan. Our actual expenditures may vary depending upon circumstances not yet
known, such as the time actually required to reach a positive cash flow, or to
successfully expand the market for our products.
10
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares of common
stock and do not anticipate paying any cash dividends on our shares of common
stock in the foreseeable future. Currently, we intend to retain any future
earnings for use in the operation and expansion of our business. Any future
decision to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other factors our board of directors may
deem relevant.
Pursuant to the terms of our Series B preferred stock, we are obligated to
pay cumulative cash dividends from legally available funds at the annual rate of
$0.2125 per share, payable in two semi-annual installments of $0.10625 each. As
of February 29, 2000, accumulated but unpaid dividends payable on the Series B
preferred stock were approximately $191,137. We intend to use a portion of the
proceeds of this offering to pay these dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- as adjusted to give effect to:
(1) the sale of 1,875,000 units in this offering at an assumed initial
public offering price of $9.00 per unit; and
(2) the planned use of the net proceeds of the offering.
This table should be read in conjunction with our financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------
ACTUAL AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities......................................... $ 7,655,440 $ 3,320,480
Notes payable to related parties, net of current portion.... 924,542 0
------------ ------------
Total liabilities....................................... $ 8,579,982 $ 3,320,480
------------ ------------
Shareholders' deficit
Preferred stock, $.01 par value, authorized 4,000,000
shares: Series B convertible redeeemable preferred
stock, designated 750,000 shares, 389,400 shares issued
and outstanding, $973,500 liquidation preference........ 3,894 3,894
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,161,802 and 3,036,802 shares issued and
outstanding............................................. 11,618 30,368
Additional paid-in capital................................ 16,599,720 30,946,645
Accumulated deficit....................................... (19,285,627) (19,614,625)
------------ ------------
Total shareholders' equity (deficit).................... $ (2,670,395) $ 11,366,282
------------ ------------
Total liabilities and shareholders' equity (deficit).... $ 5,909,587 $ 14,686,762
</TABLE>
- ------------------------
(1) The use of proceeds reflected on the as adjusted balance sheet includes
repayment of debt which was recorded net of an unamortized discount of
approximately $329,000.
12
<PAGE>
DILUTION
If you invest in our units, your interest will be diluted to the extent of
the difference between the public offering price per share of our common stock
and the as adjusted net tangible book value per share of our common stock after
this offering. For purposes of the dilution computation and the following
tables, we have allocated the full purchase price of a unit to the share of
common stock included in the unit and nothing to the warrant included in the
unit. Net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by the
total number of shares of common stock outstanding. Dilution in net tangible
book value per share represents the difference between the amount per share paid
by the purchasers of our units in this offering and the net tangible book value
per share of our common stock immediately afterwards.
As of December 31, 1999, our net tangible book value was $(5,016,952), or
$(4.32) per share of common stock. Without taking into effect any changes in the
net tangible book value after December 31, 1999, other than to give effect to
the sale of 1,875,000 units in the offering at the assumed initial public
offering price of $9.00 per unit and the application of the net proceeds of the
offering, the net tangible book value of ImageWare as of December 31, 1999 would
have been $9,349,414, or $3.08 per share. This represents an immediate increase
of $7.40 per share of common stock to existing shareholders and an immediate
dilution of $5.92, or 66%, per share of common stock to the new investors who
purchase units in the offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $9.00
Net tangible book value per share before the offering..... $(4.32)
Increase in net tangible book value per share attributable
to new investors........................................ 7.40
As adjusted net tangible book value per share after the
offering.................................................. 3.08
Dilution in tangible book value per share to new
shareholders.............................................. $5.92
</TABLE>
If the over-allotment option is exercised in full, dilution per share to new
shareholders would be $5.49 per share of common stock.
The following table summarizes as of December 31, 1999 the differences
between the existing shareholders and the new shareholders with respect to the
number of shares of common stock included in the units purchased, the total
consideration paid, and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- -------- ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 1,161,802 38% $15,641,732 48% $13.46
New shareholders........ 1,875,000 62% 16,875,000 52% 9.00
--------- --- ----------- --- ------
Total............. 3,036,802 100% $32,516,732 100% $10.71
========= === =========== === ======
</TABLE>
The above computations assume no exercise of outstanding options or warrants
to purchase common stock, the over-allotment option, the public warrants
included in units sold in the offering or the representatives' warrants. New
investors will be subject to further dilution upon the exercise of outstanding
options and warrants and conversion of our Series B preferred stock.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The statement of operations data for the years ended December 31, 1998 and
1999 and the balance sheet data at December 31, 1998 and 1999 are derived from
financial statements of the company, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. Historical results are not
necessarily indicative of the results to be expected in the future, and the
results of interim periods are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Product................................................... $ 2,708,856 $ 4,276,201
Maintenance............................................... 1,307,286 1,404,709
License and other......................................... 220,175 210,567
----------- -----------
4,236,317 5,891,477
Cost of Revenues
Product................................................... 1,354,920 1,896,916
Maintenance............................................... 1,065,740 862,816
----------- -----------
Gross margin................................................ 1,815,657 3,131,745
----------- -----------
Operating, general and administrative expenses.............. 2,265,312 2,531,079
Sales and marketing expenses................................ 960,246 1,024,224
Research and development expenses........................... 831,034 1,150,914
Depreciation and amortization............................... 988,838 1,096,484
----------- -----------
5,045,430 5,802,701
----------- -----------
Loss from operations...................................... (3,229,773) (2,670,956)
----------- -----------
Interest expense, net....................................... 204,287 363,638
----------- -----------
Loss before income taxes.................................. (3,434,060) (3,034,594)
----------- -----------
Provision for income taxes.................................. -- --
----------- -----------
Net loss.................................................. (3,434,060) $(3,034,594)
=========== ===========
Net loss per common share................................... $ (4.08) $ (3.07)
=========== ===========
Basic and diluted weighted average shares................... 861,875 1,016,399
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 45,793 $ 156,063
Net intangible assets....................................... 2,836,740 2,346,557
Total assets................................................ 4,384,005 5,909,587
Total current liabilities................................... 4,356,198 7,655,440
Notes payable, net of current portion....................... 1,473,172 924,542
Total liabilities........................................... 5,829,370 8,579,982
Total shareholders' deficit................................. (1,445,365) (2,670,395)
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS
OR OUR FUTURE FINANCIAL PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR OR OUR INDUSTRY'S ACTUAL
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE
RISKS AND OTHER FACTORS INCLUDE, AMONG OTHER THINGS, THOSE LISTED UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ImageWare Systems, Inc. was founded in February 1987 as a photo novelty
company. From 1987 through 1994, the company's business consisted of building
and operating unmanned photo booths which sold postcards with digitally captured
images of customers combined with various background and foreground scenes. In
November 1994, a group of employees and outside investors acquired a controlling
interest in the company from its founders, discontinued the photo booth business
and redirected the company toward the development of image-based software
products for the law enforcement community. Through the date of the acquisition,
the founders had invested approximately $7.7 million into the company,
represented by stock and paid in capital, and the company had an accumulated
deficit of approximately $8.6 million.
Since the acquisition, we have devoted substantially all of our resources to
designing, developing, producing and marketing image-based software products for
law enforcement agencies. At December 31, 1999, we had raised additional equity
capital of approximately $8.9 million, bringing our total equity capital raised
since inception to approximately $16.6 million. From the date of the acquisition
through December 31, 1999, we accumulated an additional deficit of approximately
$10.7 million, bringing the total accumulated deficit since inception to
approximately $19.3 million. As a result of this accumulated deficit and other
factors, our independent auditors have qualified their report on our audited
financials for fiscal 1999.
In 1995 and 1996, we worked with law enforcement agencies to identify their
needs and develop the initial modules for our C.R.I.M.E.S. suite of products and
the integrated system in which they would operate. Our first three modules,
Suspect ID, Crime Lab, and Vehicle ID, were introduced during this period. In
1997, we completed the development of Face ID and the Crime Capture System,
which, when included in our C.R.I.M.E.S. suite, gave us a sufficient breadth of
products to begin marketing entire systems in addition to individual modules.
Cash generated from sales of the initial three modules in 1997 and 1998 was
limited due to their relatively low selling prices which ranged from $600 to
$5,000 per unit. The introduction of the Crime Capture System and Face ID in
late 1997 gave us the ability to sell systems with prices ranging from $25,000
to one million dollars or more per system. With this fully integrated, modular
suite of products, we were able to differentiate ourselves in the market from
competitors offering non-integrated products. Both the Crime Capture System and
Face ID create the potential for significant add-on sales, following the
installation of an initial system, through the sale of additional modules to
both the agency purchasing the system and other agencies that desire to access
that system. In addition, we expect a significant and growing stream of revenue
from the sale of customer support services, which are generally priced at
approximately 12-18% of the price paid for installed hardware and software. As
our installed base grows, we anticipate this revenue stream will grow.
In 1997, recognizing that we would be shifting to sales of systems rather
than individual modules, and recognizing that the sales cycle for sales to
government agencies is relatively long, we established a
15
<PAGE>
national sales force and implemented a top-down sales plan to market our
products first to the largest agencies and then to smaller agencies. We
attempted to develop contacts and relationships at the federal, state and large
county/municipality levels during 1997 to lay the groundwork for larger systems
orders. Our first significant system order was received from the Arizona
Department of Public Safety in January 1998.
In January 1998, we also acquired all of the outstanding stock of XImage
Corporation for a combination of approximately $2.1 million in cash and warrants
to purchase 61,611 shares of our common stock. XImage Corporation, based in San
Jose, California, was founded in 1987 and designed and marketed mug shot systems
to the law enforcement community. This acquisition enabled us to gain a
significant foothold in the digital mug shot market with a customer base which
included the New York City Police Department and law enforcement agencies in
Minneapolis, Portland, Seattle, Indianapolis, Orlando and Montreal. We
consolidated XImage Corporation's operations into our San Diego offices during
the second and third quarters of 1998.
BACKLOG
Although our backlog as of December 31, 1999 was approximately $2.7 million
compared to $1.6 million as of December 31, 1998, we believe that such backlog
is the result, in part, of our inability to timely deliver orders due to lack of
working capital. After receiving the proceeds of this offering, we expect to be
able to ship most outstanding orders within three to four months and to ship
orders thereafter in a timely and orderly fashion. As a result, our present
backlog may not be indicative of our backlog in future periods.
REVENUE RECOGNITION
We recognize revenue from periodic license and maintenance agreements
ratably over the respective period covered thereunder. Our revenue from software
installation and implementation and from contract services is generally
recognized as the services are performed using the percentage of completion
method based on costs incurred to date compared to total estimated costs at
completion. Amounts received under contracts in advance of performance are
recorded as deferred revenue and generally recognized within one year from
receipt. Revenue from contract services for which we cannot reliably estimate
total costs are recognized upon completion.
COST OF REVENUES
Our principal product costs include:
- Hardware costs when a product is purchased as a "turnkey" system. The
majority of our system sales include equipment, which generally equates to
between 15% and 50% of the sales price. As our installed base grows and
add-on retrieval seats and investigative modules are purchased for use on
existing personal computers, we anticipate that hardware sales as a
percentage of revenue may decrease and gross margins may increase as
orders include a greater proportion of software and services.
- Third party software licensing fees for search engine technology
incorporated into our software. The amount of these fees depends on the
number of images in the customer's database.
- Costs of personnel, travel, and overhead associated with custom
integration work, hardware/software configuration, site preparation,
installation, and training.
Our principal maintenance costs to deliver customer support services include
personnel, communications and overhead costs associated with maintaining a
7-day, 24-hour customer support desk and in-house and remote field service
personnel. These costs represent significant fixed costs. These costs are not,
however, anticipated to grow as fast as customer service revenues.
16
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUES. Product revenues increased 58% from $2.7 million for the year
ended December 31, 1998 to $4.3 million for the corresponding period in 1999.
The increase reflected the further purchases of the Crime Capture System, with
purchases by state and local agencies in Arizona to tie into the state-wide
system purchased and implemented by the Arizona Department of Public Safety in
1998. The increase also reflects system upgrades by most of our UNIX-based
customers who adopted our Windows-based Crime Capture System in 1999. Our
backlog of product orders increased significantly from approximately
$1.6 million at December 31, 1998 to $2.7 million at December 31, 1999,
indicating further acceptance of our products. Our booking products represented
approximately 89% of our product revenues in 1999.
Customer service revenues increased 7% from $1.3 million for the year ended
December 31, 1998 to $1.4 million for the corresponding period in 1999. In 1999,
we offered our UNIX-based customers incentives to upgrade to the Windows-based
Crime Capture System. As part of the incentives, the customers received reduced
maintenance fees in 1999. The price reductions were justified based upon the
need to consolidate the number of versions of systems we would have to support
and to avoid the cost of bringing the older installations into Y2K compliance.
We do not expect to offer similar price reductions in the future and expect
customer service revenues to increase along with our expanded installed base.
COST OF PRODUCTS AND MAINTENANCE. Cost of products and maintenance
increased 14% from $2.4 million, or 57% of revenue, for the year ended
December 31, 1998 to $2.8 million, for the corresponding period in 1999. Cost of
products and maintenance decreased as a percent of revenue from 57% in 1998 to
47% in 1999 primarily as a result of higher than normal costs for maintenance in
the second and third quarters of 1998 as we merged the maintenance functions of
ImageWare and XImage. Maintenance costs decreased 19% from $1.1 million or 82%
of maintenance revenue in 1998 to $863,000 or 61% of maintenance revenue in
1999. In addition, the shift in product mix from the UNIX based XImage booking
products in prior years to primarily NT based products with inherently lower
hardware costs caused product costs of sales to decrease from 50% as a percent
of product revenues in 1998 to 44% in 1999. Cost of products can vary as a
percentage of revenue from quarter to quarter depending upon product mix and the
hardware content included in systems installed during a given period.
The royalties received in 1998 and 1999 were from a patent license agreement
with Panasonic for a product which does not compete with any of ImageWare's
current or contemplated products. Panasonic has stopped using the technology and
is not expected to pay further royalties.
GROSS MARGINS Total gross margins increased from $1.8 million, or 43% of
revenues, for the year ended 1998 to $3.1 million, or 53% of revenues, for the
corresponding period in 1999. Gross margins related to product sales increased
from $1.4 million, or 50% of revenues, to $2.4 million, or 56% of revenues,
during the same periods. Gross margins related to maintenance revenues increased
from $241,546, or 18% of revenues, to $541,893, or 39% of revenues, during the
same period.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased 12% from $2.3 million for the year ended
December 31, 1998 to $2.5 million for the corresponding period in 1999.
Approximately $387,000 of the increase was related to one-time, non-recurring
costs associated with an evaluation of our products for Year 2000 compliance and
the related work performed to bring them into compliance. An independent company
performed the Year 2000 work under contract.
17
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 4%
from $960,000 for the year ended December 31, 1998 to $1 million for the
corresponding period in 1999. We were unable to significantly accelerate our
sales effort in 1999 due to a lack of resources which limited our ability to
keep our sales force on the road and fully utilize trade publication advertising
and trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 38%
from $831,000 for the year ended December 31, 1998 to $1.2 million for the
corresponding period in 1999. The cost increase for research and development
reflects an increase in personnel to accelerate new product development and
respond to customer requests for product enhancements and custom integration
work.
INTEREST EXPENSE. Interest expense increased 78% from $204,000 for the year
ended December 31, 1998 to $364,000 for the same period in 1999. The increase
reflects the cost of additional debt that the company issued to fund the
consolidation of XImage and ImageWare and to fund operations in 1999.
NET LOSS. The net loss decreased 12% from $3.4 million for the year ended
December 31, 1998 to $3.0 million for the corresponding period in 1999. Gross
profits from the sale of products and maintenance services for the year
increased $1.3 million from 1998 to 1999. Research and development expenses for
the year increased $320,000 from 1998 to 1999 due to increased personnel costs
in the more recent year. Operating, general and administrative expenses for the
year increased $266,000 from 1998 to 1999, due to a $387,000 one-time charge in
1999 for Year 2000 offset by higher administrative costs in 1998 due to the
consolidation of XImage.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. We had negative working capital of $3.1 million at December 31,
1998 compared to $4.3 million at December 31, 1999. Cash used by operating
activities totaled $1.9 million for both years ended December 31, 1998 and 1999.
For the year ended December 31, 1999, cash was principally used to fund
$3.0 million in losses offset by non-cash charges of $423,000 for compensation
and fees paid with stock and $1.1 million in depreciation and amortization. Also
contributing to the cash used by operations was a $2.1 million increase in
current assets, primarily related to a $2.0 million increase in accounts
receivable. The increases in current assets were due to a significant level of
installation activity in the fourth quarter of 1999. Additional sources of
working capital in 1999 were the extension of payment terms by the Company on
$594,000 in accounts payable, an increase in accrued expenses and interest of
$1.1 million and an increase in short-term debt of $1.7 million resulting in an
increase in current liabilities of $3.3 million. These increases resulted from
our increased volume of business and our inability to meet the terms of our
obligations during the year. At the end of 1999, accounts receivable attributed
to three major customers collectively represented 55% of total accounts
receivable. Such concentration of credit risk is normal in this business.
Cash used by operating activities in 1998 totaled $1.9 million and was used
principally to fund $3.4 million in losses offset by non-cash charges of
$989,000 for depreciation and amortization and $522,000 for fees paid with
stock.
During 1998, we used an additional $2.1 million in cash for investing
activities to complete the acquisition of XImage.
CAPITAL RESOURCES. Prior to 1998, our primary sources of funds were
shareholder loans, private placements of stock and, to a lesser extent, cash
provided by operating activities. In 1998, we received $1.2 million in funds
from secured bank loans, in addition to $705,000 in loans from shareholders. In
1999, we received $2,500,000 in loans and $375,000 from the sale of stock.
During 1999, we repaid $700,000 in bank debt and $100,000 in shareholder debt.
18
<PAGE>
Included in loans received in 1999 was $1.25 million from the president of
Atlus Co., Ltd., with terms extending to the earlier of the completion of our
initial public offering or February 10, 2001. We have agreed to assume any
exchange rate risk in the repayment of this loan and have not entered into any
hedging transaction with respect to this potential obligation. In 1999, we also
received an additional $500,000 as a loan from the chairman of Paulson
Investment Company, Inc. with terms extending to the earliest of the demand of
our lender, the closing of our initial public offering, or April 3, 2000. We
used $500,000 of the funds provided by these 1999 financing activities to reduce
our bank debt. We used an additional $125,000 of the loan proceeds to reduce
notes payable to shareholders and pay officers for credit card debt. During
1999, we received an extension of the bank loan until March 3, 2000 and, in
2000, a verbal forebearance pending the completion of this initial public
offering. In 1999, we also received extensions on shareholder debt totaling
$803,500, subject to progressive principal payments on a monthly payment
schedule, with the balance due upon the completion of our initial public
offering.
We have not generated sufficient cash from operations to fund continued
operations or our growth plan, and will require significant additional future
funding. We anticipate that, after completion of this offering, our operating
cash flows will be sufficient to meet our liquidity needs for the foreseeable
future, based on our current expense calculations and our current and
anticipated revenue streams, including the proceeds of this offering. Our
operating and financing plans assume certain revenue projections can be met and
our overall cost structure remains stable, as to either of which there can not
be any assurance. There also can be no assurance that our working capital
objectives will be reached in the near future, if ever. In the event that
additional capital is required, we may seek to raise such capital though private
or public equity financing. There can be no assurance that such capital will be
available on favorable terms, if at all.
Based upon our order intake experience and quality of our existing pipeline
of future business, we are projecting significant growth in revenues in the
coming twelve months. We anticipate reaching profitability and positive cash
flow from operations within the next twelve months. We do not anticipate
significant increases in operating expenses associated with the increased
revenues, and we expect gross profit margins to maintain or improve over current
levels. No significant capital expenditures or investments in infrastructure are
anticipated. Anticipated operating cash flows and the proceeds from this
offering are expected to be sufficient to fund our growth for the foreseeable
future, however, there can be no assurance that the Company will achieve
sufficient cash flow or that the Company may not need additional funding in the
future.
OTHER COMMITMENTS. In connection with the outstanding Series B preferred
stock, we are obligated to pay cumulative dividends at the rate of $0.2125 per
share per year. At December 31, 1999, dividends due aggregated approximately
$177,572. Dividends accrued at February 29, 2000 were $191,137 and will be paid
from the proceeds from this offering.
We are also obligated to pay approximately $1,055,000 over the next three
years under our employment agreements, an estimated $200,000 over the next one
and one-half years under our license agreements, and approximately $1,018,000
over the next three and one-half years under our real property lease.
YEAR 2000 COMPLIANCE
With regard to our internal operations, we have relied on written
representations from our software and hardware vendors to confirm that the
versions of their products we are using are Year 2000 compliant. We have spent
between $15,000 and $25,000 on these compliance issues, and any additional costs
are not expected to be more than $15,000. As of February 29, 2000, our
compliance activities are complete and we are not aware of any Year 2000
compliance problems with our products. As of February 29, 2000, only one
customer reported to us any problem with its own computer system
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that affected the performance of our products. The problem has been corrected.
There may be undetected Year 2000 problems with our internal systems, our
products or our customers' computer sytems. As part of our contingency plan in
case our internal systems are not entirely Year 2000 compliant, we regularly
have all data backed up in a form so as to ensure no loss of information and to
enable a system migration if necessary.
With regard to software and hardware used in our products, we engaged an
independent firm to evaluate our products, identify areas of non-compliance,
develop a plan to bring the products into compliance and implement the plan to
bring all customers under maintenance contracts compliant by December 31, 1999.
The cost of such compliance activities totaled $387,000 and was funded primarily
through borrowings. The implementation of our remediation plan remained on
schedule and was completed by December 31, 1999.
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BUSINESS
INDUSTRY BACKGROUND
Police departments and other law enforcement and public safety agencies rely
on criminal history records to help fight crime. A criminal history record
includes personal information and a history of arrests, convictions and other
events, and may also include fingerprints and photographs. According to a 1989
recidivism study conducted by the U.S. Department of Justice, of the 108,580
persons released from prisons in 11 states in 1983, an estimated 62.5% were
re-arrested for a felony or serious misdemeanor within three years. Since many
crimes are committed by recidivists, the ability to quickly search criminal
history records to identify a suspect is particularly important.
Many law enforcement and public safety record-keeping systems are still
files of paper records, which cannot be searched quickly or from remote
locations. Even if paper records contain pictures of criminals, they cannot be
quickly searched based on selected criteria such as eye color, first name or
gang membership. To alleviate the inadequacies of paper records, many agencies
have moved to digital record-keeping systems. However, many of these systems are
merely a database of criminal records that can be searched by record number
only. While they reduce the need for paper files and are easier to keep secure,
they do not allow officers to search for an unknown suspect in the database
based on criteria such as height, hair color, gang membership or other factors.
Even agencies that have installed searchable databases often do not yet have
biometrics-based software that would allow them to compare a digital facial
photograph with photographs in the database in order to match an unknown suspect
with known criminals who have similar physical characteristics. "Biometrics"
refers to the method of identifying a person by measuring distinctive biological
characteristics, such as facial features or fingerprints.
In view of the inefficiencies in traditional record keeping-systems, many
agencies are turning to new technologies to increase their ability to quickly
identify, locate and arrest criminal suspects. Costs have decreased for computer
hardware, bandwidth and communications infrastructures. The ability to transmit
large quantities of data, such as digital images, has increased, as has the use
of open architecture among systems, allowing agencies to share data more
effectively. The speed and accuracy of facial recognition technology is also
increasing, as are the capabilities for the transmission of digital images. As a
result of these factors, we believe law enforcement agencies will increasingly
seek to replace outdated methods, increase the size of their digital booking
systems and look for investigative products that allow them to effectively
search and share the information captured in their systems.
Further, we believe that, as computer technology becomes more common, law
enforcement agencies will increasingly use laptop computers and wireless data
communication. These technologies will eventually allow investigators and police
officers to access their agency's database and other information from the scene
of a crime or from a patrol car.
MARKETS
THE LAW ENFORCEMENT AND PUBLIC SAFETY MARKETS
The United States law enforcement and public safety markets are composed of
federal, state and local law enforcement agencies. As of 1996, state and local
governments in the United States operated approximately 18,769 law enforcement
agencies consisting of 13,578 local police departments, 3,088 sheriffs'
departments and offices, 49 primary state law enforcement agencies, 1,316
special police agencies, and 738 county constable offices. As of 1996, the
federal market consisted of federal agencies, such as the Federal Bureau of
Investigation and the Drug Enforcement Administration, which in total employed
about 74,500 full-time employees, not including military agencies and their
personnel.
The federal government has promoted the development and use of nationwide
criminal history record databases called the Interstate Identification Index and
the National Crime Information Center
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2000, or NCIC 2000, each consisting of national and regional databases. The
Interstate Identification Index is maintained by the FBI and includes persons
arrested for felonies or serious misdemeanors. The FBI has indicated that this
Index will accept photographs in the future. NCIC 2000 is an on-line information
system dedicated to serving criminal justice agencies. In July 1999, NCIC 2000
replaced an older system to allow for the sharing of digital images. We
anticipate that the inclusion of digital images in these databases will increase
the value of digital booking systems and the demand for facial recognition
applications.
The Violent Crime Control and Law Enforcement Act of 1994 is expected to
contribute at least $130 million in grants to support technological improvements
for law enforcement agencies and other activities to improve law enforcement
training and information systems, which could include purchases of our products
and services. The Crime Identification Technology Act of 1998 authorized funding
of up to $250 million in each of the next five years to, among other things,
support integration of state and local justice system technology. Agencies are
eligible for grants under this program based on their initiatives to develop,
oversee, plan and implement integrated information technology, including
technology of the type produced by ImageWare. This act merely authorizes this
funding and is contingent on Congress passing legislation to appropriate the
funds each year.
OTHER APPLICATIONS AND MARKETS
We believe there are emerging applications for our products within the
public safety market beyond the needs of agencies to book and identify criminal
suspects. Variations on our system can be used to track inmate populations of
correctional facilities, to monitor the location of persons on parole or
probation without the need for them to visit their parole or probation officer
in person, to monitor gun registrations and allow gun retailers and distributors
to run more accurate background checks on potential buyers, and to help
authorities locate missing children.
Our technology also has emerging applications in markets related to access
control and identification. Organizations concerned with security issues can use
our products to create picture identification cards that can be instantly
checked against a database of facial images to prevent unauthorized access to
secure areas. Potential customers in these markets include large corporations,
hospitals, universities and government agencies.
While we have not yet had significant international sales, we plan to
continue to market and sell our products internationally in the future. Some of
the challenges and risks associated with international sales include the
difficulty in protecting our intellectual property rights, longer collection
cycles, difficulty in enforcing agreements through foreign legal systems and
volatility and unpredictability in the political and economic conditions of
foreign countries. We believe we can work to successfully overcome these
challenges.
PRODUCTS AND SERVICES
We believe our integrated suite of software products significantly reduces
the inefficiencies and expands the capabilities of traditional booking systems.
Using our products, an agency can create a digital database of thousands of
criminal history records, each including a full-color facial image, text
information and images of other distinctive physical features. This database can
be quickly searched using text queries or by using our facial recognition
technology to compare the face of an unknown suspect with facial images in the
database. Our investigative software products can also be used to create, edit
and enhance digital images and to search databases of other agencies to which
the customer has access.
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We believe our products allow our customers to achieve the following
benefits:
MORE QUICKLY BOOK AND IDENTIFY SUSPECTS. Because many officers can enter
information and images directly into the booking system simultaneously from
multiple locations, an agency can reduce the time required to book a
suspect. In addition, rather than flipping through books of mugshots, an
officer and witness can use our software to quickly compare the digital
image of a suspect with thousands of facial images in the booking system.
MORE ACCURATELY CAPTURE AND IDENTIFY FACES. Officers and witnesses can
together create and edit full-color, photograph-quality images to match the
facial image as closely as possible to the description of the suspect.
SEARCH THROUGH A GREATER NUMBER OF CRIMINAL RECORDS. As agencies are able
to access not only their own booking system but the databases of other
agencies as well, they will be able to access a far greater number of
criminal records than available through traditional booking systems.
MINIMIZE TRAINING TIME AND EXPENSE. Our products are designed to be used by
persons with minimal technical backgrounds. Our software programs ask simple
questions to create full-color facial images, book a suspect or search a
booking system.
INTEGRATE OUR PRODUCTS INTO A COMPLETE SYSTEM. Our system is made up of a
suite of six fully integratable software modules. A customer may purchase
all of the modules as a complete system or each module individually. Our
booking system can also be integrated with other information systems, such
as an automated fingerprint identification system.
SCALE OUR PRODUCTS FOR USE ON A SINGLE COMPUTER OR A LARGE NETWORK. Our
products are completely scalable, so that they may be used on one computer
terminal or with a client-server network including dozens of terminals or
more.
Our C.R.I.M.E.S. system consists of six software modules, which may also be
purchased individually. The Crime Capture System (including both the Capture
Module and the Retrieval Module) is our booking system and database. Our
investigative modules are Face ID, Suspect ID, Crime Lab and Vehicle ID.
CRIME CAPTURE SYSTEM. The Crime Capture System is a Windows-based digital
booking system made up of two distinct software modules and associated hardware
such as cameras and computer hardware as needed. The Crime Capture System allows
a customer to capture and store images and other information in a database and
search and retrieve records from the database. The Crime Capture System uses
off-the-shelf hardware and is designed to comply with open industry standards so
that it can operate on an array of systems ranging from a stand-alone personal
computer to a wide area network. To avoid duplication of entries, the system can
be integrated easily with several other information storage and retrieval
systems, such as a live scan fingerprint system, a records management system or
an automated fingerprint identification system.
Our first order for the Crime Capture System occurred in January 1998. As of
December 31, 1999, the Crime Capture System is being used by 34 customers,
including the Arizona Department of Public Safety and the Los Angeles County
Sheriff's Department. Each Crime Capture System is scalable to suit each
customer's needs and can be configured to connect with systems which may already
be in place. As a result, the price of the system to the customer varies widely.
Full installations of the Crime Capture System have ranged from $25,000 for a
stand-alone system to over $1 million, and most commonly range from $150,000 to
$400,000. Gross revenues from sales of the Crime Capture System represented 80%
of our 1999 gross revenues.
CCS CAPTURE. This software module allows a user to capture and store facial
images as well as images of distinguishing features such as scars, tattoos and
other marks. Each entry contains both images and text information in an
easy-to-view format made up of distinct fields. As of February 29,
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2000, we had installed CCS Capture at 59 sites. Current customers of this module
range from agencies that capture a few thousand mugshots per year to those that
capture over 600,000 mugshots per year. CCS Capture will generally replace our
UNIX-based booking system, ForceField 2000, which was originally introduced by
XImage Corporation in 1989 as a mugshot capture system. While a few of our
customers will continue to use ForceField 2000 for the foreseeable future, we
have upgraded most current customers from the ForceField 2000 to the Crime
Capture System.
CCS RETRIEVAL. This software module allows a user to search the database
created with CCS Capture. Officers can conduct text searches in many fields,
including file number, name, alias, distinctive features like "brown eyes" or
"tattoo," and other information such as gang membership, arrests and
convictions. CCS Retrieval creates a catalogue of possible matches, allowing
officers or witnesses to save time by looking only at mugshots that closely
resemble the description of the suspect. This module can also be used to create
a line-up of similar facial images from which a witness may identify the
suspect. CCS Retrieval can be used by a law enforcement agency's satellite
offices that need to access a database created and maintained at a central
location using CCS Capture. As of February 29, 2000, we had installed CCS
Retrieval at 240 sites. When purchased separately from CCS Capture, the CCS
Retrieval module is typically priced at approximately $6,750.
FACE ID. This software module uses biometric facial recognition and
retrieval technology to help authorities identify possible suspects. Images
taken from surveillance videos, digital sketches or photographs can be searched
against a digital database of facial images to retrieve any desired number of
faces with similar characteristics. This investigative module can also be used
at the time of booking to identify persons using multiple aliases. Using
biometrics-based technology, Face ID can search through thousands of facial
images in a matter of seconds, reducing the time it would otherwise take a
witness to flip through a paper book of photographs that may or may not be
similar to the description of the suspect. Face ID then creates a selection of
possible matches ranked in order of similarity to the suspect, and a percentage
confidence level is attributed to each possible match. Face ID incorporates
search engine technology which we license from Visionics, Inc. We first
introduced Face ID in late 1997. This module is comprised of a server, which is
typically priced at $25,000 or more, and a personal computer client, which is
typically priced at approximately $15,000.
SUSPECT ID. This software module allows officers and witnesses to quickly
create full-color, photo-realistic suspect composites. The digital composites
are constructed from libraries of facial features based upon actual color
photographs of such features. Suspect ID allows officers with minimal computer
training and artistic talent to create a suspect composite by pointing and
clicking with a mouse. This module can be installed on a laptop computer and
taken into the field, allowing officers to conduct interviews and create
composites before witnesses' memories fade. For rapid identification, officers
can distribute completed composites within minutes via fax or e-mail. Suspect ID
incorporates our patented object-layering technology. We first introduced
Suspect ID in 1995. This module is typically priced at approximately $5,000.
CRIME LAB. This software module allows officers to enhance and edit digital
images. Using Crime Lab, an officer can update old images, create
non-prejudicial line-ups, remove distracting backgrounds and enhance the quality
of surveillance videos. Crime Lab incorporates our patented object-layering and
color-masking technologies. We first introduced Crime Lab in 1995. This module
is typically priced at approximately $600.
VEHICLE ID. This software module helps officers identify motor vehicles
which may have been stolen or involved in a crime. Vehicle ID's comprehensive
database includes images and text information for over 1,000 vehicle makes and
models and can be searched using many fields, including physical features and
Vehicle Identification Number. Images of vehicles similar to the suspect vehicle
can be viewed from front, rear, side or three quarter angles and can be depicted
in any color. A color copy of the suspect vehicle can then be produced and
immediately broadcast, printed or faxed to
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officers in the field. Vehicle ID incorporates our patented object-layering
technology. Vehicle ID also incorporates Vehicle Identification Number software
provided by the National Insurance Crime Bureau. We first introduced Vehicle ID
in 1996. This module is typically priced at approximately $1,500.
MAINTENANCE AND CUSTOMER SUPPORT
We work directly with purchasers of our system to ensure that the system
they purchase will meet their unique needs. We configure and test the system
either at our facilities or on-site and conduct any customized programming
necessary to connect the system with any legacy systems already in place, such
as old booking system databases or other records management systems.
As part of our installation of a system, we train our customer's employees
in the effective use of our products. We also provide training on an ongoing
basis both on-site and at our facilities in San Diego, California. We provide
on-site hardware support to our customers, generally within 24 hours of the
customer request. Customers can use a toll free number to speak with our
technical support center, which provides software support and general assistance
24 hours a day, seven days a week. On-site customer support is coordinated by
our field personnel in New York, Minnesota, Washington and Arizona. Providing
customer support services typically provides us with annual revenue of 12% to
18% of the initial sales price of the system purchased by our customer.
SYSTEM CONFIGURATION AND FULFILLMENT
We directly employ computer programmers and also retain independent
programmers to develop our software and perform quality control. We provide
customers software which we specifically configure to operate on their existing
computer system. We can also provide customers with a complete computer hardware
system with our software already installed and configured. In either case, the
customer is provided with a complete "turn-key" system which can be used
immediately. When we provide our customers with a complete computer system
including hardware, we use "off-the-shelf" computers, cameras and other
components purchased from other companies such as IBM or Gateway 2000. Systems
are assembled and configured either at our facilities in San Diego, California,
or at the customer's location.
OUR STRATEGY
Key elements of our strategy for growth include the following:
FULLY EXPLOIT THE EXPANDING LAW ENFORCEMENT AND PUBLIC SAFETY MARKETS
We intend to use our successful installations with customers such as the
Arizona Department of Public Safety as reference accounts and to aggressively
market C.R.I.M.E.S. as a superior technological solution. The majority of our
recent and near term sales has been and will be from sales of the Crime Capture
System. Our sales effort in the near term will be to establish the Crime Capture
System as the mug shot system adopted in as many countries, states and large
county/municipalities as possible. Once we have a system installed in a region,
we intend to then sell additional systems or retrieval seats to other agencies
within the primary customer's region and in neighboring regions. In addition, we
will then market our complementary investigative modules to the customer,
including Face ID, Suspect ID, Crime Lab and Vehicle ID. As customer databases
of digital mug shots grow, we expect that the perceived value of our
investigative modules, and corresponding revenues from sales of those modules,
will also grow.
EXPAND INTO RELATED APPLICATIONS WITHIN THE LAW ENFORCEMENT AND PUBLIC SAFETY
MARKETS
Our products can provide solutions to law enforcement and public safety
agencies beyond our core application of police booking systems and related
investigative products, with minimal adaptation. The
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technology behind our C.R.I.M.E.S. product line can be used to create databases
of missing children and compare the facial image of a lost child to the images
in the database. Our system can be used to help correctional facilities track
and control inmates. Gun sellers could use our products to access available
criminal databases and help prevent the sale of guns to ineligible persons. Our
technology can be used to monitor persons on parole or probation without
requiring them to travel to their parole or probation officer. We anticipate
that a parolee or probationer will be able to have his photograph taken in a
specially designed kiosk which uses biometrics-based technology to identify the
person and inform his parole or probation officer of his location.
PENETRATE THE ACCESS CONTROL AND IDENTIFICATION MARKETS
We believe security issues are becoming increasingly important among public
agencies, corporations, hospitals, universities and similar organizations. Using
our products, an organization can create picture IDs that correspond to images
in a digital database. A security guard can stop an individual and accurately
check his identity against a database of authorized persons, and either allow or
deny access as required. Picture IDs cannot be faked in the system, and
authorized people are not delayed more than a moment. Our technology can also be
applied in other markets to facilitate activities such as voter registration,
immigration control and welfare fraud identification. Our system has been
adopted as the picture ID system for the government of Kuwait.
DEVELOP THE INTERNET AND WIRELESS CAPABILITIES OF OUR PRODUCTS
We are currently developing a new software module, called Crime Web, which
will allow users to use the Internet or secure Intranets to conduct
investigative searches of digital booking systems. Crime Web will include the
most frequently used investigative features of the Crime Capture System to allow
users to retrieve single images, conduct searches based on one or more
parameters, create digital line-ups and print retrieved records. We are also
currently developing an Internet-based version of Face ID that will allow
investigators to use the Internet to compare the digital image of an unknown
suspect with a database of images using biometrics-based technology. We believe
our Internet products will allow users to quickly access and share images via
the Internet while maintaining the security and integrity of databases, thereby
encouraging the widespread dissemination and sharing of criminal information
among law enforcement agencies. We intend to introduce Crime Web in the first
quarter of fiscal 2000.
We also intend to develop the wireless capabilities of our products. Public
safety agencies require information to be available to their agents in the
field. Vehicles are being outfitted with wireless terminals which will allow for
the receipt of more information, including color photographs and arrest records.
Additionally, public safety agencies are investigating the feasibility of
handheld devices which can operate outside of a vehicle and accompany
investigators wherever an investigation takes them. In order to facilitate the
transfer of arrest records and investigative tools to public safety employees in
the field, we plan to develop technology in cooperation with wireless
communications companies which will allow our products in the field to operate
over wireless systems.
ACQUIRE BUSINESSES THAT ENHANCE OUR STRATEGIC POSITION
We may in the future acquire businesses that will complement our growth
strategy and enhance our competitive position in our core markets and other
markets. However, we have no current plans for such acquisitions.
SALES AND MARKETING
We market and sell our products through our direct sales force and through
indirect distribution channels, including systems integrators. Our sales and
account representatives are based in Massachusetts, New Jersey, Georgia and
California.
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As of February 29, 2000, our domestic sales organization included our
director of sales, our director of major account development, our vice president
of sales and business development and five regional managers. Our director of
major account development, based in Boston, coordinates relationships with
systems integrators and other strategic partners and is responsible for U.S.
federal accounts and European sales. Other international sales are coordinated
by our vice president of sales and business development. Our sales professionals
are supported by our technical experts who are available by telephone and
conduct on-site customer presentations.
The typical sales cycle for our Crime Capture System includes a pre-sale
process to define the potential customer's needs and budget, an on-site
demonstration, and conversations between the potential customer and existing
customers. Government agencies are typically required to purchase large systems
by including a list of requirements in a Request For Proposal, known as an
"RFP", and allowing several companies to openly bid for the project by
responding to the RFP. If our response is selected, we enter into negotiations
for the contract and, if successful, ultimately receive a purchase order from
the customer. This process can take anywhere from a few months to over a year.
In addition to our direct sales force, we have developed relationships with
a number of large systems integrators who contract with government agencies for
the installation and integration of large computer and communication systems. By
acting as a subcontractor to these systems integrators, we are able to avoid the
time-consuming and often expensive task of submitting proposals to government
agencies and also gain access to large clients who might not contract directly
with small companies. In this context, we provide agencies with digital image
booking systems and our related investigative software products. As of
February 29, 2000, we were a subcontractor to the following prime contractors:
- SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, for the New York City
Police Department.
- MORPHO SYSTEMES, S.A., a subsidiary of SAGEM, S.A., a French company, for
the national identification system of Kuwait.
- PRC, INC., for the Las Vegas Metropolitan Police Department.
- DIGITAL BIOMETRICS, INC., for the Los Angeles County Sheriff's Department.
We have also entered into agreements or arrangements with the following
companies to jointly bid on certain specific projects:
- HEWLETT-PACKARD SINGAPORE (SALES) PTE LTD., to jointly bid on the booking
and facial recognition system for the Singapore Police Department.
- INTELLIGENCE AND STRATEGIC PROCESSES PTY LTD., an Australian company, to
sell our booking system in Australia and New Zealand.
We also work with companies that offer complementary products, where value
is created through product integration. These teaming arrangements allow us to
both enhance our products and expand our customer base through the relationships
and contracts of our strategic partners. We have entered into agreements with
the following companies:
- POLAROID CORPORATION. In September 1999, we entered into an agreement to
jointly market centralized imaging and facial recognition technology to
law enforcement agencies in selected states where Polaroid has state
contracts for drivers' license systems.
- H.T.E., INC. In August 1999, we entered into an agreement to integrate our
Crime Capture System with the records management system and jail
management system of H.T.E., Inc.
We promote our products through trade journal advertisements, direct mail,
and attendance at industry trade shows, including those sponsored by the
International Association for Law Enforcement,
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the International Association for Identification, and the International
Association of Chiefs of Police. We also target other media through public
relations efforts, including non-industry publications, daily newspapers, local
and national news programs, and television programs related to law enforcement.
Articles regarding our products have appeared in BUSINESS WEEK, IMAGING
MAGAZINE, THE WALL STREET JOURNAL and a number of other publications.
CUSTOMERS
We have a broad range of domestic and international customers. Most of our
customers are government agencies at the federal, state and local levels in the
United States. Our products are also being used in Canada, the United Arab
Emirates, Kuwait, Mexico, Colombia, Venezuela, and the Philippines by over 450
customers, including the following:
<TABLE>
<S> <C>
New York City Police Department Los Angeles County Sheriff's Department
Arizona Department of Public Safety King County (Seattle), Washington
Orange County, Florida Sheriff's Office U.S. Army, Navy and Air Force
Hennepin County (Minneapolis), Minnesota Montreal Police Department
Government of Kuwait Milwaukee County, Wisconsin
City of San Antonio, Texas
</TABLE>
In addition to the major customers listed above, we also receive purchase
orders from or enter into contracts with cities or counties. We have agreed in
certain instances with the state agency, for example, the Arizona Department of
Public Safety, to provide our products and services to smaller cities within the
state at the price and on the terms offered to the state agency. When referring
to the number of our customers, we not only include the large entities such as
the Arizona Department of Public Safety, but also include the smaller cities (or
counties), such as Tempe and Scottsdale, which separately enter into contracts
with us or submit purchase orders for our products and services.
COMPETITION
Due to the fragmented nature of the law enforcement and public safety market
and the modular nature of our product suite, we face different degrees of
competition with respect to each C.R.I.M.E.S. module. We believe the principal
bases on which we compete with respect to all of our products are:
- The ability to integrate our modular products into a complete imaging and
facial recognition system.
- Our reputation as a reliable systems supplier.
- The usability and functionality of our products.
- The responsiveness, availability and reliability of customer support.
The Crime Capture System faces strong competition from other makers of
booking systems, including companies such as Printrak International, Inc. and
Digital Descriptors Systems, Inc. Other companies in this market include Identix
Corp., Dynamic Imaging, Inc. and Epic Solutions, Inc. Printrak serves over 250
customers, including the Philadelphia Police Department. Internationally, there
are a number of local companies offering booking solutions in most countries.
Most competitors' products in this niche offer basic image capture and storage
but lack the functionality of investigative products, including facial
recognition and image editing and enhancement.
We believe Face ID was the first facial recognition software produced and
sold to the law enforcement and public safety markets. As a result, we believe
it is the most widely recognized product
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in this niche, with the largest number of installations. Identix Corp. has,
through its subsidiary, developed products with facial recognition capabilities.
Suspect ID faces competition primarily from Smith and Wesson and
Faces, Inc. Some agencies continue to employ sketch artists who develop
hand-drawn composites from witness interviews. Smith and Wesson has supplied
"acetate foil overlay" products for over 30 years. This method of creating
suspect composites requires a user to overlay sheets of clear plastic with
different facial features in order to produce a full picture. This method is
still the most widely used method for creating suspect composites, but its use
has declined since the introduction of computerized composite systems.
Crime Lab faces competition primarily from off-the-shelf image editing and
enhancement programs such as Photoshop from Adobe Systems. Photoshop is a well
known application, but was not specifically designed for the law enforcement and
public safety industry. As a result, it is not customized for use by law
enforcement agencies and cannot be easily integrated with other law enforcement
investigative software products.
Vehicle ID is, to our knowledge, the only software product using digital
images of motor vehicles to help law enforcement agencies locate and identify
stolen vehicles or vehicles involved in crimes.
INTELLECTUAL PROPERTY
We rely on patents, trademarks, trade secret and copyright laws, and
confidentiality agreements to protect our intellectual property. We own two
United States patents that are important to our business strategy. Our patented
"Color Masking System" allows a user to manipulate selected colors of an image
without affecting other colors of the image. Our patented "Object Layering"
technology allows a user to save each element of an image as a separate layer so
that edits can be made to certain elements without affecting other elements or
having to re-create the entire image. Our patented object layering technology is
used in Suspect ID, Crime Lab and Vehicle ID, and our patented color masking
technology is used in Crime Lab. These patents expire in 2012 and 2013,
respectively. We have several unregistered and federally registered trademarks,
as well as trademarks for which there are pending trademark registrations with
the United States Patent & Trademark Office, including the following marks:
<TABLE>
<S> <C>
C.R.I.M.E.S.-Registered Trademark- Crime Capture System-Registered Trademark-
Image Wizard-Registered Trademark- Crime Lab-TM-
ImageWare-Registered Trademark- Crime Web-TM-
Morphwizard-Registered Trademark- Face ID-TM-
People Postcards-Registered Trademark- Face Investigate-TM-
Suspect ID-Registered Trademark- ForceField 2000-TM-
Vehicle ID-Registered Trademark-
</TABLE>
We license and depend on intellectual property from third parties. We
license certain facial recognition and retrieval technology from Excalibur
Technologies Corporation on a nonexclusive, worldwide basis. Under the agreement
with Excalibur, we can create our own intellectual property as a derivative of
the Excalibur technology. Our license from Excalibur with respect to certain
technology will expire on April 29, 2001, while our license with respect to
other technology expired on October 29, 1999. Under the license with Excalibur,
we are currently paying royalties at rates equal to 10% and 25% of the net sales
price of the product depending on the category of Excalibur's technology which
is incorporated into the specific product being sold.
We also license search engine technology from Viisage Technology, Inc. and
Visionics, Inc. Our license from Viisage Technology is a nonexclusive license
for the United States and expires on December 31, 2000. The royalties payable by
us under the license from Viisage are $5,000 for searches
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of up to 40,000 images and $0.17 per image beyond 40,000 images. Our license
from Visionics is on a nonexclusive, worldwide basis and expires in July 2001.
The royalties payable by us under the license are based upon the number of
images on the database and the number of clients accessing the server. As of
February 29, 2000, we were actively using the technology licensed from Visionics
in our products. We believe that, prior to expiration of the Visionics license,
we will be able to either enter into a new license agreement with Visionics,
obtain similar search engine technology from another third party or develop our
own technology.
We also license certain of our technology to third parties. For a one-time
licensing fee of $1,961,039 received in 1997, we entered into a license
agreement pursuant to which we granted Atlus Co., Ltd. an exclusive license
(except with respect to the license granted to American Photo Booth, Inc.) to
use our patents and related technology in the entertainment photo booth market
and a nonexclusive license to use our patents and related technology in other
markets. The patents licensed to Atlus relate to only two of the six modules of
our C.R.I.M.E.S. suite of products, Suspect ID and Crime Lab. The remaining four
modules of the C.R.I.M.E.S. suite of products are not based on the patents or
technology which was the subject of this license agreement. The license
agreement also required that we first offer to Atlus, at a price and at terms
acceptable to us, the right to license all new technologies which we developed
before we could license such new technology to any third party. Atlus, in turn,
could only assign or sublicense its rights under the license agreement to an
affiliate or subsidiary of Atlus.
As of June 30, 1999, we entered into a settlement agreement and release with
Atlus in which we assigned to Atlus certain patents that were previously subject
to the license agreement mentioned above. In turn, Atlus has given us perpetual,
nonexclusive licenses to such assigned patents to use for applications other
than photo booth entertainment applications. The settlement agreement modifies
the license agreement with Atlus in that those patents which were assigned to
Atlus are no longer subject to the license agreement, and Atlus is now able to
freely sublicense to third parties the patents and intellectual property which
is still subject to the license agreement.
Pursuant to a license agreement with Panasonic Computer Peripheral Company,
Panasonic has the exclusive right to use our technology for the purpose of
bundling it with its motion printers and distributing the bundled product in the
United States and Canada. As of February 29, 2000, we had received payments from
Panasonic under this agreement of approximately $277,000, and Panasonic had
informed us that they have stopped using the technology for the time being. We
also granted to American Photo Booths Inc. a non-exclusive license to make and
sell entertainment photo booths using our "Color Masking" and "Object Layering"
technology pursuant to a confidential license agreement dated as of August 28,
1999. We do not receive royalties under this license agreement. We believe
certain of our patented technology may be currently used by third parties
without licenses from us and we intend to seek to enter into license agreements
with the parties similar to our arrangement with Panasonic.
RESEARCH AND DEVELOPMENT
Our research and development team is made up of 11 programmers, engineers
and other employees. We spent approximately $831,000 on research and development
in 1998 and $1,200,000 in 1999. We continually work to increase the speed and
accuracy of our existing suite of products. Our research and development efforts
will continue to focus on technology and products for the law enforcement and
public safety markets. We intend to use the proceeds of this offering to expand
our research and development efforts related to other markets as well.
Currently, our principal projects include:
- Completing the development of the Crime Web product and enabling our
existing products to allow facial images and associated data to be
accessed over the Internet or an agency's Intranet.
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- Completing the development of our "real time" facial recognition
application so that facial searches and resulting matches can be processed
within seconds of initial image capture.
- Adding wireless communications capabilities to our suite of products to
allow for the transmissions of images and text between agencies and their
officers in the field.
- Developing a standard interface template to allow for easier integration
of C.R.I.M.E.S. with the complementary applications of our strategic
partners, such as jail management and record keeping programs.
EMPLOYEES
As of February 29, 2000, we had a total of 52 full-time employees, including
ten in sales and marketing, 24 in customer support and installation, eleven in
research and development and seven in administration. Our employees are not
covered by any collective bargaining agreement, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.
FACILITIES
We conduct our operations from a 16,000-square-foot facility located in San
Diego, California. The monthly rent for this facility is approximately $22,000.
This lease expires on July 31, 2003. We believe this facility will meet our
needs for the next three years and that additional space will be available on
reasonable terms upon the expiration of our current lease or in the event we
need to expand our facilities.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition.
CORPORATE INFORMATION
ImageWare Systems, Inc. was incorporated in California in February 1987 as
Practically Perfect Productions, Inc. and changed its name to ImageWare
Software, Inc. in July 1992. We first focused on the law enforcement and public
safety markets in 1994 and originally introduced our C.R.I.M.E.S. system in
August 1995. We acquired XImage Corporation in January 1998. We changed our name
to ImageWare Systems, Inc. in November 1999. Our headquarters are located at
10883 Thornmint Road, San Diego, California 92127, and our telephone number is
(858) 673-8600. Our website address is WWW.IWSINC.COM. Information contained on
our website or any other website does not constitute a part of this prospectus.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------
<S> <C> <C>
S. James Miller, Jr.................. 46 Chairman, President and Chief Executive Officer
Wayne G. Wetherell................... 47 Vice President of Finance and Chief Financial
Officer
Paul J. Devermann.................... 44 Vice President of Sales and Business Development
Patricia E. Ryan..................... 35 Director of Major Account Development
William J. Ibbetson.................. 31 Chief Technical Officer
Patrick J. Downs..................... 63 Director
John L. Holleran..................... 73 Director
Yukuo Takenaka....................... 57 Director
</TABLE>
S. JAMES MILLER, JR. has served as our president and chief executive officer
and as a director since 1990. From 1980 to 1990, Mr. Miller was an executive
with Oak Industries, Inc., a manufacturer of components for the
telecommunications industry. While at Oak Industries, Mr. Miller served as a
director and as general counsel, corporate secretary and chairman/president of
Oak Industries' Pacific Rim subsidiaries. Mr. Miller has a J.D. from the
University of San Diego School of Law and a B.A. from the University of
California, San Diego.
WAYNE G. WETHERELL has served as our vice president of finance and chief
financial officer since 1996. From 1991 to 1996, Mr. Wetherell was the vice
president and chief financial officer of Bilstein Corporation of America, a
manufacturer and distributor of automotive parts. Mr. Wetherell holds a B.S. in
Management and a M.S. in Finance from San Diego State University.
PAUL J. DEVERMANN has served as our vice president of sales and business
development since 1997. From 1992 to 1997, Mr. Devermann was the managing
director and founding partner of Intra-International Trade and Transactions, an
international consulting and trading company which facilitates business
transactions between the U.S. and Japanese companies. He holds a B.S. degree in
Marketing from Northern Illinois University and an M.B.A. from the University of
Puget Sound.
PATRICIA E. RYAN has served as our director of major account development
since 1994. From 1992 to 1994, Ms. Ryan was an account executive of Noble
Broadcasting, Inc., where she was responsible for developing new business
through vendor and event marketing campaigns. Ms. Ryan holds a B.S. in Business
Administration and a B.A. in Economics from the University of New Hampshire.
WILLIAM J. IBBETSON joined us in 1992 as a field support technician and has
served as our chief technical officer since April 1996. Mr. Ibbetson holds a
Certification in Computer Electronics Technology from Coleman College.
PATRICK J. DOWNS was elected to the Board in August 1994. Since 1997,
Mr. Downs has been manager of Control Commerce, LLC, an Internet business. He is
a founding shareholder of NTN Communications, Inc., a interactive gaming company
whose common stock is listed on the American Stock Exchange, and served as its
chairman and chief executive officer from 1983 to 1997.
JOHN L. HOLLERAN was elected to the Board in May 1996. For the last five
years, Mr. Holleran has been self-employed as a management and investment
consultant.
YUKUO TAKENAKA was elected to the Board in April 1997. Since 1989,
Mr. Takenaka has been president of Takenaka & Company LLC, an investment firm.
Mr. Takenaka is a director of Atlus Dream Entertainment Co., Ltd., which is
majority owned by Atlus Holding, a wholly owned subsidiary of our largest
shareholder, Atlus Co., Ltd.
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We currently have four directors on our board and we intend to maintain at
least two independent directors. Each director holds office until the next
annual meeting of shareholders and until a successor is elected and qualified.
DIRECTOR COMPENSATION
In January 1998, for past services rendered as directors, we issued 2,844
shares of common stock to S. James Miller, 2,844 shares to Patrick Downs, 2,654
shares to William Guthner, 1,327 shares to John Holleran and 569 shares to Yukuo
Takenaka. Directors did not receive any other compensation in 1998. Beginning
November 1999, directors who are not also employees will receive $12,000
annually in return for their services as directors, payable in cash or our
common stock as determined by the company. We reimburse directors for travel and
other out-of-pocket expenses incurred in attending shareholder, board and
committee meetings. Directors are also entitled to receive options under the
1994 nonqualified stock option plan.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee consisting of Mr. Downs
and Mr. Holleran and an audit committee consisting of Mr. Takenaka, Mr. Downs
and Mr. Holleran, all of whom are independent directors. The compensation
committee reviews and recommends to the board of directors the compensation and
benefits of our officers, reviews general policy matters relating to
compensation and benefits of our employees and administers the issuance of stock
options and discretionary cash bonuses to our officers, employees, directors and
consultants. The audit committee meets with management and our independent
public accountants to determine the adequacy of our internal controls and other
financial reporting matters. It is our intention to appoint only independent
directors to the audit and compensation committees.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation awarded
to, earned by or paid to our president and chief executive officer and executive
officers whose annual compensation exceeded $100,000 in 1999 for all services
rendered to us during 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#)
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
S. James Miller, Jr. .................. 1999 $174,310 -- $ 9,000(3) 11,000
President and Chief Executive Officer 1998 159,769 -- 9,000(3) --
1997 156,445(1) $15,000 10,320(2)(3) 9,479
Wayne G. Wetherell .................... 1999 $117,884 -- -- 7,000
Vice President of Finance and 1998 108,606 -- -- 2,844
Chief Financial Officer 1997 108,127 $ 7,500 $ 1,320(2) 18,957
Paul J. Devermann ..................... 1999 $112,593 -- -- 7,000
Vice President of Sales and 1998 101,300 $10,000 -- 2,844
Business Development 1997 99,865 -- -- 18,957
</TABLE>
- ------------------------
(1) Includes cash and common stock.
(2) Includes a 401(k) matching contribution of $1,320.
(3) Includes an auto allowance of $750 per month.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to the
following executive officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE
NAME OPTIONS GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
S. James Miller, Jr................. 11,000 4.0% $8.00 Nov. 18, 2004
Wayne G. Wetherell.................. 7,000 2.5% 8.00 Nov. 18, 2004
Paul J. Devermann................... 7,000 2.5% 8.00 Nov. 18, 2004
</TABLE>
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and value of
unexercised options held by the following executive officers on December 31,
1999. None of these executive officers exercised options to purchase common
stock during 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
S. James Miller, Jr............................ 28,436 11,000 $77,486 $ 0
Wayne G. Wetherell............................. 14,265 14,536 38,873 20,534
Paul J. Devermann.............................. 14,265 14,536 38,873 20,534
</TABLE>
- ------------------------
(1) Based on the estimated fair value of our common stock as of December 31,
1999, determined by our board of directors to be $8 per share.
STOCK OPTION PLANS
We have three separate stock option plans: the 1994 employee stock option
plan, the 1994 nonqualified stock option plan, and the 1999 stock option plan.
The 1994 employee stock option plan is an incentive stock option plan which
authorizes us to issue options to purchase up to 170,616 shares of our common
stock to our officers and key employees. Under this plan, we have issued options
to purchase 165,118 shares at a weighted average exercise price of $5.275 per
share. The plan is administered by our board of directors. Subject to the
provisions of this plan, the board determines who will receive options, the
number of options granted, the manner of exercise and the exercise price of the
options. The term of the options granted under the plan may not exceed ten
years, or five years for options granted to an optionee owning more than 10% of
our common stock. No options may be granted after August 31, 2004. The exercise
price of the options granted under this plan must be equal to or greater than
the fair market value of the shares of our common stock on the date the option
is granted or, in the case of options granted to an optionee owning more than
10% of our voting stock, at a price equal to or greater than 110% of the fair
market value of our common stock on the date the option is granted.
The 1994 nonqualified stock option plan is a non-qualified stock option plan
which authorizes us to issue options to purchase up to 18,957 shares of our
common stock to our directors and consultants. Under this plan, we have issued
options to purchase 16,493 shares at an exercise price of $8.00. The plan is
administered by our board of directors. Subject to the provisions of this plan,
the board determines who will receive options, the number of options granted,
the manner of exercise and the exercise price of the options. The term of the
options granted under the plan may not exceed five
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<PAGE>
years. No options may be granted after August 31, 2004. The exercise price of
the options granted under this plan must be equal to or greater than 85% of the
fair market value of the shares of our common stock on the date the option is
granted.
The 1999 stock option plan is a combined incentive and non-qualified stock
option plan which authorizes us to issue options to purchase up to 100,000
shares of our common stock. Under this plan, we have issued options to purchase
95,000 shares at $8.00 per share, including 11,000 options to Mr. Miller, 7,000
options to Mr. Wetherell and 7,000 options to Mr. Devermann. The plan is
administered by our board of directors. Subject to the provisions of this plan,
the board determines who will receive options, the number of options granted,
the manner of exercise and the exercise price of the options. The term of the
options granted under the plan may not exceed ten years, or five years for
options granted to an optionee owning more than 10% of our voting stock. No
additional options are currently available for issuance under this plan.
The exercise price of an incentive stock option granted under the 1999 stock
option plan must be equal to or greater than the fair market value of the shares
of our common stock on the date the option is granted. The exercise price of a
non-qualified option granted under this plan must be equal to or greater than
85% of the fair market value of the shares of our common stock on the date the
option is granted. In either case, an option granted to an optionee owning more
than 10% of our voting stock must have an exercise price equal to or greater
than 110% of the fair market value of our common stock on the date the option is
granted.
Effective immediately upon the determination of the initial public offering
price of the units in this offering, the 1999 stock option plan will be amended
to authorize us to issue options to purchase an additional 150,000 shares of our
common stock. We have entered into agreements with Mr. Miller, Mr. Wetherell and
Mr. Devermann to grant them 64,000, 43,000 and 43,000 of these options,
respectively, as of the determination of the initial public offering price of
the units, at an exercise price equal to the initial public offering price of
the units.
In February 1999, all then-outstanding options were repriced so that the new
exercise price of these options became $5.28 per share, as adjusted to reflect
the 5.275-to-1 reverse stock split in November 1999. No outstanding options,
except those issued pursuant to our qualified stock option plans, may be
exercisable more than five years from the date of this offering.
EMPLOYMENT AGREEMENTS
S. JAMES MILLER, JR. In September 1997, we entered into an amended
employment agreement with Mr. Miller pursuant to which Mr. Miller will serve as
our president and chief executive officer. This agreement is for an initial
three-year term ending December 31, 2001, which period is renewed annually on
January 1(st) of each year for a three-year term unless we give Mr. Miller
one-year prior notice of termination. This agreement provides for annual base
compensation in the amount of 155,000 which was increased by the compensation
committee on August 30, 1999 to $185,000, which amount will be increased based
on cost-of-living increases, and a $750 per month auto allowance. Under this
agreement, we will reimburse Mr. Miller for reasonable expenses incurred in
connection with our business. If we terminate Mr. Miller's employment without
cause or if we move our principal offices out of San Diego, Mr. Miller will be
entitled to a lump sum amount equal to the full amount of his base salary for
the remainder of the term of the agreement. Upon a change in control of the
company or a material reduction of Mr. Miller's duties by the board of
directors, Mr. Miller may provide 30 days notice of the termination of his
employment and will be entitled to his entire unpaid base salary for the
remainder of the term of the agreement.
WAYNE G. WETHERELL. On March 1, 1999, we entered into an amended employment
agreement with Mr. Wetherell pursuant to which Mr. Wetherell will serve as our
chief financial officer. This agreement is for a term ending April 30, 2002.
This agreement provides for annual base salary in the
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<PAGE>
amount of $112,144, which amount will be increased based on cost-of-living
increases and may also be increased based on performance reviews. Currently, Mr.
Wetherell's annual salary is $125,000. Under this agreement, we will reimburse
Mr. Wetherell for reasonable expenses incurred in connection with our business.
If we terminate Mr. Wetherell's employment without cause, Mr. Wetherell will be
entitled to the full amount of his base salary for a period of one year after
termination. Upon a change in control of the company or a material reduction of
Mr. Wetherell's duties by the board of directors, Mr. Wetherell may provide
30 days notice of the termination of his employment and will be entitled to his
entire unpaid base salary for a period of one year from the date of termination.
PAUL J. DEVERMANN. On March 1, 1999, we entered into an amended employment
agreement with Mr. Devermann pursuant to which Mr. Devermann will serve as our
vice president of sales and business development. This agreement is for a term
ending February 28, 2002. This agreement provides for annual base salary in the
amount of $103,731, which amount will be increased based on cost-of-living
increases and may also be increased based on performance reviews. Currently
Mr. Devermann's annual salary is $125,000. Under this agreement, we will
reimburse Mr. Devermann for reasonable expenses incurred in connection with our
business. If we terminate Mr. Devermann's employment without cause,
Mr. Devermann will be entitled to a lump sum equal to the full amount of his
base salary for a period of one year after termination. Upon a change in control
of the company or a material reduction of Mr. Devermann's duties by the board of
directors, Mr. Devermann may provide 30 days notice of the termination of his
employment and will be entitled to his entire unpaid base salary for a period of
one year from the date of termination.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In connection with our acquisition of XImage in January 1998, we borrowed
$700,000 from Imperial Bank. On September 18, 1998, we borrowed an additional
$500,000 from Imperial Bank which has been paid in full. The maturity date of
the outstanding balance of the $700,000 loan has been extended until March 3,
2000. Both of the loans were personally guaranteed by Mr. Miller, Mr. Wetherell
and Mr. Devermann, and by William E. Guthner, one of our former directors. In
consideration of these guarantees, we issued to each of Mr. Miller,
Mr. Wetherell, Mr. Devermann and Mr. Guthner 27,014 shares of common stock,
warrants to purchase 3,318 shares of common stock at $15.825 per share, and
warrants to purchase 2,370 shares of common stock at $7.91 per share. These
guarantees will be released upon payment of the outstanding loan from Imperial
Bank. We intend to pay this loan in full with the proceeds of this offering.
We have also entered into letter agreements with Mr. Miller, Mr. Wetherell
and Mr. Devermann which provides that, immediately upon the determination of the
initial public offering price of the units, we will grant them options to
purchase common stock at an exercise price equal to the initial public offering
price of the units, in return for services rendered. Under these agreements, we
are obligated to grant 64,000 options to Mr. Miller, 43,000 options to Mr.
Wetherell and 43,000 options to Mr. Devermann.
Mr. Miller loaned us $267,500 pursuant to the terms of a convertible note
dated June 15, 1995. This debt was incurred to meet working capital needs. The
note provides for quarterly payments of interest at an annual rate of 8%, with
the entire amount due and payable on June 15, 2000. The amount due under the
note may be converted, at Mr. Miller's election, into units comprised of shares
of Series B preferred stock and warrants to purchase common stock on the same
terms as sold to our current Series B preferred shareholders in a 1995 private
placement. If Mr. Miller converts the note, he will be entitled to any dividends
which accrue on the Series B preferred stock after the date of conversion but
not before.
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<PAGE>
As of December 31, 1999, we have an outstanding debt of approximately
$33,000 to Patrick J. Downs, a director of the company, pursuant to the terms of
a convertible note dated June 15, 1995. This debt was incurred to meet working
capital needs. The note provides for quarterly payments of interest at an annual
rate of 8%, with the entire amount due and payable on June 15, 2000. The amount
due under the note may be converted, at Mr. Downs election, into units comprised
of shares of Series B preferred stock and warrants to purchase common stock on
the same terms as sold to our current Series B preferred shareholders in a 1995
private placement. If Mr. Downs converts the note, he will be entitled to any
dividends which accrue on the Series B preferred stock after the date of
conversion but not before.
We also have an outstanding debt of $55,000 to the Nossaman, Guthner,
Knox & Elliot Profit Sharing & Savings Plan dated April 1, 1969 for the benefit
of W.E. Guthner, Jr., our former director, pursuant to the terms of a promissory
note dated November 5, 1998. This debt was incurred to meet working capital
needs. The note provides for interest to accrue at the rate of 10% with a
payment of principal and interest which was due on January 31, 1999. This note
is secured by a security agreement granting a security interest in all of our
assets. The William Guthner Estate has not enforced its rights with respect to
repayment of the note. We intend to repay this obligation from the proceeds of
this offering.
We have entered into a letter agreement with Takenaka & Company LLC pursuant
to which Takenaka & Company has agreed to assist us in communicating with Atlus,
our largest shareholder. Pursuant to the terms of the letter agreement,
Takenaka & Company LLC will be compensated for its services on an hourly basis
ranging from $250 to $375 per hour depending on the level of experience of the
professional staff involved. Mr. Takenaka is the president of Takenaka & Company
LLC and one of our directors.
TRANSACTIONS WITH ATLUS CO., LTD.
Atlus Co., Ltd., a Japanese corporation, beneficially owns approximately 31%
of our common stock. In conjunction with an investment by Atlus in March of
1997, we entered into a securities purchase agreement and a license agreement
with Atlus. The license agreement is described in "Business--Intellectual
Property." The securities purchase agreement entitles Atlus to purchase, at the
end of each quarter until the date of an initial public offering of our common
stock, the number of warrants to purchase shares of common stock at $21.10 per
share which, if exercised, would result in Atlus owning 33 1/3% of our
outstanding common stock at the end of such quarter. The warrants granted to
Atlus would be exercisable for a period of five years after their date of
issuance. Atlus has not purchased any warrants under the securities purchase
agreement.
The securities purchase agreement also grants to Atlus a right of first
refusal to participate, on a pro rata basis, in future securities offerings, and
the right to approve of:
- any changes to our articles of incorporation,
- our obtaining a controlling interest in any other entity,
- the sale of any of our intellectual property,
- any change in the nature of our business, or
- the encumbrance of any of our material assets.
The securities purchase agreement with Atlus will be terminated effective upon
the completion of this offering.
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TRANSACTION WITH PRESIDENT OF ATLUS
Naoya Harano, the president of Atlus, loaned $1,250,000 to us pursuant to
the terms of a convertible promissory note dated November 10, 1999. The
convertible promissory note provides for payment upon the earlier of
February 10, 2001 or five days after the completion of this offering. The
repayment of the debt is in United States dollars, but the amount to be repaid
will be adjusted based upon the change in the exchange rate between the United
States dollar and the Japanese yen between the date of the promissory note and
the date of repayment. Changes in the value of the yen relative to the U.S.
dollar could cause currency transaction gains or losses. We may experience
significant currency exchange transaction losses when it is time to repay such
loan. To date, we have not hedged this loan transaction to protect us from risks
associated with foreign currency fluctuations.
If the convertible promissory note is not paid before April 1, 2000, the
holder may convert the outstanding balance due into our common stock at $1.00
per share. The amount due under the convertible promissory note accrues interest
at the rate of 10% per year. In connection with this loan, Mr. Harano received
warrants to purchase 125,000 shares of our common stock exercisable at $6.00 per
share. The note has been recorded net of a discount equal to the fair value
allocated to the warrants issued of approximately $361,000, which will be
amortized over the life of the note. These warrants are exercisable at any time
after January 1, 2001 and before November 10, 2004.
All future material transactions between us and our affiliates, including
loans and forgiveness of loans, will be made or entered into on terms that are
no less favorable to the company than those that can be obtained from
unaffiliated third parties. In addition, these future transactions will be
approved by a majority of our independent directors who do not have an interest
in the transaction and who have access to legal counsel at our expense.
All previous material transactions between us and our affiliates were
ratified by a majority of our independent directors who did not have an interest
in the transaction and who had access to legal counsel at our expense. There
were at least two independent directors on our board at the time of all such
transactions.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 29, 2000, and as adjusted to
reflect the sale of 1,875,000 units in this offering, by:
- each person or group of affiliated persons known to be the beneficial
owner of more than 5% of our outstanding common stock,
- each of our directors,
- each our executive officers, and
- all of our directors and executive officers as a group.
As of such date, there were 1,161,802 shares of common stock outstanding
before giving effect to the sale of units in the offering. The Company believes
that, except as otherwise listed below, each named beneficial owner has sole
voting and investment power with respect to the shares listed.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
------------------------
NUMBER OF SHARES BEFORE THIS AFTER THIS
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------- ------------------ ----------- ----------
<S> <C> <C> <C>
Atlus Co., Ltd.......................................... 365,116(2) 30.7% 11.9%
S. James Miller, Jr..................................... 184,054(3) 15.1% 5.9%
R Squared Limited(4) ................................... 120,943 10.4% 4.0%
c/o Royal Bank of Canada Trust Co.
P.O. Box 1856
Cardinal Avenue, George Town, Grand Cayman
Cayman Islands, B.W.I.
Wayne G. Wetherell...................................... 56,398(5) 4.7% 1.8%
Paul J. Devermann....................................... 53,649(6) 4.5% 1.8%
Patrick J. Downs........................................ 61,426(7) 5.3% 2.0%
John L. Holleran........................................ 10,332(8) 0.9% 0.3%
Yukuo Takenaka.......................................... 4,076(9) 0.3% 0.1%
369,935(10) 28.7% 11.9%
All directors and executive officers as a group (6
persons)..............................................
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the address of each person in this table is c/o
ImageWare Systems, Inc., 10833 Thornmint Road, San Diego, California 92127.
(2) Includes 26,540 shares subject to warrants that are exercisable within
60 days. Atlus Co., Ltd. is a Japanese company publicly traded in Japan.
(3) Includes 60,663 shares subject to options, warrants or convertible
securities that are exercisable or convertible within 60 days, and 9,479
shares held by members of Mr. Miller's immediate family.
(4) R Squared Limited is owned by a private trust whose ultimate beneficiary is
the International Red Cross.
(5) Includes 26,635 shares subject to options or warrants that are exercisable
within 60 days.
(6) Includes 26,635 shares subject to options or warrants that are exercisable
within 60 days.
(7) Includes 7,397 shares subject to options or convertible securities that are
exercisable or convertible within 60 days.
(8) Includes 2,370 shares subject to options that are exercisable within
60 days.
(9) Includes 3,507 shares subject to options that are exercisable or convertible
within 60 days.
(10) Includes 127,207 shares subject to options, warrants or convertible
securities that are exercisable or convertible within 60 days.
39
<PAGE>
DESCRIPTION OF SECURITIES
Upon completion of the offering, our authorized capital stock will consist
of (1) 50,000,000 authorized shares of common stock, $0.01 par value, and
(2) 4,000,000 authorized shares of preferred stock, $0.01 par value, of which
there will be 3,036,802 shares of common stock and 389,400 shares of preferred
stock outstanding. The following description of our capital stock is a summary
and is qualified by the provisions of our amended and restated articles of
incorporation and our bylaws, copies of which have been filed as exhibits to the
registration statement.
UNITS
Each unit consists of one share of common stock and one public warrant to
purchase an additional share of common stock. The common stock and warrants will
trade only as a unit for at least 30 days following this offering. Paulson
Investment Company, Inc. will then determine when the units separate, after
which the common stock and the public warrants will trade separately.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote and, in the election of directors, may
upon proper notice cumulate their votes and cast them for one or more directors.
Holders of common stock are entitled to share in dividends that the board of
directors, in its discretion, declares from legally available funds. In the
event of the liquidation or dissolution of the company, each outstanding share
entitles its holder to a proportionate share of all assets that remain after
payment of liabilities subject to the rights of any outstanding preferred stock.
Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. The rights of the holders of common stock are subject to the
rights of holders of preferred stock. All outstanding shares of common stock
are, and the shares underlying all options and public warrants will be, duly
authorized, validly issued, fully paid and non-assessable upon our issuance of
such shares.
PREFERRED STOCK
Our amended and restated articles of incorporation provide for the issuance
of up to 750,000 shares of Series B preferred stock. As of the date of this
prospectus, there are 389,400 outstanding shares of Series B preferred stock.
The Series B preferred stock have rights and preferences which are superior to
the rights of the holders of our common stock. These rights and preferences
include the right to receive a cumulative cash dividend at the rate of $0.2125
per share per year, a preference in the distribution of our assets over the
holders of common stock in event of the liquidation or dissolution of the
company, the right to convert to shares of common stock, and the right to elect
a director in the event we are in default of the provisions of the amended and
restated articles of incorporation with respect to the Series B preferred stock.
Subject to certain limitations prescribed by law and the rights and preferences
of the Series B preferred stock, our board of directors is authorized from time
to time to issue up to an aggregate of 3,610,600 shares of our preferred stock.
Each new series of preferred stock may have different rights and preferences
that may be established by our board of directors. The rights and preferences of
future series of preferred stock may include:
- number of shares to be issued;
- dividend rights and dividend rates;
- right to convert the preferred stock into a different type of security;
40
<PAGE>
- voting rights attributable to the preferred stock;
- right to receive preferential payments upon a liquidation of the company;
- right to set aside a certain amount of assets for payments relating to the
preferred stock; and
- prices to be paid upon redemption of the preferred stock.
PUBLIC WARRANTS
GENERAL
Each public warrant entitles the holder to purchase one share of our common
stock at an exercise price per share of 120% of the initial public offering
price of the units during the first year after the offering and 150% of the
initial public offering price of the units thereafter. The exercise price is
subject to adjustment upon the occurrence of certain events as provided in the
public warrant certificate and summarized below. Our public warrants may be
exercised at any time during the period commencing 30 days after this offering
and ending on the fifth anniversary date of the closing of the offering, which
is the expiration date. Those of our public warrants which have not previously
been exercised will expire on the expiration date. A public warrant holder will
not be deemed to be a holder of the underlying common stock for any purpose
until the public warrant has been properly exercised.
SEPARATE TRANSFERABILITY
Our public warrants will trade only as a unit for a period of at least 30
days following this offering. Paulson Investment Company, Inc. will then
determine when the units separate, after which the common stock and the public
warrants will trade separately.
REDEMPTION
We have the right, commencing six months after the closing of this offering,
to redeem the public warrants issued in the offering at a redemption price of
$0.25 per public warrant after providing 30 days prior written notice to the
public warrant holders, if the average closing bid price of the common stock
equals or exceeds 200% of the initial public offering price of the units for ten
consecutive trading days ending prior to the date of the notice of redemption.
We will send the written notice of redemption by first class mail to public
warrant holders at their last known addresses appearing on the registration
records maintained by the transfer agent for our public warrants. No other form
of notice or publication or otherwise will be required. If we call the public
warrants for redemption, they will be exercisable until the close of business on
the business day next preceding the specified redemption date.
EXERCISE
A public warrant holder may exercise our public warrants only if an
appropriate registration statement is then in effect with the Securities and
Exchange Commission and if the shares of common stock underlying our public
warrants are qualified for sale under the securities laws of the state in which
the holder resides.
Our public warrants may be exercised by delivering to our transfer agent the
applicable public warrant certificate on or prior to the expiration date or the
redemption date, as applicable, with the form on the reverse side of the
certificate executed as indicated, accompanied by payment of the full exercise
price for the number of public warrants being exercised. Fractional shares will
not be issued upon exercise of our public warrants.
41
<PAGE>
ADJUSTMENTS OF EXERCISE PRICE
The exercise price is subject to adjustment if we declare any stock dividend
to shareholders or effect any split or share combination with respect to our
common stock. Therefore, if we effect any stock split or stock combination with
respect to our common stock, the exercise price in effect immediately prior to
such stock split or combination will be proportionately reduced or increased, as
the case may be. Any adjustment of the exercise price will also result in an
adjustment of the number of shares purchasable upon exercise of a public warrant
or, if we elect, an adjustment of the number of public warrants outstanding.
PRIOR WARRANTS
As of the date of this prospectus, we had issued and outstanding warrants to
purchase 328,662 shares of our common stock at a weighted average exercise price
of $9.34, the forms of which have been filed as exhibits to the registration
statement. These warrants include warrants issued to Imperial Bank to purchase
13,586 shares of our common stock. These warrants grant to Imperial Bank the
right to require us to purchase such warrants from Imperial Bank for $70,000 on
or after January 15, 2001 or within 20 days after a merger, consolidation or
sale of assets of the company or the liquidation, dissolution or winding up of
the company. No issued and outstanding warrants are exercisable more than five
years from the date of this offering.
REGISTRATION RIGHTS
GENERAL
We have granted certain registration rights with respect to 505,176 of our
securities. We will pay for all expenses incurred in connection with these
registrations, other than underwriting discounts and commissions. The following
is only a summary of certain of the terms and conditions of the agreements
involving parties which have registration rights. Copies of the actual
agreements have been filed with the Securities and Exchange Commission as
exhibits to the registration statement. Holders of registration rights with
respect to 441,312 of our securities have waived such registration rights for at
least six months following the completion of this offering.
GRANTED TO THE SERIES B PREFERRED SHAREHOLDERS IN A 1995 PRIVATE PLACEMENT
We granted demand and incidental registration rights to our Series B
preferred shareholders with respect to the shares underlying the Series B
preferred shares and warrants issued to them in connection with the 1995 private
placement of our Series B units. Holders of Series B preferred shares may demand
to have our common stock underlying their Series B preferred shares registered
at any time after completion of this offering and before April 30, 2000. The
Series B warrants have expired. Additionally, if we register an issuance of any
of our equity securities, other than shares issuable under employee stock option
plans, at any time prior to April 30, 2000, the Series B preferred shareholders
may request that such underlying common stock be included in the registration.
However, holders of Series B preferred shares convertible, as of February 29,
2000, into 67,675 shares of common stock agreed to waive such registration
rights for six months following completion of this offering.
GRANTED TO ATLUS
We also granted demand and incidental registration rights to Atlus with
respect to all shares held by Atlus pursuant to the securities purchase
agreement with Atlus. The securities purchase agreement with Atlus will be
terminated effective upon the completion of this offering.
42
<PAGE>
GRANTED TO FORMER XIMAGE SHAREHOLDERS
The former XImage shareholders have also been granted demand and incidental
registration rights with respect to 71,090 shares underlying the warrants held
by them. The holders of a majority of all registrable securities owned by these
shareholders may demand registration for the resale of any or all of their
shares at any time after this offering and before November 30, 2003.
Additionally, if we register an issuance of our equity securities, other than
shares issuable under our employee stock option plans at any time prior to
November 30, 2003, these holders may request to include their shares in the
registration. However, holders of warrants with respect to 53,341 shares
underlying the warrants agreed to waive such registration rights for one year
following the completion of this offering.
GRANTED TO FORMER XIMAGE OFFICERS, NOTEHOLDERS AND OTHER INVESTORS
We have also granted certain former XImage officers, noteholders and other
investors "piggyback" registration rights under which they can request to be
included in a registration of our securities, other than a registration of
shares issuable under an employee stock option plan.
GRANTED TO OFFICERS, DIRECTORS AND OTHER PARTIES
Mr. Miller, Mr. Wetherell, Mr. Devermann and the William Guthner estate have
the same registration rights as the former XImage Shareholders described above.
Mr. Miller, Mr. Wetherell and Mr. Devermann have agreed not to make a demand for
registration for a period of at least one year after this offering.
Mr. Miller and Mr. Downs also have registration rights with respect to their
convertible promissory notes. These registration rights are identical to the
registration rights which have been granted to the Series B preferred
shareholders as described above.
William Guthner and related parties converted their convertible promissory
notes in December 1997 into shares of Series B preferred stock and warrants to
purchase common stock. The registration rights granted to these parties, which
apply to the shares and warrants they received upon conversion of their
convertible notes, are identical to the registration rights which have been
granted to the Series B preferred shareholders as described above.
GRANTED TO IMPERIAL BANK
In January 1998 and September 1998, in connection with the credit line
extended to us, we granted demand and incidental registration rights to Imperial
Bank with respect to shares of common stock underlying the warrants held by
Imperial Bank. Imperial Bank has the same registration rights as the Series B
preferred shareholders in the 1995 private placement described above. Imperial
Bank has agreed not to make a demand for registration for a period of at least
one year after this offering.
GRANTED TO PAULSON AND I-BANKERS
We have entered into a warrant agreement with Paulson Investment
Company, Inc. and I-Bankers Securities, Inc. as representatives of the
underwriters of this offering. These representatives' warrants, as well as the
shares of common stock and warrants included in the units issuable upon exercise
of the representatives' warrants, are being registered on the registration
statement. We will cause the registration statement to remain effective until
the earlier of the time that all of the representatives' warrants have been
exercised and the date which is five years after the effective date of the
offering. The common stock and warrants issued to the representatives upon
exercise of these warrants will be freely tradable. All expenses incurred in
connection with the registration of the shares of common stock and warrants
included in the units issuable upon the exercise of the representatives'
warrants will be borne by us. Under the warrant agreement, the parties will also
be bound by standard indemnification
43
<PAGE>
and contribution provisions with respect to the registration of the warrant
shares issuable upon the exercise of the representatives' warrants.
GRANTED TO R SQUARED LIMITED
In connection with a loan made to us, R Squared Limited has also been
granted the right to include their shares in any registration made by us. R
Squared Limited has agreed to waive such registration rights for one year
following the completion of this offering.
GRANTED TO THE PRESIDENT OF ATLUS
In connection with a loan made to us, Mr. Harano has been issued warrants to
purchase common stock. Mr. Harano has been granted the same demand and
incidental registration rights with respect the common stock underlying these
warrants as we have granted to the former XImage shareholders. Mr. Harano has
agreed to waive such registration rights for one year following the completion
of this offering.
TRANSFER AGENT AND PUBLIC WARRANT AGENT
The transfer agent for our common stock, units and public warrants is
American Securities Transfer & Trust, Inc., Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
THIS OFFERING
Upon completion of the offering, we expect to have 3,036,802 shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants, or 3,318,052 shares if the over-allotment is exercised in full. Of
these shares, the 1,875,000 shares of common stock issued as part of the units
sold in the offering will be freely tradeable without restrictions or further
registration under the Securities Act of 1933, except that any shares purchased
by our "affiliates", as that term is defined under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 under the
Securities Act. The 1,875,000 shares of common stock underlying the public
warrants issued as part of the units sold in this offering will also be freely
tradeable, except for shares purchased by our affiliates. As of the date of this
prospectus, there are approximately 104 holders of our common stock.
OUTSTANDING RESTRICTED STOCK
The remaining 1,161,802 outstanding shares of common stock are restricted
securities within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption from registration offered by Rule 144.
Holders of 916,263 of our outstanding restricted shares of common stock have
agreed not to sell or otherwise dispose of any of their shares of common stock
for a period of one year after completion of the offering, without the prior
written consent of Paulson Investment Company, Inc., subject to certain limited
exceptions. Prior to the expiration of this lock-up period, 245,539 shares of
our outstanding restricted common stock may be sold in the public market
pursuant to Rule 144. After the expiration of this lock-up period, or earlier
with the prior written consent of Paulson Investment Company, Inc., all
1,161,802 of these outstanding restricted shares may be sold in the public
market pursuant to Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including a person who may be deemed to be our
affiliate, may sell within any three-month period a number of shares of common
stock that does not exceed a specified maximum number of shares. This maximum is
equal to the greater of 1% of the then outstanding shares of our common stock or
the average weekly
44
<PAGE>
trading volume in the common stock during the four calendar weeks immediately
preceding the sale. Sales under Rule 144 are also subject to restrictions
relating to manner of sale, notice and availability of current public
information about us. In addition, under Rule 144(k) of the Securities Act, a
person who is not our affiliate, has not been an affiliate of ours within three
months prior to the sale and has beneficially owned shares for at least two
years would be entitled to sell such shares immediately without regard to volume
limitations, manner of sale provisions, notice or other requirements of
Rule 144.
SERIES B PREFERRED STOCK
As of February 29, 2000, we had 389,400 shares of Series B preferred stock
outstanding. These shares, plus accrued but unpaid dividends, are convertible at
the option of the holders into an aggregate of approximately 88,314 shares of
our common stock. Any shares issued upon the conversion of the Series B
preferred stock will be eligible for sale pursuant to Rule 144, except that
298,400 of these shares are subject to lockup agreements for a period of six
months after the completion of this offering.
OPTIONS
Beginning 90 days after the date of this prospectus, certain shares issued
or issuable upon the exercise of options granted by us prior to the date of this
prospectus will also be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act of 1933, except that 268,081 of these shares
are subject to the lock-up agreements for a period of one year after completion
of this offering. Pursuant to Rule 701, persons who purchase shares upon
exercise of options granted under a written compensatory plan or contract may
sell such shares in reliance on Rule 144 without having to comply with the
holding period requirements of Rule 144, and in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. As of February 29, 2000, we had options
outstanding to purchase 276,611 shares of common stock which have not been
exercised and which become exercisable at various times in the future. Any
shares issued upon the exercise of these options will be eligible for sale
pursuant to Rule 701.
We intend to file registration statements on Form S-8 under the Securities
Act to register approximately 7,962 shares of our common stock issuable under
our stock option plans. These registration statements are expected to be filed
within three to six months after the completion of this offering. Shares of
common stock registered under these registration statements will be available
for resale in the public market, subject to Rule 144 volume limitations
applicable to our affiliates and to the lock-up agreements which will be in
effect for a period of one year after the completion of this offering.
WARRANTS
As of February 29, 2000, we had warrants outstanding to purchase 328,662
shares of common stock which have not been exercised and which become
exercisable at various times in the future. Any shares issued upon the exercise
of these warrants will be eligible for sale pursuant to Rule 144, except that
278,193 of these shares are subject to the lock-up agreements for a period of
one year after the completion of this offering.
REPRESENTATIVES' WARRANTS
In connection with the offering, we have agreed to issue to the
representatives of the underwriters warrants to purchase 181,339 units. This
number is equal to 10% of the number of units being offered by this prospectus,
excluding over-allotment shares, less certain warrants previously granted to a
finder. The representatives' warrants will be exercisable into units at any time
during the four-year period
45
<PAGE>
commencing one year after the effective date of the offering. We will cause the
registration statement to remain effective until the earlier of the time that
all of the representatives' warrants have been exercised and the date which is
five years after the effective date of the offering. The common stock and
warrants issued to the representatives upon exercise of these warrants will be
freely tradable.
REGISTRATION RIGHTS
As of February 29, 2000, holders of approximately 505,176 shares of our
outstanding or issuable common stock had the right to include their shares in
registration statements relating to our securities or to require us to register
their shares. Holders of 441,312 of these shares, have agreed to waive these
registration rights for at least six months following the completion of this
offering or shorter as determined by Paulson Investment Company, Inc. Holders of
registration rights may cause the price of our common stock to fall by
exercising their registration rights and causing a large number of shares to be
registered and sold in the public market. In addition, any demand for future
registration of these shares could have a material adverse effect on our ability
to raise needed capital.
Prior to the offering, there has been no public market for our common stock
and there can be no assurance that a significant public market for the common
stock will develop or be sustained after the offering.
46
<PAGE>
UNDERWRITING
Paulson Investment Company, Inc. and I-Bankers Securities, Inc. are acting
as representatives of the underwriters. We and the underwriters named below have
entered into an underwriting agreement with respect to the units being offered.
In connection with this offering and subject to certain conditions, each of the
underwriters named below has severally agreed to purchase, and we have agreed to
sell, the number of units set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
- ------------ ---------------
<S> <C>
Paulson Investment Company, Inc.............................
I-Bankers Securities, Inc...................................
---------
Total.....................................................
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the units offered by this prospectus, other than those covered
by the over-allotment option, if any units are purchased. The underwriting
agreement also provides that the obligations of the several underwriters to pay
for and accept delivery of the units are subject to the approval of certain
legal matters by counsel and certain other conditions. These conditions include
the requirements that no stop order suspending the effectiveness of the
registration statement be in effect and that no proceedings for such purpose
have been instituted or threatened by the Securities and Exchange Commission.
The representatives have advised us that the underwriters propose to offer
our units to the public initially at the offering price set forth on the cover
page of this prospectus and to selected dealers at such price less a concession
of not more than $ per unit. The underwriters and selected dealers may
reallow a concession to other dealers, including the underwriters, of not more
than $ per unit. After completion of the initial public offering of the
units, the offering price, the concessions to selected dealers and the
reallowance to their dealers may be changed by the underwriters.
The underwriters have informed us that they do not expect to confirm sales
of our units offered by this prospectus to any accounts over which they exercise
discretionary authority.
OVER-ALLOTMENT OPTION
Pursuant to the underwriting agreement, we have granted Paulson Investment
Company, Inc. an option, exercisable for 45 days from the date of this
prospectus, to purchase up to an additional 281,250 units on the same terms as
the units being purchased by the underwriters from us. Paulson Investment
Company, Inc. may exercise the option solely to cover over-allotments, if any,
in the sale of the units that the underwriters have agreed to purchase. If the
over-allotment option is exercised in full, the total public offering price,
underwriting discounts and commissions, and proceeds to the company before
offering expenses will be $ , $ and $ , respectively.
STABILIZATION
Until the distribution of the units offered by this prospectus is completed,
rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for and purchase units. As an exception to these rules, the
underwriters may engage in transactions that stabilize the price of the units.
Paulson Investment Company, Inc., on behalf of the underwriters, may engage in
over-allotment sales, stabilizing transactions, syndicate covering transactions
and penalty bids in accordance with Regulation M under the Securities Exchange
Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
47
<PAGE>
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock and
public warrants in the open market after the distribution has been
completed in order to cover syndicate short positions. The underwriters
may also elect to reduce any short position by exercising all or part of
the over-allotment option to purchase additional units as described above.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the units originally sold by the syndicate
member are purchased in a syndicate covering transaction to cover
syndicate short positions.
In general, the purchase of a security to stabilize or to reduce a short
position could cause the price of the security to be higher than it might be
otherwise. These transactions may be effected on the American Stock Exchange or
otherwise. Neither we nor the underwriters can predict the direction or
magnitude of any effect that the transactions described above may have on the
price of the units. In addition, neither we nor the underwriters can represent
that the underwriters will engage in these types of transactions or that these
types of transactions, once commenced, will not be discontinued without notice.
INDEMNIFICATION
The underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities under the Securities Act of 1933 is against
public policy as expressed in the Securities Act and is therefore unenforceable.
UNDERWRITERS' COMPENSATION
We have agreed to sell the units to the underwriters at the initial offering
price of $ , less the % underwriting discount. The underwriting
agreement also provides that upon the closing of the sale of the units offered,
Paulson Investment Company, Inc. will be paid a nonaccountable expense allowance
equal to two percent of the gross proceeds from the sale of the units offered by
this prospectus, including the over-allotment option.
We have also agreed to issue warrants to the representatives to purchase
from us up to 181,339 units at an exercise price per unit equal to 120% of the
offering price per unit. These warrants are exercisable during the four-year
period beginning one year from the date of effectiveness of the registration
statement. These warrants, and the securities underlying the warrants, are not
transferable for one year following the effective date of the registration,
except to an individual who is an officer or partner of an underwriter, by will
or by the laws of descent and distribution, and are not redeemable. These
warrants will have registration rights. We will cause the registration statement
to remain effective until the earlier of the time that all of the
representatives' warrants have been exercised and the date which is five years
after the effective date of the offering. The common stock and warrants issued
to the representatives upon exercise of these warrants will be freely tradable.
The holders of the representatives' warrants will have, in that capacity, no
voting, dividend or other shareholder rights. Any profit realized by the
representatives on the sale of the securities issuable upon exercise of the
representatives' warrants may be deemed to be additional underwriting
compensation. The securities underlying the representatives' warrants are being
registered on the registration statement. During the term of the
representatives' warrants, the holders thereof are given the opportunity to
profit from a rise in the market price of our common stock. We may find it more
difficult to raise additional equity capital while the representatives' warrants
are outstanding. At any time at which the representatives' warrants are likely
to be exercised, we may be able to obtain additional equity capital on more
favorable terms.
48
<PAGE>
LOAN BY CHESTER PAULSON
Chester L.F. Paulson, the chairman and indirect majority shareholder of
Paulson Investment Company, Inc., loaned $500,000 to us pursuant to a promissory
note and loan agreement dated November 24, 1999. Mr. Paulson has borrowed the
$500,000 which he has loaned to us from U.S. Bank National Association. Paulson
Investment Company, Inc. has agreed to indemnify Mr. Paulson against any default
by us. We are paying Paulson Investment Company, Inc. a $75,000 loan fee.
We must repay the loan to Mr. Paulson upon the earlier of a demand for
payment by U.S. Bank, the completion of this offering, or April 3, 2000. If we
are unable to repay the loan, Paulson Investment Company, Inc. is entitled to
receive warrants to purchase one share of our common stock for each dollar which
Mr. Paulson must repay to U.S. Bank. If this offering is not completed, we must
offer to pay Paulson Investment Company, Inc. from the proceeds of any other
financing in excess of $575,000 which we complete prior to December 31, 2000.
Upon our offer of repayment, Paulson Investment Company, Inc. may either accept
such repayment and surrender the warrants issued to it or keep the warrants in
which case we will have no further obligations to Mr. Paulson or Paulson
Investment Company, Inc. under the promissory note or loan agreement. The amount
due under the promissory note accrues interest at the same variable rate of
interest which Mr. Paulson must pay U.S. Bank, which is based on the prime
lending rate. The initial interest rate is 9%.
LOCK-UP AGREEMENT
Our officers and directors have agreed that for a period of one year, and
certain of our shareholders have agreed for a period of at least six months,
from the date this registration statement becomes effective that they will not
sell, contract to sell, grant any option for the sale or otherwise dispose of
any of our equity securities, or any securities convertible into or exercisable
or exchangeable for our equity securities, other than through intra-family
transfers or transfers to trusts for estate planning purposes, without the
consent of Paulson Investment Company, Inc., as a representative of the
underwriters, which consent will not be unreasonably withheld.
EXPENSES
The following table sets forth an itemization of all expenses we will pay in
connection with the issuance and distribution of the securities being
registered. Except for the SEC registration fee, the NASD filing fee and The
American Stock Exchange listing fee, the amounts listed below are estimates:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC registration fee........................................ $ 15,525
NASD filing fees............................................ 6,381
The American Stock Exchange listing fee..................... 38,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses..................................... 300,000
Director and officer insurance expenses..................... 85,000
Printing and related expenses............................... 170,000
Blue sky legal fees and expenses............................ 65,000
Transfer agent fees and expenses............................ 1,250
Miscellaneous expenses...................................... 25,044
--------
TOTAL..................................................... $906,200
</TABLE>
In addition, we have been advised that Paulson Investment Company, Inc. will
pay $50,000 to J. Michael Reisert for services as a finder in connection with
the offering. This payment, payable only if the offering is completed, is the
customary fee paid to a third party who introduces a company to an underwriter.
49
<PAGE>
DETERMINATION OF OFFERING PRICE
Before this offering, there has been no public market for the units and the
common stock and public warrants contained in the units. Accordingly, the
initial public offering price of the units offered by this prospectus and the
exercise price of the public warrants were determined by negotiation between us
and the underwriters. Among the factors considered in determining the initial
public offering price of the units and the exercise price of the public warrants
were:
- our history and our prospects,
- the industry in which we operate,
- the status and development prospects for our proposed products and
services,
- our past and present operating results,
- the previous experience of our executive officers, and
- the general condition of the securities markets at the time of this
offering.
The offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the units. That price is subject
to change as a result of market conditions and other factors, and we cannot
assure you that the units, or the common stock and public warrants contained in
the units, can be resold at or above the initial public offering price.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon on
our behalf by Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite
2600, San Diego, CA 92101. Certain legal matters will be passed upon for the
underwriters by Tonkon Torp LLP, 1600 Pioneer Tower, 888 SW Fifth Avenue,
Portland, Oregon 97204.
EXPERTS
The financial statements for the years ended December 31, 1999 and 1998
included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act
with the Securities and Exchange Commission with respect to the units offered
hereby. This prospectus does not contain all of the information contained in the
registration statement and the exhibits to the registration statement.
Statements made in this prospectus concerning any contracts, agreements or
documents are not necessarily complete. We refer you to the copies of these
contracts, agreements and documents filed as exhibits to the registration
statement. These statements are qualified in all respects by this reference to
these exhibits.
The registration statement and the exhibits and schedules thereto filed with
the Securities and Exchange Commission may be inspected by you at the Securities
and Exchange Commission's principal office in Washington, D.C. Copies of all or
any part of the registration statement may be obtained from the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the commissions' regional offices located at
Seven World Trade Center, 13(th)Floor, New York, New York 10048 and 500 West
Madison Street, Suite 11400, Chicago, Illinois 60661. The commission also
maintains a website (http://www.sec.gov) that contains reports, proxy statements
and information statements and other information regarding registrants that file
electronically with the Commission. For further information pertaining to us and
the units offered by this prospectus, reference is made to the registration
statement.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent accountants.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
IMAGEWARE SYSTEMS, INC.:
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1999................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1998 and 1999............ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999................................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
ImageWare Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
ImageWare Systems, Inc. and its subsidiary at December 31, 1998 and 1999 and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a negative working capital that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Diego, California
February 25, 2000
F-2
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 45,793 $ 156,063
Accounts receivable, net.................................. 931,654 2,919,857
Inventories............................................... 43,386 112,250
Other current assets...................................... 256,838 183,062
------------ ------------
Total current assets.................................. 1,277,671 3,371,232
Property and equipment, net................................. 269,594 191,798
Intangible assets, net of accumulated amortization of
$1,190,183 in 1998 and $2,172,888 in 1999................. 2,836,740 2,346,557
------------ ------------
$ 4,384,005 $ 5,909,587
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable.......................................... $ 1,030,716 $ 1,624,940
Deferred revenue.......................................... 421,351 853,003
Accrued expenses.......................................... 1,342,901 2,226,876
Deferred compensation..................................... 261,015 294,330
Accrued interest.......................................... 300,440 437,244
Notes payable to bank..................................... 700,000 500,000
Notes payable to related parties.......................... 299,775 1,719,047
------------ ------------
Total current liabilities............................. 4,356,198 7,655,440
Notes payable to bank, net of current portion............... 500,000 --
Notes payable to related parties, net of current portion.... 973,172 924,542
------------ ------------
Total liabilities........................................... 5,829,370 8,579,982
------------ ------------
Commitments and contingencies
Shareholders' deficit
Preferred stock, $.01 par value, authorized
4,000,000 shares........................................
Series B convertible redeemable preferred stock,
designated 750,000 shares, 389,400 shares issued and
outstanding, $973,500 liquidation preference.......... 3,894 3,894
Common stock, $.01 par value, 50,000,000 shares
authorized, 899,081 and 1,161,802 shares issued and
outstanding............................................. 8,991 11,618
Additional paid-in capital................................ 14,792,783 16,599,720
Accumulated deficit....................................... (16,251,033) (19,285,627)
------------ ------------
Total shareholders' deficit........................... (1,445,365) (2,670,395)
------------ ------------
$ 4,384,005 $ 5,909,587
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
REVENUES
Product................................................... $ 2,708,856 $ 4,276,201
Maintenance............................................... 1,307,286 1,404,709
License and other......................................... 220,175 210,567
----------- -----------
4,236,317 5,891,477
COST OF REVENUES
Product................................................... 1,354,920 1,896,916
Maintenance............................................... 1,065,740 862,816
----------- -----------
Gross margin............................................ 1,815,657 3,131,745
----------- -----------
Operating, general and administrative expenses.............. 2,265,312 2,531,079
Sales and marketing expenses................................ 960,246 1,024,224
Research and development expenses........................... 831,034 1,150,914
Depreciation and amortization............................... 988,838 1,096,484
----------- -----------
5,045,430 5,802,701
----------- -----------
Loss from operations.................................... (3,229,773) (2,670,956)
----------- -----------
Interest expense, net....................................... 204,287 363,638
----------- -----------
Loss before income taxes................................ (3,434,060) (3,034,594)
----------- -----------
Provision for income taxes.................................. -- --
----------- -----------
Net loss................................................ $(3,434,060) $(3,034,594)
=========== ===========
Net loss per common share (see Note 2)...................... $ (4.08) $ (3.07)
=========== ===========
Basic and diluted common shares............................. 861,875 1,016,399
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE,
REDEEMABLE
PREFERRED COMMON STOCK ADDITIONAL
------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- --------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 389,400 $3,894 845,163 $ 8,452 $14,296,302 $(12,816,973) $ 1,491,675
Issuance of common stock
for loan guarantees.... -- -- 44,866 449 359,571 -- 360,020
Issuance of common stock
for payment of Board
fees................... -- -- 10,236 102 161,898 -- 162,000
Repurchase of shares..... -- -- (1,184) (12) (24,988) -- (25,000)
Net loss................. -- -- -- -- -- (3,434,060) (3,434,060)
------- ------ --------- ------- ----------- ------------ -----------
Balance at December 31,
1998................... 389,400 3,894 899,081 8,991 14,792,783 (16,251,033) (1,445,365)
Issuance of common stock
for loan guarantees.... -- -- 73,466 735 348,044 -- 348,779
Issuance of common stock
for cash............... -- -- 47,393 473 374,527 -- 375,000
Conversion of note
payable to common
stock.................. -- -- 141,862 1,419 738,290 -- 739,709
Financing commission..... -- -- -- -- (15,000) -- (15,000)
Detachable warrants
issued with debt....... -- -- -- -- 361,076 -- 361,076
Net loss................. -- -- -- -- -- (3,034,594) (3,034,594)
------- ------ --------- ------- ----------- ------------ -----------
Balance at December 31,
1999................... 389,400 $3,894 1,161,802 $11,618 $16,599,720 $(19,285,627) $(2,670,395)
======= ====== ========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IMAGEWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(3,434,060) $(3,034,594)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization........................... 988,838 1,096,484
Deferred revenue........................................ (431,271) 431,652
Noncash compensation and fees........................... 522,020 423,488
Change in assets and liabilities
Accounts receivable, net.............................. 40,482 (1,988,203)
Inventory............................................. 69,895 (68,864)
Other current assets.................................. 114,313 73,776
Other long-term assets................................ -- (492,883)
Accounts payable...................................... 292,320 594,224
Accrued expenses...................................... (165,925) 917,271
Accrued interest...................................... 61,344 168,902
----------- -----------
Total adjustments................................... 1,492,016 1,155,847
----------- -----------
Net cash used by operating activities............... (1,942,044) (1,878,747)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (68,991) (35,983)
Acquisition of business, net of cash acquired............. (2,129,331) --
----------- -----------
Net cash used by investing activities............... (2,198,322) (35,983)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on amounts due stockholders.......... -- (150,000)
Proceeds from issuance of stock........................... -- 375,000
Repurchase of common stock................................ (25,000) --
Proceeds from issuance of notes payable................... 1,905,000 2,500,000
Repayment of loans........................................ (3,700) (700,000)
----------- -----------
Net cash provided by financing activities........... 1,876,300 2,025,000
----------- -----------
Net increase (decrease) in cash..................... (2,264,066) 110,270
Cash at beginning of period................................. 2,309,859 45,793
----------- -----------
Cash at end of period............................... $ 45,793 $ 156,063
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest.................................... $ 99,079 $ 141,930
=========== ===========
Conversion of notes payable to common stock............... $ -- $ 650,000
=========== ===========
Issuance of common stock to loan guarantors............... $ 360,020 $ 348,779
=========== ===========
Issuance of common stock for Board of Director's fees..... $ 162,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. DESCRIPTION OF BUSINESS AND OPERATIONS
ImageWare Systems, Inc. (the "Company"), formerly known as ImageWare
Software, Inc., was incorporated in the State of California on February 6,
1987 for the purpose of developing, manufacturing and distributing products
utilizing electronic imaging technology. The Company has developed the Crime
Reduction, Image Management and Enhancement System ("CRIMES") and several
related products which are being marketed to law enforcement agencies
throughout the United States.
The Company has incurred losses of $3,434,060 and $3,034,594 for the years
ended December 31, 1998 and 1999, respectively. The Company also has
significant working capital deficiencies as of December 31, 1998 and 1999.
The Company operates in markets that are emerging and highly competitive.
Moreover, the Company's sales are typically concentrated in large orders
derived from a small base of customers and, accordingly, new orders, sales
levels and operating profits, if any, can and will fluctuate on a
quarter-by-quarter basis. There is no assurance that the Company will
operate at a profit in the future.
New financing will be required to fund working capital and operations. The
Company believes that additional financing will be available under terms and
conditions that are acceptable to the Company. However, there can be no
assurance that additional financing will be available. In the event
financing is not available in the time frame required, then the Company will
be forced to reduce its rate of sales growth, if any, reduce operating
expenses and reschedule research and development projects. In addition, the
Company might be required to sell certain of its assets or license its
technologies to others. These actions, while necessary for the continuance
of operations during a time of cash constraints and a shortage of working
capital, could adversely effect the Company's long-term business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary which was acquired on January 26, 1998 (see
Note 3). All significant intercompany transactions and balances have been
eliminated.
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 and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from
estimates.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture and equipment, are stated at
cost and are being depreciated on a straight-line basis over the estimated
useful lives of the assets, which range from
F-7
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
three to five years. Maintenance and repairs are charged to expense as
incurred. Major renewals or improvements are capitalized. When assets are
sold or abandoned, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is recognized.
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has recorded no
impairment losses.
INTANGIBLE ASSETS
Intangible assets consist of patents and goodwill which are stated at cost.
Amortization is calculated using the straight-line method over five years
for patents and four years for goodwill.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Sales are typically made on credit and the Company generally
does not require collateral. The Company performs ongoing credit evaluations
of its customers' financial condition and maintains an allowance for
estimated potential losses. Accounts receivable are presented net of an
allowance for doubtful accounts of $10,000 and $28,517 at December 31, 1998
and 1999, respectively.
The Company had combined sales to two major customers which represented 30%
and 23% of total revenues for the years ended December 31, 1998 and 1999,
respectively.
As of December 31, 1998 and 1999, the Company had amounts due from three
major customers which represented 41% and 55%, respectively, of total
accounts receivable.
STOCK-BASED COMPENSATION
The Company measures compensation costs related to stock option plans using
the intrinsic value method and provides pro forma disclosures of net income
(loss) and earnings (loss) per common share as if the fair value based
method had been applied in measuring compensation costs. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the fair value of the Company's common stock at the date of measurement over
the amount an employee must pay to acquire the stock and is amortized over
the vesting period, generally three years.
INCOME TAXES
Current income tax expense or benefit is the amount of income taxes expected
to be payable or refundable for the current year. A deferred income tax
asset or liability is computed for the expected future impact of differences
between the financial reporting and tax bases of assets and liabilities and
for the expected future tax benefit to be derived from tax credits and loss
carryforwards. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
F-8
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license
periods provided no significant obligations remain and collectibility of the
related receivable is probable. The Company's revenue from software and
hardware installation and implementation and from contract services is
generally recognized as the services are performed using the percentage of
completion method based on costs incurred to date compared to total
estimated costs at completion. Amounts received under contracts in advance
of performance are recorded as deferred revenue and are generally recognized
within one year from receipt. Contract losses are recorded as a charge to
income in the period such losses are first identified. Unbilled accounts
receivable are stated at estimated realizable value. Revenue from contract
services for which the Company cannot reliably estimate total costs are
recognized upon completion.
Revenue from royalties is recognized in the period earned.
CAPITALIZED SOFTWARE COSTS
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a
working model. Software development costs incurred subsequent to the time a
product's technological feasibility has been established, through the time
the product is available for general release to customers, are capitalized
if material. To date, the Company has not capitalized any software costs as
the period between achieving technological feasibility and the general
availability of the related products has been short and software development
costs qualifying for capitalization have been insignificant.
EARNINGS PER COMMON SHARE
Effective November 29, 1999, the Company declared a 5.275-for-1 reverse
stock split of common stock. All references to the number of shares, per
share amounts, conversion amounts and stock option data of the Company's
common stock have been restated to reflect this reverse stock split for all
periods presented.
Basic earnings per common share is calculated by dividing net income (loss)
available to common shareholders for the period by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share is calculated by dividing net income (loss) available to common
shareholders for the period by the weighted-average number of common shares
outstanding during the period, increased to include, if dilutive, the number
of additional common shares that would have been outstanding if the
potential common shares had been issued. The dilutive effect of outstanding
stock options is included in the calculation of diluted earnings per common
share using the treasury stock method. During the years ended December 31,
1998 and 1999, the Company has excluded all convertible preferred stock and
outstanding stock options from the calculation of diluted loss per share, as
their effect would have been antidilutive.
F-9
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted loss per
share for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Numerator
Net loss......................................... $(3,434,060) $(3,034,594)
Less Series B preferred dividends................ (82,748) (82,748)
----------- -----------
Loss available to common shareholders............ $(3,516,808) $(3,117,342)
=========== ===========
Denominator
Weighted-average shares outstanding.............. 861,875 1,016,399
=========== ===========
Basic and diluted earnings per share............. $ (4.08) $ (3.07)
=========== ===========
</TABLE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This statement requires that all components of
comprehensive income be reported in the financial statements in the period
in which they are recognized. During the years ended December 31, 1998 and
1999, the Company did not have any components of comprehensive income.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement
requires disclosure of certain information about the Company's operating
segments, products, geographic areas in which it operates and its major
customers. This statement also allows a company to aggregate similar
segments for reporting purposes. Management has determined that its
operations can be aggregated into one reportable segment. Additionally, as
the Company's products are sold primarily within the U.S., no segment
disclosures have been included in the accompanying notes to the consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statements to conform to the current year presentation.
3. ACQUISITION
On January 26, 1998, the Company completed the acquisition of all the
outstanding common stock of XImage Corporation ("XImage") located in San
Jose, California. XImage's principal business activity is the design,
implementation and maintenance of digital booking systems.
The Company paid approximately $2,150,000 in cash, issued warrants to
purchase 61,611 shares of the Company's common stock and incurred
approximately $310,000 in direct acquisition costs. The acquisition was
accounted for as a purchase with goodwill being amortized over four years.
F-10
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
3. ACQUISITION (CONTINUED)
The purchase price was allocated to identifiable assets and liabilities
based on their estimated fair values, with the excess of the purchase price
over the fair value of such net liabilities acquired reflected as goodwill,
as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 947,177
Property and equipment...................................... 53,132
Goodwill.................................................... 3,526,322
Liabilities assumed......................................... (2,069,100)
-----------
Purchase price.............................................. $ 2,457,531
===========
</TABLE>
The results of operations of XImage for the period from January 26, 1998
(acquisition) through December 31, 1998 and for the year ended December 31,
1999 are included in the Company's consolidated statements of operations for
the years ended December 31, 1998 and 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consists of:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Equipment............................................. $ 804,007 $ 839,990
Furniture............................................. 63,313 63,314
--------- ---------
867,320 903,304
Less accumulated depreciation......................... (597,726) (711,506)
--------- ---------
$ 269,594 $ 191,798
========= =========
</TABLE>
Total depreciation expense for the years ended December 31, 1998 and 1999
was $100,215 and $113,780, respectively.
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Short-term note payable to shareholder. Such note accrues
interest at prime and is due upon demand.................. $ 30,000 $ 30,000
8% convertible notes payable to shareholders due June 15,
2000. At the option of either the Company or the holder,
interest may be accrued and added to principal or paid.
The notes, at the option of the holders, shall be prepaid
to the extent of 20% of the Company's pre-tax income
earned subsequent to June 30, 1995. The principal amount
of the notes plus accrued interest shall be convertible,
at the option of the holder, at any time after date of
issuance, into units of Series B preferred stock and
common stock purchase warrants of the Company at $13.19
per unit, subject to adjustment........................... 208,150 208,150
</TABLE>
F-11
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
8% convertible note payable to employee, due June 15, 2000.
At the option of either the Company or the holder,
interest may be accrued and added to principal or paid.
The principal amount of the note plus accrued interest
shall be convertible, at the option of the holder, at any
time after the date of issuance in common stock at $7.91
per share................................................. -- 50,000
10% convertible note payable to shareholder affiliate, due
earlier of February 10, 2001 or five days following the
close of an initial public offering. The principal amount
and accrued interest shall be convertible into common
stock at $1.00 per share if principal and interest is not
paid prior to June 1, 2000. Note is net of unamortized
discount of $328,998 as of December 31, 1999.............. -- 921,002
Short-term note payable to a third party with interest of
9%, payable monthly beginning December 15, 1999. Note due
at the earlier of: (1) any written or oral demand by
lender, (2) closing of borrowers' initial public offering,
or (3) April 3, 2000...................................... -- 500,000
Short-term notes payable to financial institution. Such
notes accrue interest at prime plus 2% and were due
April 15, 1999. Due date extended to November 7, 1999 for
$500,000 and March 3, 2000 for the remaining $500,000. The
notes are collateralized by substantially all the assets
of the Company and guaranteed by certain officers and
directors of the Company.................................. 1,200,000 500,000
Short-term notes payable to lending institution. Such notes
accrue at prime plus 2% and were due September 28,
1999...................................................... -- 100,000
Short-term notes payable to shareholders and other related
parties. Such notes accrue interest at 10% and are due on
the earlier of February 15, 1999 or the closing of
permanent financing....................................... 150,000 --
Short-term note payable to shareholder to accrue interest at
10%. Note due the earlier of January 31, 1999 (extended to
March 15, 2000) or the closing of permanent financing..... $ 55,000 $ 55,000
Short-term notes payable to previous XImage employees. Such
notes accrue interest at prime plus 2% and were due
December 31, 1998. The notes' terms were revised to
include monthly payments through November 2000............ 600,000 550,000
Short-term notes payable to XImage officers. Such notes
accrue interest at 10% and were due upon the acquisition
of XImage. The note's terms were revised to include
monthly payments through November 2000.................... 152,500 152,500
</TABLE>
F-12
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Short-term note payable to prior XImage shareholder. Such
note accrues interest at 10% and was due upon acquisition
of XImage. The note's terms were revised to include
monthly payments through November 2000.................... 51,000 51,000
Short-term notes payable to certain vendors................. 26,297 25,937
---------- -----------
2,472,947 3,143,589
Less current portion........................................ (999,775) (2,219,047)
---------- -----------
Long-term notes payable..................................... $1,473,172 $ 924,542
========== ===========
</TABLE>
In February 1999, the Company issued a promissory note to a third party for
$500,000 at an interest rate of 9.75% to mature February 2000. In
conjunction with the note, the Company issued a warrant to purchase 324,300
shares of common stock at $4.75 per share. The fair value of the warrants
was calculated using the minimum value method and was determined to be $0.07
per share. In August 1999, the note plus accrued interest was converted into
120,944 shares of common stock.
In August 1999, the Company issued two $100,000 promissory notes at prime
plus 2%. Principal and interest was due September 28, 1999 and October 1,
1999 with a 30-day extension option. The Company has exercised the 30-day
extension options in exchange for warrants to acquire 10,000 shares of
common stock at $7.91 per share. In October 1999, the Company made a
principal payment of $20,000 on one of the promissory notes, and in November
1999 paid off the remaining balance on that note.
In September 1999, the Company issued a promissory note for $50,000 due
June 15, 2000 to an employee with interest at 8%, convertible into common
stock at $7.91 at the option of the holder.
In November 1999, the Company issued a convertible promissory note for
$1,250,000 at an interest rate of 10%, due the earlier of February 10, 2001
or five days following the closing of an IPO, to an individual affiliated
with Atlus Co. (which beneficially owns approximately 31% of the Company's
common shares outstanding). Under the terms of the note, the principal
amount is fixed in Japanese yen and shall be repaid in U.S. dollars at a
fixed (104.55 Japanese yen per U.S. dollar) conversion rate established on
the date of issuance. If the principal and interest has not been paid prior
to April 1, 2000, the note becomes convertible to common stock at $1.00 per
share. In conjunction with the note, the Company issued the individual a
warrant to purchase 125,000 shares of common stock for $6.00 per share. The
Company has recorded the note net of a discount equal to the fair value
allocated to the warrants issued of approximately $361,000.
In November 1999, the Company issued a $500,000 note to a related party with
interest payable monthly beginning on December 15, 1999. The note is due at
the earlier of (i) any written or oral demand by lender, (ii) the closing of
borrower's initial public offering or (iii) April 3, 2000.
F-13
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5. NOTES PAYABLE (CONTINUED)
In November 1999, the maturity date for the remaining $500,000 balance of
the note to the financial institution was extended to March 3, 2000.
Additionally, approximately $800,000 in notes to shareholders and XImage
employees, officers and shareholders were revised to include payments
through November 2000.
In December 1999, the $150,000 of short-term notes to shareholders and other
related parties plus accrued interest were converted into 20,919 shares of
common stock.
At December 31, 1999, approximately $100,000 of uncollateralized notes
payable were in default for non-payment.
6. INCOME TAXES
Due to the Company's net loss position for the years ended December 31, 1998
and 1999 and as the Company has recorded a full valuation allowance against
deferred tax assets, there was no provision for income taxes recorded.
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate for the years ended December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Tax provision (benefit) at statutory rate................... (34)% (34)%
State tax, net of federal benefit........................... 3 (3)
Research credits............................................ (2) (3)
Goodwill amortization....................................... 8 10
Other permanent differences................................. 1 6
Net change in valuation allowance........................... 24 24
--- ---
0% 0%
=== ===
</TABLE>
The components of the net deferred tax assets at December 31, 1998 and 1999
are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Intangible assets.................................. $ 102,459 $ 122,012
Fixed assets....................................... (34,111) (40,060)
Reserves and accrued expenses...................... 169,667 73,070
Net operating loss carryforwards................... 1,683,180 2,335,618
Research credit carryforwards...................... 209,497 330,888
----------- -----------
2,130,692 2,821,528
Less valuation allowance........................... (2,130,692) (2,821,528)
----------- -----------
Net deferred tax asset............................. $ -- $ --
=========== ===========
</TABLE>
The Company has established a valuation allowance against its deferred tax
asset due to the uncertainty surrounding the realization of such asset.
Management periodically evaluates the
F-14
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. INCOME TAXES (CONTINUED)
recoverability of the deferred tax asset. At such time as it is determined
that it is more likely than not that deferred tax assets are realizable, the
valuation allowance will be reduced.
At December 31, 1998 and 1999, the Company had federal net operating loss
carryforwards of approximately $4,400,000 and $6,200,000, respectively, and
state net operating loss carryforwards of approximately $3,000,000 and
$3,900,000, respectively, which may be available to offset future taxable
income for tax purposes. The federal net operating loss carryforwards expire
at various dates from 2002 through 2019. The California net operating loss
carryforwards expire at various dates from 2000 through 2004.
The Company also had federal research credit carryforwards of approximately
$152,000 and $227,000 and state research credit carryforwards of
approximately $87,000 and $157,000 for tax purposes at December 31, 1998 and
1999, respectively. The federal carryforwards will begin expiring, if
unused, in 2005.
The Internal Revenue Code (the "Code") limits the availability of net
operating losses and certain tax credits that arose prior to certain
cumulative changes in a corporation's ownership resulting in a change of
control of the Company. The Company's use of its net operating loss
carryforwards and tax credit carryforwards will be significantly limited
because the Company underwent "ownership changes" in 1991 and 1995. The
affect of the existing limitations has been reflected in the above summary
of deferred tax assets.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its President, Vice President of
Finance and Vice President of Sales and Business Development. The Company
may terminate the agreements with or without cause. Should the Company
terminate the agreements without cause, the President is entitled to
compensation for up to 36 months of salary and the Vice Presidents of
Finance and of Sales and Business Development are entitled to compensation
equal to 12 months of salary.
LICENSE AGREEMENTS
During 1998, the Company entered into certain license agreements related to
technology used in its products. Under the terms of the agreements, the
Company is required to pay royalties at fixed fees or percentages based upon
product sales. The agreements expire at various dates through October 2001.
LETTER OF CREDIT
As collateral for performance on a software installation and implementation
contract, the Company is contingenlty liable under an irrevocable standby
letter of credit in the amount of $100,000. The letter of credit expires in
September 2000. As a condition, the bank required the Company to invest
$100,000 in the form of a one year certificate of deposit, which matures in
September 2000.
F-15
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is, from time to time, subject to legal proceedings and claims
which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
LEASES
The Company entered into a 5-year operating lease for its office and
research and development facilities which commenced August 1998.
At December 31, 1999, future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES TOTAL
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
2000............................................... $270,338 $8,496 $278,834
2001............................................... 281,152 3,540 284,692
2002............................................... 292,398 -- 292,398
2003............................................... 174,480 -- 174,480
</TABLE>
Rental expense under operating leases for the years ended December 31, 1998
and 1999 was approximately $311,985 and $262,223, respectively.
8. EQUITY
The Company's Articles of Incorporation were amended effective August 31,
1994 and authorize the issuance of two classes of stock to be designated
"Common Stock" and "Preferred Stock," provide that both Common and Preferred
Stock shall have a par value of $.01 per share and authorize the Company to
issue 50,000,000 shares of Common Stock and 4,000,000 shares of Preferred
Stock. The Preferred Stock may be divided into such number of series and
with the rights, preferences, privileges and restrictions as the Board of
Directors may determine.
COMMON STOCK
Effective November 29, 1999, the Company declared a 5.275-for-1 reverse
stock split of common stock. All references to the number of shares, per
share amounts, conversion amounts and stock option data of the Company's
common stock have been restated to reflect this reverse stock split for all
periods presented.
The Company issued 44,866 and 73,466 shares of common stock during 1998 and
1999, respectively, to certain officers and directors as compensation for
personally guaranteeing the $1,200,000 bank note. The estimated fair value
of $360,020 and $348,779 in 1998 and 1999, respectively, was capitalized as
loan fees and amortized as interest expense over the term of the note.
During 1998, the Company issued 10,236 shares of common stock to directors
for payment of board fees. The estimated fair value of $162,000 was expensed
during 1998.
F-16
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
8. EQUITY (CONTINUED)
SERIES B CONVERTIBLE, REDEEMABLE PREFERRED STOCK
In April 1995, the Company's Articles of Incorporation were amended to
authorize 750,000 shares of Series B Convertible Redeemable Preferred Stock
("Series B").
The holders of Series B are entitled to cumulative preferred dividends
payable at the rate of $.2125 per share per annum commencing April 30, 1996,
subject to legally available funds. The Series B plus accrued but unpaid
dividends are convertible at the option of the holder into shares of common
stock at a conversion price equal to the original Series B issue price as
adjusted to prevent dilution. The Series B will automatically be converted
into shares of common stock upon the closing of a firm commitment
underwritten public offering at a price per common share of not less than
$31.65. If the public offering price is less than $31.65 but at least $21.10
per share, the conversion shall still be automatic upon written consent of a
majority of the then outstanding shareholders of Series B.
The Series B, on an as-converted basis, have the same voting rights per
share as the Company's common shares. The Series B are entitled to initial
distributions of $13.19 per share, upon liquidation and in preference to
common shares and any other series of preferred stock, except Series A, plus
all accrued but unpaid dividends.
Any time after December 31, 2000, the Company has the right to redeem all or
some of the outstanding shares of Series B at a price equal to the original
issue price, plus all accrued but unpaid dividends.
As of December 31, 1998 and 1999, the Company had cumulative undeclared
dividends of $94,825 and $177,573, respectively.
WARRANTS
As of December 31, 1999, warrants to purchase 328,662 shares of common stock
at prices ranging from $6.00 to $21.00 were outstanding. All warrants are
exercisable as of December 31, 1999 and expire at various dates through
November 2004.
9. STOCK OPTION PLANS
On August 31, 1994, the directors of the Company adopted the Company's 1994
Employee Stock Option Plan (the "1994 Plan") and the 1994 Nonqualified Stock
Option Plan (the "Nonqualified Plan"). The 1992 Stock Option Plan and
options previously granted were canceled by the Board of Directors.
The 1994 Plan provides that officers and other key employees may receive
nontransferable incentive stock options to purchase up to 170,616 shares of
the Company's common stock. The option price per share must be at least
equal to 100% of the market value of the Company's common stock on the date
of grant and the term may not exceed ten years.
The Nonqualified Plan provides that directors and consultants may receive
nontransferable options to purchase up to 18,957 shares of the Company's
common stock. The option price per share must
F-17
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
9. STOCK OPTION PLANS (CONTINUED)
be at least equal to 85% of the market value of the Company's common stock
on the date of grant and the term may not exceed five years.
Both the 1994 Plan and the Nonqualified Plan are administered by the Board
of Directors or a Committee of the Board which determines the employees,
directors or consultants which will be granted options and the terms of the
options, including vesting provisions which to date has been over a three
year period. Both the 1994 Plan and the Nonqualified Plan expire in ten
years.
Due to a significant decline in the estimated fair value of the Company's
common stock, in February 1999, the exercise price of previously granted
stock options was repriced to $5.28 per share, which was based upon the fair
value of the Company's common stock as of that date, as determined by the
Company's Board of Directors. Under proposed accounting rules, the Company
will be required to record compensation expense equal to the difference
between the estimated fair value of the common stock and the exercise price
of the repriced options. For the year ended December 31, 1999, the Company
recorded no compensation expense as the exercise price was equal to the
estimated fair value.
In December 1999, the Company's Board of Directors adopted the ImageWare
Systems, Inc. Amended and Restated 1999 Stock Option Plan (the "1999 Plan").
Under the terms of the 1999 Plan, the Company may issue up to 350,000
non-qualified or incentive stock options to purchase common stock of the
Company. The 1999 Plan has substantially the same terms as the 1994 Employee
Stock Option Plan and the 1994 Nonqualified Stock Option Plan and expires in
ten years.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net losses would have been
increased to the pro forma amount indicated below for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
NET LOSS
As reported...................................... $(3,434,060) $(3,034,594)
Pro forma........................................ (3,709,771) (3,106,255)
EARNINGS PER COMMON SHARE
As reported...................................... $ (4.08) $ (3.07)
Pro forma........................................ (4.30) (3.14)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions:
dividend yield of 0%, risk-free interest rate ranging from 4.65% to 5.99%,
and expected lives of five years.
F-18
<PAGE>
IMAGEWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
9. STOCK OPTION PLANS (CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS PRICE
-------- ---------
<S> <C> <C>
Balance at January 1, 1997............................... 66,825 $5.28
Granted................................................ 95,261 $5.28
Expired/canceled....................................... (38,389) $5.28
--------
Balance at December 31, 1997............................. 123,697 $5.28
Granted................................................ 24,455 $5.28
Expired/canceled....................................... --
--------
Balance at December 31, 1998............................. 148,152 $5.28
Granted................................................ 276,611 $6.37
Expired/canceled....................................... (148,152) $5.28
--------
Balance at December 31, 1999............................. 276,611 $6.37
========
</TABLE>
At December 31, 1999, a total of 110,834 options were exercisable at a
weighted average price of $5.48 per share.
10. EMPLOYEE BENEFIT PLAN
During 1995, the Company adopted a defined contribution 401(k) retirement
plan (the "Plan"). All employees aged 21 years and older become participants
after completion of three months of employment. The Plan provides for annual
contributions by the Company determined at the discretion of the Board of
Directors. Participants may contribute up to 20% of their compensation.
Employees are fully vested in their share of the Company's contributions
after the completion of five years of service. For the years ended
December 31, 1998 and 1999, there were no contributions to the Plan by the
Company.
11. SUBSEQUENT EVENTS
Stock Option Plan
In February 2000, the Company's Board of Directors amended the Amended and
Restated 1999 Stock Option Plan (the "1999 Plan") to decrease the number of
shares of common stock subject to options under the 1999 Plan from 350,000
to 100,000. Additionally, the Board of Directors resolved that the number of
shares of common stock set aside for issuance under the 1999 Plan shall be
set at 100,000 shares. Upon the closing of an initial public offering, the
number of shares subject to options and reserved for the 1999 Plan will
increase from 100,000 to 250,000 shares.
Note Payable (unaudited)
As of March 4, 2000 the Company was in default for nonpayment under the
terms of the short term note payable to a financial institution.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, UNITS ONLY IN JURISDICTIONS IN WHICH OFFERS AND SALES ARE
PERMITTED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Use of Proceeds....................... 9
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Financial Information........ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 21
Management............................ 32
Certain Transactions.................. 36
Security Ownership of Certain
Beneficial Owners and Management.... 39
Description of Securities............. 40
Shares Eligible for Future Sale....... 44
Underwriting.......................... 47
Legal Matters......................... 50
Experts............................... 50
Available Information................. 50
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
BROKER-DEALERS THAT EFFECT THE TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,875,000 UNITS
[LOGO]
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
I-BANKERS SECURITIES, INC.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 204 of the California General Corporation Law permits a corporation
to include in its Articles of Incorporation provisions eliminating or limiting
the personal liability of directors for monetary damages in an action brought by
or in the right of the corporation for breach of a director's fiduciary duties,
subject to certain limitations. Section 317 of the California General
Corporation Law requires a corporation to indemnify its directors and other
agents to the extent they incur expenses in successfully defending lawsuits
brought against them by reason of their status as directors or agents.
Section 317 also permits a corporation to indemnify its directors and other
agents to a greater extent than specifically required by law.
Our amended and restated articles of incorporation eliminate the personal
liability of our directors for monetary damages upon breach of fiduciary duties
as a director except:
- acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
- acts or omissions that the director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director;
- any transaction from which a director derived an improper personal
benefit;
- acts or omissions that show a reckless disregard for the director's duty
in circumstances in which the director was aware, or should have been
aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders;
- an unexcused pattern of inattention that amounts to an abdication of the
director's duty;
- unlawful dividends or distributions; and
- for unlawful interested director transactions.
Article VI of our bylaws permits us to indemnify any of our directors,
officers and other agents who is a party, or is threatened to be made a party,
to any proceeding by reason of his or her status as our agent. In such a case,
we may indemnify the agent against expense, liability and loss actually and
reasonably incurred by the agent in connection with such a proceeding if he or
she acted in good faith and in a manner he or she reasonably believed to be in
the best interests of the corporation, and, with respect to any criminal
proceeding, had no reasonable cause to believe that the conduct was unlawful.
If such a proceeding is brought by or on behalf of the corporation in the
form of a derivative suit, the agent may be indemnified against expenses
actually and reasonably incurred if the agent acted in good faith, in a manner
reasonably believed to be in the best interests of the corporation, and with
reasonable care. There can be no indemnification with respect to any matter as
to which the agent is adjudged to be liable to the corporation unless and only
to the extent that the court in which such proceeding was brought determines
upon application that, in view of all of the circumstances of the case, the
agent is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Where an agent is successful in any such proceeding, the agent is entitled
to be indemnified against expenses actually and reasonably incurred by him or
her. In all other cases (unless by court order), indemnification is made by the
corporation upon determination by it that indemnification of the agent is proper
in the circumstances because the agent has met the applicable standard of
conduct. We may advance expenses incurred in defending any such proceeding upon
receipt of an undertaking to repay any amount so advanced if it is ultimately
determined that the agent is not eligible for indemnification.
II-1
<PAGE>
Our bylaws also provide that we may purchase and maintain liability
insurance on behalf of any of our directors, officers, employees and agents. As
of the date of this registration statement, we do not maintain such policies of
insurance. We intend to purchase director and officer insurance for the benefit
of our directors and officers.
We have entered into indemnification agreements with each of our directors
and officers, a form of which is attached as Exhibit 10.4 to this registration
statement. We intend to enter into indemnification agreements with any new
directors and officers in the future. The indemnification agreements require us
to indemnify our directors and officers to the extent permitted by our bylaws
and to advance their expenses incurred in connection with a proceeding with
respect to which they are entitled to indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC Registration fee........................................ $ 15,525
NASD Filing fees............................................ $ 6,381
The American Stock Exchange listing fee..................... $ 38,000
Accounting fees and expenses................................ $200,000
Legal fees and expenses..................................... $300,000
Directors and officers insurance expenses................... $ 85,000
Printing and related expenses............................... $170,000
Blue sky legal fees and expenses............................ $ 65,000
Transfer agent fees and expenses............................ $ 1,250
Miscellaneous expenses...................................... $ 25,044
--------
TOTAL..................................................... $906,200
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We have issued the following securities within the last three years. The
following information regarding our securities has been adjusted to reflect a
5.275-to-1 reverse stock split effected on November 29, 1999.
(1) During the last three years, we granted options to purchase a total of
276,611 shares of our common stock, at an average weighted exercise price of
$6.37 per share, to employees and consultants pursuant to our 1994 Employee
Stock Option Plan, our 1994 Nonqualified Stock Option Plan and our 1999 Stock
Option Plan. Each grant was made in reliance on Rule 701 promulgated under the
Securities Act of 1933. All of these options were granted in return for services
provided to us by these employees and consultants, and certain of these options
were granted to replace options granted earlier at a higher exercise price.
(2) In January 1997, pursuant to an exemption under Section 4(2) of the
Securities Act, we sold shares of our common stock to the following accredited
investors as follows: 4,739 shares at $21.10 per share for an aggregate purchase
price of $100,000 to The Melvin Garb Foundation; 1,896 shares at $21.10 per
share for an aggregate purchase price of $40,000 to The Harold Stern Trust; and
3,791 shares at $13.19 per share for an aggregate purchase price of $50,000 to
Private Asset Management Inc.
(3) In February 1997, in return for services rendered in relation to the
development of a business plan, we issued a warrant to purchase 9,479 shares of
our common stock, exercisable at $13.19 per
II-2
<PAGE>
share, to Mark Guthner, a sophisticated investor with full access to company
information, pursuant to an exemption under Section 4(2) of the Securities Act.
(4) In March 1997, we sold 34,058 shares of common stock at approximately
$15.82 per share for an aggregate purchase price of $538,961 to Atlus
Co., Ltd., an accredited investor, pursuant to an exemption under Section 4(2)
of the Securities Act.
(5) In November 1997, we sold 157,978 shares of our common stock at
approximately $15.82 per share for an aggregate purchase price of $2,500,000 to
Atlus Co., Ltd., pursuant to an exemption under Section 4(2) of the Securities
Act.
(6) In December 1997, in connection with the conversion of a promissory
note, we issued 37,915 shares of our common stock to Atlus Co., Ltd., pursuant
to an exemption under Section 4(2) of the Securities Act.
(7) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act and in connection with the conversion of promissory notes, we
issued four warrants to purchase an aggregate of 9,175 shares of our common
stock, exercisable at $21.10 per share, to the following sophisticated investors
with access to company information: William E. Guthner, Jr., a former director;
Thomas Guthner; William E. Guthner III, Trustee for Gabriella Guthner; and
Nossaman, Knox, Guthner & Elliott Profit Sharing and Savings Plan, FBO
William E. Guthner, Jr.
(8) In December 1997, in connection with the exercise of warrants to
purchase common stock, we sold 3,412 shares of our common stock at $6.07 per
share for an aggregate purchase price of $20,700 to J. Michael Reisert, Inc., a
sophisticated investor with access to the company's business plan, chief
executive officer and chief financial officer, pursuant to an exemption under
Section 4(2) of the Securities Act.
(9) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act and in connection with the conversion of promissory notes, we
issued an aggregate of 48,400 shares of our Series B preferred stock to the
following sophisticated investors with access to company information:
William E. Guthner, Jr., a former director; Thomas Guthner; William E.
Guthner III, Trustee for Gabriella Guthner; and Nossaman Knox, Guthner and
Elliott Profit Sharing & Savings Plan, FBO William E. Guthner, Jr.
(10) In December 1997, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 894 shares of our common stock to S. James Miller,
Jr., our president and chief executive officer and a sophisticated investor, in
return for services rendered as an executive officer.
(11) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued shares of our common stock as follows in return for
services rendered as directors by the following sophisticated investors: 2,844
shares to S. James Miller, Jr.; 2,654 shares to William Guthner, Jr.; 2,844
shares to Patrick Downs; 1,327 shares to John Holleran; and 569 shares to Yukuo
Takenaka.
(12) In January 1998, in return for a $700,000 loan to assist in the purchase
of XImage Corporation, we issued a warrant to purchase 8,847 shares of our
common stock, exercisable at $7.91 per share, to Imperial Bank pursuant to an
exemption under Section 4(2) of the Securities Act.
(13) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 3,318 shares of our common stock to each of the
following employees and directors, all sophisticated investors, in return for
the personal guarantee of the $700,000 promissory note issued by us in favor of
Imperial Bank: S. James Miller, Jr.; Wayne Wetherell, our vice president of
finance and chief financial officer; Paul Devermann, our vice president of sales
and business development; and William Guthner, Jr.
II-3
<PAGE>
(14) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued a warrant to purchase 3,318 shares of our common
stock, exercisable at $15.83 per share, to each of the following employees and
directors in return for the personal guarantee of the $700,000 promissory note
issued by us in favor of Imperial Bank: S. James Miller, Jr.; Wayne Wetherell;
Paul Devermann; and William Guthner, Jr.
(15) In January 1998, in connection with our acquisition of XImage
Corporation, we issued warrants to purchase a total of 61,611 shares of our
common stock, exercisable at $7.91 per share, to shareholders the of XImage
Corporation, pursuant to an exemption under Section 4(2) of the Securities Act.
The shareholders of XImage Corporation were represented in the acquisition by
the principals of XImage at the time, including: James Gossett, chairman of the
board; Jagdish Narasimhan, director, vice president, treasurer and secretary;
Kenneth Fields, director and vice president; Donald Dehaan, director and vice
president; and Neil Kelly, director.
(16) In January 1998, pursuant to an exemption under Section 4(2) of the
Securities Act and in return for loans to us in the aggregate amount of
$500,000, we issued warrants to purchase a total of 9,479 shares of our common
stock, exercisable at $7.91 per share, to the following former shareholders of
XImage Corporation: James Gossett, Jagdish Narasimhan, Kenneth Fields, Donald
Dehaan, Dennis Honeywell and Herbert Fields. These loans were used in connection
with our acquisition of XImage.
(17) In February 1998, in connection with the conversion of a promissory
note, we issued a warrant to purchase 26,540 shares of our common stock,
exercisable at $21.10 per share, to Atlus Co., Ltd., pursuant to an exemption
under Section 4(2) of the Securities Act.
(18) In March 1998, as required by the agreement to acquire XImage
Corporation, we issued a warrant to purchase 948 shares of our common stock at
an exercise price of $7.91 to Jagdish Narasimhan and a warrant to purchase 948
shares of our common stock at an exercise price of $7.91 to Kenneth Fields, each
pursuant to an exemption under Section 4(2) of the Securities Act. Each of these
investors was a sophisticated investor with full access to company information
as a result of the acquisition of XImage Corporation.
(19) In July 1998, pursuant to an exemption under Section 4(2) of the
Securities Act and in return for the extension of the time for payment on
promissory notes issued by us, we issued warrants to purchase a total of 9,479
shares of our common stock, exercisable at $7.91 per share, to the following
former shareholders of XImage Corporation: James Gossett, Jagdish Narasimhan,
Kenneth Fields, Donald Dehaan, Dennis Honeywell and Herbert Fields.
(20) In July 1998, in return for the extension of the time for payment on
promissory notes issued by us, we issued a warrant to purchase 948 shares of our
common stock, exercisable at $7.91 per share, to Jagdish Narasimhan and a
warrant to purchase 948 shares of our common stock, exercisable at $7.91 per
share, to Kenneth Fields, each pursuant to an exemption under Section 4(2) of
the Securities Act.
(21) In July 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued a warrant to purchase 2,370 shares of our common
stock, exercisable at $7.91 per share, to each of the following employees and
directors in return for the personal guarantee of loans made to us by Imperial
Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and William
Guthner, Jr.
(22) In September 1998, in return for a $500,000 loan, we issued a warrant to
purchase 4,739 shares of our common stock, exercisable at $7.91 per share, to
Imperial Bank, an accredited investor, pursuant to an exemption under
Section 4(2) of the Securities Act.
(23) In November 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 7,899 shares of our common stock to each of the
following employees and directors as follows in return for the personal
guarantee of a $500,000 promissory note issued by us in favor of Imperial Bank
II-4
<PAGE>
and the extended $700,000 promissory note previously issued by us in favor of
Imperial Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and
William Guthner, Jr.
(24) In November 1998, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued warrants to purchase shares of our common stock,
exercisable at $7.91 per share, to each of the following persons in return for a
$50,000 loan from each of them and for services provided by J. Michael
Reisert, Inc., as follows: warrant to purchase 6,872 shares to J. Michael
Reisert, Inc.; warrant to purchase 4,739 shares to Case Holding Company, Inc.,
an accredited investor; and warrant to purchase 4,739 shares to William Boyd, an
accredited investor.
(25) In February 1999, pursuant to an exemption under Section 3(b) of the
Securities Act and Rule 505 promulgated thereunder, we issued a convertible
promissory note in the amount of $500,000 and a warrant to purchase 324,301
shares of our common stock, exercisable at $4.75 per share, to R Squared
Limited, an accredited investor, in return for an aggregate purchase price of
$500,000.
(26) In April 1999, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued 15,798 shares of our common stock to each of the
following employees and directors as follows in return for the personal
guarantee of the promissory notes previously issued by us in favor of Imperial
Bank: S. James Miller, Jr.; Wayne Wetherell; Paul Devermann; and William
Guthner, Jr.
(27) In April 1999, pursuant to an exemption under Section 4(2) of the
Securities Act, we issued shares of our common stock as follows in return for
loans made to us by the following employees and directors: 8,853 shares to S.
James Miller, Jr.; and 1,422 shares to Wayne Wetherell.
(28) In July and August 1999, we sold 37,914 shares of common stock at
approximately $7.91 per share for an aggregate purchase price of $300,000 to the
following four accredited investors pursuant to an exemption under Section 4(2)
of the Securities Act: J. Michael Reisert, Inc.; Case Holding Company, Inc.;
William Boyd; and Al Sorenson.
(29) In August and September 1999, pursuant to an exemption under
Section 4(2) of the Securities Act, we issued warrants to purchase 4,739 shares
of our common stock, exercisable at $7.91 per share, to each of the Richard K.
Roberts Trust and Private Asset Management Inc., each an accredited investor, in
return for a $100,000 loan from each of them.
(30) In August 1999, R Squared Limited forgave an outstanding loan to us as
payment in connection with its exercise of a warrant to purchase our common
stock. In connection with the exercise of this warrant, we issued 120,943 shares
of our common stock to R Squared Limited pursuant to an exemption under
Section 4(2) of the Securities Act.
(31) In October 1999, we sold 6,319 shares of common stock at approximately
$7.91 per share for an aggregate purchase price of $50,000 to William Boyd, an
accredited investor, pursuant to an exemption under Section 4(2) of the
Securities Act.
(32) In November 1999, in consideration of a $1,250,000 loan to us, we issued
a warrant to purchase 125,000 shares of our common stock, exercisable at $6.00
per share, to Naoya Harano, an accredited investor and president of Atlus
Co., Ltd., pursuant to an exemption under Section 4(2) of the Securities Act.
(33) In December 1999, in connection with the conversion of debt, we issued
20,919 shares of common stock to the following three accredited investors
pursuant to an exemption under Section 4(2) of the Securities Act: J. Michael
Reisert, Inc.; Case Holding Company, Inc.; and William Boyd.
(34) In December 1999, we sold 3,160 shares of common stock at approximately
$7.91 per share for an aggregate purchase price of $25,000 to John D. Lium, an
accredited investor, pursuant to an exemption under Section 4(2) of the
Securities Act.
II-5
<PAGE>
(35) In December 1999, in consideration of services rendered, we issued a
warrant to purchase 6,161 shares of common stock, at an exercise price of $16.46
per share, to J. Michael Reisert, Inc. pursuant to an exemption under
Section 4(2) of the Securities Act.
As of the date of this registration statement, there are approximately 104
holders of our common stock and 35 holders of our Series B preferred stock.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of ImageWare
Systems, Inc.*
3.2 Bylaws of ImageWare Systems, Inc.*
4.1 Form of Common Stock Certificate*
4.3 Form of Unit Certificate
4.4 Reference is made to pages 1-5 and 12-15 of Exhibit 3.2*
4.5 Form of Public Warrant
4.6 Form of Representatives' Warrant
4.7 Form of Warrant and Unit Agreement
5.1 Opinion of Luce, Forward, Hamilton & Scripps LLP
10.1 Employment Agreement with S. James Miller dated January 1,
1996, as amended September 1997*
10.2 Employment Agreement with Wayne G. Wetherell dated April 1,
1997, as amended March 1, 1999*
10.3 Employment Agreement with Paul J. Devermann dated July 20,
1997, as amended March 1, 1999*
10.4 Form of Indemnity Agreement entered into by the registrant
with its directors and executive officers*
10.5 Letter Agreement with Takenaka & Company LLC*
10.6 1994 Employee Stock Option Plan*
10.7 1994 Nonqualified Stock Option Plan*
10.8 1999 Stock Option Plan*
10.9 Merger Agreement with XImage Corporation dated November 12,
1997*
10.10 Promissory Note in favor of Chester L.F. Paulson dated
November 1999*
10.11 Loan and Indemnification Agreement with Chester L.F.
Paulson*
10.12 Teaming Agreement with Hewlett-Packard Singapore (Sales) PTE
Ltd. dated April 30, 1999*
10.13 Value Added Reseller Agreement with Intelligence and
Strategic Processes Pty. Ltd.
dated January 1, 1999*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.14 OEM and Development Agreement with Excalibur Technologies
Corporation
dated April 30, 1998*
10.15 Lease between Thormint I and the registrant dated June 9,
1998*
10.16 [Intentionally left blank.]
10.17 Teaming Agreement with PRC Inc. dated November 5, 1998*
10.18 Memorandum of Understanding with Polaroid Corporation dated
September 13, 1999*
10.19 Teaming Agreement with H.T.E., Inc. dated August 6, 1999*
10.20 Software License and Services Subcontract with PRC Inc.
dated June 29, 1999*
10.21 Agreement with Kitsap County dated June 28, 1999*
10.22 Maintenance Agreement between Sagem S.A. and XImage
Corporation
dated January 31, 1994 for the portrait storage system of
Kuwait*
10.23 Agreement with Law Enforcement Support Agency (County of
Pierce and City of Tacoma, Washington) dated April 23, 1999*
10.24 Agreement with the State Procurement Office of Arizona dated
January 14, 1999*
10.25 Agreement with the City of San Antonio dated September 2,
1999*
10.26 Agreement with Milwaukee County dated June 21, 1999*
10.27 Procurement Agreement with the Orange County Sheriff's
Office, Florida
dated August 2, 1999*
10.28 Subcontract Agreement between Science Applications
International Corporation and XImage Corporation dated
September 26, 1996 with regard to the City of New York
Police Department*
10.29 Agreement with King County, Washington dated November 1,
1999*
10.30 Agreement with County of Hennepin dated November 23, 1993*
10.31 Agreement with Ventura County Sheriff's Department dated
October 12, 1999*
10.32 Securities Purchase Agreement with Atlus Co., Ltd. dated
March 7, 1997*
10.33 Notes and Security Agreements in favor of Imperial Bank*
10.34 Convertible Promissory Note in favor of S. James Miller, Jr.
dated June 15, 1995*
10.35 Convertible Promissory Note in favor of Naoya Harano dated
November 10, 1999
10.36 Convertible Promissory Note in favor of Patrick Downs dated
June 15, 1995*
10.37 Stock Purchase Warrant in favor of Naoya Harano dated
November 10, 1999
10.38 Stock Purchase Warrant in favor of Torrey Pines Securities*
10.39 Form of Warrant (Former XImage Shareholders)*
10.40 Form of Warrant (Former XImage Officers, Noteholders and
Other Investors)*
10.41 Form of Warrant (Officers and directors)*
10.42 Warrant to Purchase Common Stock in favor of Imperial Bank*
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
10.43 Registration Rights Agreement with R Squared Limited dated
February 1999*
10.44 Form of Warrant (Purchasers of Series B units)*
10.45 Relationship Agreement with the National Insurance Crime
Bureau dated January 20, 1997*
10.46 License Agreement with Atlus Co., Ltd. dated March 7, 1997*
10.47 Software Development and Technology License Agreement with
Panasonic Computer Peripherals Company dated October 20,
1998*(#)
10.48 Licensing Agreement with Viisage Technology, Inc. dated
November 16, 1998*
10.49 Value Added Reseller Agreement with Visionics Corporation
dated October 7, 1998*
10.50 Software License and Services Subcontract with Digital
Biometrics, Inc. dated July 23, 1999*
21 Subsidiaries of the Registrant*
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors
23.2 Consent of Luce, Forward, Hamilton & Scripps LLP. Reference
is made to Exhibit 5.1
24 Power of Attorney.*
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
+ To be filed.
(#) Confidential treatment requested with respect to certain portions of the
exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
II-8
<PAGE>
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the dollar value of the
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
In addition, the undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment no. 2
to the registration statement to be signed on its behalf by the undersigned, in
the City of San Diego, State of California, on March 15, 2000.
<TABLE>
<S> <C> <C>
IMAGEWARE SYSTEMS, INC.
BY: /S/ S. JAMES MILLER, JR.
-----------------------------------------
S. James Miller, Jr., PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
amendment no. 2 to the registration statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ S. JAMES MILLER, JR. President and Chief Executive
--------------------------------- Officer (Principal Executive March 15, 2000
S. James Miller, Jr. Officer) and Director
Vice President of Finance and Chief
*/s/ WAYNE WETHERELL Financial Officer (Principal
--------------------------------- Financial Officer and Principal March 15, 2000
Wayne Wetherell Accounting Officer)
*/s/ PATRICK J. DOWNS Director
--------------------------------- March 15, 2000
Patrick J. Downs
*/s/ JOHN L. HOLLERAN Director
--------------------------------- March 15, 2000
John L. Holleran
*/s/ YUKUO TAKENAKA Director
--------------------------------- March 15, 2000
Yukuo Takenaka
*By: /s/ S. JAMES MILLER, JR.
---------------------------------
S. James Miller, Jr.
Attorney-in-Fact
</TABLE>
II-10
<PAGE>
Exhibit 1.1
1,875,000 UNITS
IMAGEWARE SYSTEMS, INC.
UNDERWRITING AGREEMENT
__________, 2000
Paulson Investment Company, Inc.
I-Bankers Securities, Inc.
As Representatives of the
Several Underwriters
811 SW Naito Parkway, Suite 200
Portland, Oregon 97204
Gentlemen:
ImageWare Systems, Inc., a California corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as Representatives (the
"Representatives") an aggregate of 1,875,000 Units (the "Firm Units"). Each
Unit will consist of one share of the Company's Common Stock ("Common Stock")
and one Redeemable Purchase Warrant substantially in the form filed as an
exhibit to the Registration Statement (as hereinafter defined) ("Warrants").
The respective number of the Firm Units to be so purchased by the several
Underwriters is set forth opposite their names in Schedule I hereto. The
Company also proposes to grant to Paulson Investment Company, Inc. an option
to purchase in the aggregate up to 281,250 additional Units, identical to the
Firm Units (the "Option Units"), as set forth below.
As the Representatives, you have advised the Company (a) that you
are authorized to enter into this Agreement for yourself as Representatives
and on behalf of the several Underwriters, and (b) that the several
Underwriters are willing, acting severally and not jointly, to purchase the
number of Firm Units set forth opposite their respective names in Schedule I.
The Firm Units and the Option Units (to the extent the aforementioned option
is exercised) are herein collectively called the "Units."
In consideration of the mutual agreements contained herein and of
the interests of the parties in the transactions contemplated hereby, the
parties hereto agree as follows:
1
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No.
333-_____) with respect to the Units has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and revised,
have heretofore been delivered by the Company to you. Such registration
statement, together with any registration statement filed by the Company
pursuant to Rule 462(b) of the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred
to below, has become effective under the Act and no post-effective amendment
to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means (i) the form of prospectus first filed with the
Commission pursuant to Rule 424(b) or (ii) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered by
the Company to the Underwriters for delivery to purchasers of the Units,
together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it
becomes effective is herein referred to as a "Preliminary Prospectus."
(b) Each of the Company and its subsidiary has been duly
organized and is validly existing as a corporation in good standing under the
laws of the State of California, with corporate power and corporate authority
to own or lease its properties and conduct its business as described in the
Registration Statement. The Company does not own and never has owned a
controlling interest in any other corporation or other business entity,
except as disclosed in the Registration Statement. Each of the Company and
its subsidiary is duly qualified to transact business and is in good standing
in all jurisdictions in which the conduct of its business requires such
qualification.
(c) The Company owns all of the outstanding capital stock
of its subsidiary free and clear of all claims, liens, charges and
encumbrances. The outstanding shares of each class or series of capital stock
of each of the Company and its subsidiary have been duly authorized and
validly issued and are fully paid and non-assessable and, except as disclosed
in the Registration Statement, have been issued and sold by the Company in
compliance in all material respects with applicable securities laws; the
issuance and sale of the Units, and the common stock and warrants included
within the Units, have been duly authorized by all necessary corporate action
and, when issued and paid for as contemplated herein, will be validly issued,
fully paid and non-assessable; and no preemptive rights of shareholders exist
with respect to any security of the Company or the issue and sale thereof.
Except as set forth in the Registration Statement, neither the filing of the
Registration Statement nor the offering or sale of the Units as contemplated
by this Agreement
2
<PAGE>
give rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock
or other securities of the Company.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. The Common Stock
conforms and the Warrants and the Representatives' Warrants will conform to
the description thereof contained in the Registration Statement. The forms of
certificates for the securities comprising the Units conform to the
requirements of the corporate law of California. Except as described in the
Registration Statement, there are no outstanding securities of the Company or
its subsidiary convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or rights of any
character obligating the Company or its subsidiary to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such stock.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Units nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus and
any amendments and supplements thereto do not contain, and will not contain,
any untrue statement of material fact; and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; PROVIDED, HOWEVER, that the Company makes no
representations or warranties as to information contained in or omitted from
the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
(f) The financial statements of the Company and XImage
Corporation ("XImage"), the Company's wholly-owned subsidiary, together with
related notes and schedules as set forth in the Registration Statement,
present fairly the financial position, results of operations, cash flows and
shareholders equity of the Company and XImage at the indicated dates and for
the indicated periods. Such financial statements and related schedules have
been prepared in accordance with generally accepted accounting principles,
consistently applied throughout the periods involved, except as disclosed
therein, and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary financial and statistical data of
the Company and XImage included in the Registration Statement presents fairly
the information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company and XImage. The pro forma financial information
included in the Registration Statement and the Prospectus presents fairly the
information shown therein, has been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, has been properly compiled on the pro forma bases described
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therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(g) PricewaterhouseCoopers LLP, who have certified certain
of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the applicable published Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending
or, to the knowledge of the Company, threatened against the Company or its
subsidiary before any court or administrative agency or otherwise which if
determined adversely to the Company or its subsidiary might result in any
material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company or its subsidiary or prevent the consummation of the
transactions contemplated hereby, except as set forth in the Registration
Statement.
(i) Each of the Company and it subsidiary has good and
marketable title to all properties and assets, tangible and intangible,
reflected in the financial statements (or as described in the Registration
Statement) hereinabove described, subject to no lien, mortgage, pledge,
charge or encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement) or which are not
material. Each of the Company's and its subsidiary's ownership rights in its
patents, patent licenses and other material technology is consistent with (i)
the description thereof in the Registration Statement, and (ii) the business
needs of the Company and its subsidiary. The Company has sole and exclusive
right, title and interest to the all contracts and agreements acquired
pursuant to the acquisition of the subsidiary, and the Company has obtained
all requisite consents to the transfer of such contracts and agreements. All
of the leases and subleases under which each of the Company and its
subsidiary holds properties, tangible or intangible, are in full force and
effect conforming in all respects to the description thereof set forth in the
Registration Statement. Neither the Company nor its subsidiary have received
notice of any claim that is materially adverse to the rights of the Company
or its subsidiary under any of such leases or subleases.
(j) Other than past due payroll and sales taxes owing, in
an aggregate amount not to exceed $300,000, each of the Company and its
subsidiary has filed all federal, state, local and foreign income tax returns
which have been required to be filed and has paid all taxes indicated by said
returns and all assessments received by it to the extent that such taxes have
become due and are not being contested in good faith. All tax liabilities
have been adequately provided for in the financial statements of the Company,
and each of the Company and its subsidiary does not know of any actual or
proposed additional material tax assessments relating to any of its
historical periods.
(k) Since the respective dates as of which information is
given in the Registration Statement, as it may have been amended or
supplemented, there has not been any material adverse change or any
development involving a prospective material adverse change in or affecting
the earnings, business, management, properties, assets, rights, operations,
condition
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(financial or otherwise), or prospects of the Company or its subsidiary,
whether or not occurring in the ordinary course of business, and there has
not been any material transaction entered into or any material transaction
that is probable of being entered into by the Company or its subsidiary,
other than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. Neither the Company nor its subsidiary has any material
contingent obligations which are not disclosed in the Company's financial
statements or elsewhere in the Prospectus which is included in the
Registration Statement.
(l) Each of the Company and its subsidiary is not, nor,
with the giving of notice or lapse of time or both, will it be, in violation
of or in default under its Articles of Incorporation or Bylaws or under any
agreement, lease, contract, indenture or other instrument or obligation to
which it is a party or by which it, or any of its properties, is bound and
which default is of material significance in respect of the condition,
financial or otherwise, of the Company or its subsidiary or the business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company or its subsidiary. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with
or result in a breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, material contract or
other agreement or instrument to which the Company or its subsidiary is a
party or by which its assets may be bound, or of the Articles of
Incorporation or Bylaws of the Company or its subsidiary or any order, rule
or regulation applicable to the Company or its subsidiary of any court or of
any regulatory body or administrative agency or other governmental body
having jurisdiction.
(m) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative
or other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may be
required by the Commission, the National Association of Securities Dealers,
Inc. (the "NASD") or such additional steps as may be necessary to qualify the
Units for public offering by the Underwriters under state securities or Blue
Sky laws) has been obtained or made and is in full force and effect.
(n) Each of the Company and its subsidiary owns or
possesses adequate rights to use or can acquire on reasonable terms, all
patents, patent rights, trademarks, service marks, trade names, copyrights,
trade secrets and licenses of any of the foregoing (collectively,
"Intellectual Property Rights") that are described in the Prospectus or which
are necessary to the conduct of its business; there is no claim pending or,
to the best knowledge of the Company, threatened against the Company, its
subsidiary, or any of its officers, directors, employees or consultants, in
their capacities as such, alleging any infringement of Intellectual Property
Rights, or any violation of the terms of any license relating to Intellectual
Property Rights, nor does the Company know of any basis for any such claim.
Except as disclosed in the Registration Statement or in the letter from the
Company to the Representatives dated ________, the Company knows of no
infringement by others of Intellectual Property Rights owned by or licensed
to the Company. Except as disclosed in the Registration Statement, the
expiration of any Intellectual Property Rights would not have a material
adverse effect on the condition, or on the earnings, business or
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operations of the Company or its subsidiaries, taken as a whole. Each of the
Company and its subsidiary has obtained, is in compliance in all material
respect with and maintains in full force and effect all material licenses,
certificates, permits, orders or other, similar authorizations granted or
issued by any governmental agency (collectively "Government Permits")
required to conduct its business as it is presently conducted. No proceeding
to revoke, limit or otherwise materially change any Government Permit has
been commenced or, to the knowledge of the Company, is threatened against the
Company or its subsidiary, and neither the Company nor its subsidiary has
reason to anticipate that any such proceeding will be commenced against the
Company or its subsidiary. Except as disclosed or contemplated in the
Prospectus, each of the Company and its subsidiary has no reason to believe
that any pending application for a patent or Government Permit will be denied
or limited in a manner inconsistent with the Company's or its subsidiary's
business plan as described in the Prospectus.
(o) Each of the Company and its subsidiary is in all
material respects in compliance with all applicable Environmental Laws (as
defined below). Each of the Company and its subsidiary has no knowledge of
any past, present or, as anticipated by the Company or its subsidiary, future
events, conditions, activities, investigation, studies, plans or proposals
that (i) would interfere with or prevent compliance with any Environmental
Law by the Company or its subsidiary or (ii) could reasonably be expected to
give rise to any common law or other liability, or otherwise form the basis
of a claim, action, suit, proceeding, hearing or investigation, involving the
Company or its subsidiary and related to Hazardous Substances (as defined
below) or Environmental Laws. No Hazardous Substance is or has been used,
treated, stored, generated, manufactured or otherwise handled on or at any
Facility (as defined below) and to the knowledge of the Company, no Hazardous
Substance has otherwise come to be located in, on or under any Facility. No
Hazardous Substances are stored at any Facility except in quantities
necessary to satisfy the reasonably anticipated use or consumption by the
Company or its subsidiary. No litigation, claim, proceeding or governmental
investigation is pending regarding any environmental matter for which the
Company or its subsidiary has been served or otherwise notified or, to the
knowledge of the Company, threatened or asserted against the Company, its
subsidiary, or the officers or directors of the Company or its subsidiary in
their capacities as such, or any Facility or the Company's or its
subsidiary's business. There are no orders, judgments or decrees of any court
or of any governmental agency or instrumentality under any Environmental Law
which specifically apply to the Company, its subsidiary, any Facility or any
of the Company's or its subsidiary's operations. Each of the Company and its
subsidiary has not received from a governmental authority or other person (i)
any notice that it is a potentially responsible person for any Contaminated
site (as defined below) or (ii) any request for information about a site
alleged to be Contaminated or regarding the disposal of Hazardous Substances.
There is no litigation or proceeding against any other person by the Company
or its subsidiary regarding any environmental matter. The Company has
disclosed in the Prospectus or made available to the Underwriters and their
counsel true, complete and correct copies of any reports, studies,
investigations, audits, analyses, tests or monitoring, in the possession of
or initiated by the Company or its subsidiary, pertaining to any
environmental matter relating to the Company, its subsidiary, and their past
or present operations or any Facility.
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For the purposes of the foregoing paragraph, "Environmental Laws"
means any applicable federal, state or local statute, regulation, code, rule,
ordinance, order, judgment, decree, injunction or common law pertaining in
any way to the protection of human health or the environment, including
without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution
Control Act and any similar or comparable state or local law; "Hazardous
Substance" means any hazardous, toxic, radioactive or infectious substance,
material or waste as defined, listed or regulated under any Environmental
Law; "Contaminated" means the actual existence on or under any real property
of Hazardous Substances, if the existence of such Hazardous Substances
triggers a requirement to perform any investigatory, remedial, removal or
other response action under any Environmental Laws or if such response action
legally could be required by any governmental authority; "Facility" means any
property owned, leased or occupied by the Company or its subsidiary.
(p) Neither the Company, nor to the knowledge of the
Company, any of its affiliates, has taken or intends to take, directly or
indirectly, any action which is designed to cause or result in, or which
constitutes or might reasonably be expected to constitute, the stabilization
or manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Units.
(q) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules
and regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(s) Each of the Company and its subsidiary carries, or is
covered by, insurance in such amounts and covering such risks as is adequate
for the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(t) Each of the Company and its subsidiary is in compliance
in all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company or its subsidiary
would have any liability; neither the Company nor its subsidiary has incurred
and does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any
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"pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of
1986, as amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the Company or its
subsidiary would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(u) Each of the Company and its subsidiary is in material
compliance with all laws, rules, regulations, orders of any court or
administrative agency, operating licenses or other requirements imposed by
any governmental body applicable to it and otherwise as is applicable to its
business; and the conduct of the business of the Company and its subsidiary,
as described in the Prospectus, will not cause the Company or its subsidiary
to be in violation of any such requirements.
(v) Each of the Warrants and the Representatives' Warrants
(as defined in Paragraph (d) of Section 2 hereof) have been authorized for
issuance to the purchasers thereof or to the Representatives or their
designees, as the case may be, and will, when issued, entitle the holders
thereof to the rights, privileges, and characteristics as represented in the
most recent form of Warrants or Representatives' Warrants, as the case may
be, filed as an exhibit to the Registration Statement; the securities to be
issued upon exercise of the Warrants and the Representatives' Warrants, when
issued and delivered against payment therefor in accordance with the terms
thereof, will be duly and validly issued, fully paid, nonassessable and free
of preemptive rights, and all corporate action required to be taken for the
authorization and issuance of the Warrants and the Representatives' Warrants,
and the securities to be issued upon their exercise, have been validly and
sufficiently taken.
(w) Except as disclosed in the Prospectus, neither the
Company nor any of its officers, directors or affiliates have caused any
person, other than the Underwriters, to be entitled to reimbursement of any
kind, including, without limitation, any compensation that would be
includable as underwriter compensation under the NASD's Corporate Financing
Rule with respect to the offering of the Units, based on any activity of such
person as a finder, agent, broker, investment adviser or other financial
service provider, and there are no contracts, agreements or understandings
between the Company and any person that would give rise to a valid claim
against the Company or any Underwriter for a brokerage commission, finder's
fee or other like payment in connection with this offering.
(x) Except as described in the Prospectus, neither the
Company nor its subsidiary directly or indirectly controls or has a material
interest in any other business entity.
(y) No labor dispute with the employees of the Company or
its subsidiary exists or, to the knowledge of the Company, is imminent, and
neither the Company nor its subsidiary is aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers,
customers or vendors, which, in any case, may reasonably be expected to
result in a material adverse effect on the Company.
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(z) There are no contracts or other documents which are
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits thereto which have not been so described and filed as
required.
(aa) There are no affiliations or associations between any
member of the NASD and any of the Company's officers, directors or 5% or
greater security holders.
(bb) Other than as disclosed in the Prospectus, there are
no contracts, agreements or understandings between the Company or its
subsidiary and any person granting such person the right (other than rights
which have been waived or satisfied) to require the Company to file a
registration statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Act.
(cc) Each of the Company's and its subsidiary's products
will produce no material, logical or arithmetic inconsistencies when dealing
with leap years or dates beyond the year 1999. Without limiting the
foregoing, each of the Company's and its subsidiary's services and products
will not materially impede the accurate processing of data, or cause
programming or processing errors resulting from the rollover of two-digit
year values to "00" on January 1, 2000. The foregoing does not constitute a
warranty or representation that the Company's or its subsidiary's software
will be capable of recording, storing, processing, calculating and displaying
correct calendar dates based on software supplied by any party other than the
Company or its subsidiary, or that the Company's or its subsidiary's software
will properly interact with such third party software.
(dd) The Company confirms as of the date hereof that it is
in compliance with all provisions of Section 1 of the Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba,
and the Company further agrees that if it commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba after
the date of the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Financing (the
"Department"), whichever date is later, of if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changed in
any material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the Department.
2. PURCHASE, SALE AND DELIVERY OF THE UNITS.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth,
the Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $____ per Unit, the
number of Firm Units set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9 hereof.
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(b) Payment for the Firm Units to be sold hereunder is
to be made in New York Clearing House funds and, at the option of Paulson
Investment Company, Inc. by bank wire to an account specified by the Company,
or certified or bank cashier's checks drawn to the order of the Company,
against either uncertificated delivery of Firm Units or of certificates
therefor (which delivery, if certificated, shall take place in such location
in New York, New York as may be specified by Paulson Investment Company,
Inc.) to Paulson Investment Company, Inc. for the several accounts of the
Underwriters. Such payment is to be made at the offices of Paulson Investment
Company, Inc. at the address set forth on the first page of this Agreement,
at 7:00 a.m., Pacific time, on the third business day after the date of this
Agreement or at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and not permitted by law or
executive order to be closed.) Except to the extent uncertificated Firm Units
are delivered at closing, certificates for the Firm Units and for the common
stock and warrants comprising such Firm Units will be delivered in such
denominations and in such registrations as Paulson Investment Company, Inc.
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by Paulson Investment
Company, Inc. at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to Paulson Investment Company,
Inc. to purchase the Option Units at the price per Unit as set forth in the
first paragraph of this Section 2. The option granted hereby may be exercised
in whole or in part by giving written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 45 days after the date of
this Agreement, by Paulson Investment Company, Inc. to the Company setting
forth the number of Option Units as to which Paulson Investment Company, Inc.
is exercising the option, the names and denominations in which the Option
Units are to be registered and the time and date at which certificates
representing such Units are to be delivered. The time and date at which
certificates for Option Units are to be delivered shall be determined by
Paulson Investment Company, Inc. but shall not be earlier than three nor
later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred
to as the "Option Closing Date"). If the date of exercise of the option is
three or more days before the Closing Date, the notice of exercise shall set
the Closing Date as the Option Closing Date. The option with respect to the
Option Units granted hereunder may be exercised only to cover over-allotments
in the sale of the Firm Units by the Underwriters. Paulson Investment
Company, Inc. may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Units shall be made
on the Option Closing Date in New York Clearing House funds and, at the
option of Paulson Investment Company, Inc., by bank wire to an account
specified by the Company, or certified or bank cashier's check drawn to the
order of the Company for the Option Units to be sold by the Company in
consideration either of uncertificated delivery of Option Units or delivery
of certificates therefor (which delivery, if certificated, shall take place
in such location in New York, New York as may be specified by Paulson
Investment Company, Inc.) to Paulson Investment Company, Inc. Except to the
extent uncertificated Option Units are delivered at closing, the certificates
for the Option Units and for the common stock and warrants comprising such
Option Units will be delivered in such
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denominations and in such registrations as Paulson Investment Company, Inc.
request in writing not later than the second full business day prior to the
Option Closing Date, and will be made available for inspection by Paulson
Investment Company, Inc. at least one business day prior to the Option
Closing Date.
(d) In addition to the sums payable to the Representatives
as provided elsewhere herein, the Representatives shall be entitled to
receive at the Closing, for themselves alone and not as Representatives of
the Underwriters, as additional compensation for their services, purchase
warrants (the "Representatives' Warrants") for the purchase of up to 181,339
Units at a price of $___ per Unit, upon the terms and subject to adjustment
and conversion as described in the form of Representatives' Warrants filed as
an exhibit to the Registration Statement.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to
make a public offering of the Firm Units as soon as the Representatives deem
it advisable to do so. The Firm Units are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
Paulson Investment Company, Inc. may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Units are purchased pursuant to Section 2 hereof, the
Representatives will offer them to the public on the foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Units in
accordance with an Agreement Among Underwriters entered into by you and the
several other Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A
of the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations, (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations, and (C) file on a timely basis all reports and any definitive
proxy or information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the
termination of the offering of the Units by the Underwriters.
(b) The Company will advise the Representatives promptly
(A) when the Registration Statement or any post-effective amendment thereto
shall have become effective, (B) of receipt of any comments from the
Commission, (C) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
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additional information, (D) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose,
and (E) of the issuance of any order suspending trading of the Units, the
Common Stock or the Warrants. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use
of the Prospectus or suspending trading and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Units for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction where it is not
now so qualified or required to file such a consent. The Company will, from
time to time, prepare and file such statements, reports, and other documents,
as are or may be required to continue such qualifications in effect for so
long a period as the Representatives may reasonably request for distribution
of the Units.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder,
so as to permit the completion of the distribution of the Units as
contemplated in this Agreement and the Prospectus, and make all required
filings thereunder to maintain compliance with such act with respect to the
trading and issuance of the Common Stock, the Warrants and the Common Stock
underlying the Warrants. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Representatives, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus
as so amended or supplemented will not, in the light of the circumstances
existing at the time the Prospectus is so delivered, be misleading, or so
that the Prospectus will comply with the law.
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(f) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration Statement,
an earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement has
been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and
copies of all other documents, reports and information furnished by the
Company to its shareholders or filed with any securities exchange pursuant to
the requirements of such exchange or with the Commission pursuant to the Act
or the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined in
the Rules and Regulations, which are not consolidated in the Company's
financial statements. The Company will, for a period of five years from the
Closing Date, deliver to the Representatives notice of all meetings of its
Board of Directors and any executive or similar committee thereof.
(h) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other securities convertible
into or exchangeable or exercisable for shares of Common Stock or derivatives
of Common Stock (or agreement therefor) will be made for a period of one year
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder, or pursuant to contractual obligations existing on
the date hereof or pursuant to employee benefit plans in effect on the date
hereof, or with the prior written consent of the Representatives, which
consent will not be unreasonably withheld.
(i) The Company will use its best efforts to qualify,
subject to notice of issuance, the Units, the Common Stock and Warrants for
listing on The American Stock Exchange.
(j) The Company has caused each officer and director and
persons who own, in the aggregate, [__]% of the shares of the Common Stock
outstanding or issuable upon conversion of convertible securities outstanding
immediately prior to the date hereof to furnish to you, on or prior to the
date of this agreement, a letter or letters, in form and substance
satisfactory to the Underwriters ("Lock-up Agreements"), pursuant to which
each such person shall agree (A) not to offer, sell, contract to sell or
grant any option to purchaser or otherwise dispose of any shares of Common
Stock or preferred stock or other capital stock of the Company, or any
options or other securities convertible, exchangeable or exercisable for
Common Stock or derivatives of Common Stock owned by such person or request
the registration for the offer or sale of any of the foregoing (or as to
which such person has the right to direct the disposition) for a period of
one year after the date of this Agreement, directly or indirectly, except
with the prior written consent of Paulson Investment Company, Inc.; and (B)
to give prior written notice to Paulson Investment Company, Inc. for a period
of one year from the effective date of the Registration Statement, with
respect to any sales of Common Stock of the Company pursuant to Rule 144
under the Securities Act or any similar rule.
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(k) The Company shall apply the net proceeds of its sale of
the Units as set forth in the Prospectus and shall properly disclose such
information with respect to the sale of the Units and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Units in such a manner as
would require the Company to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Units and Common Stock and a Warrant Agent for the Warrants.
(n) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
(o) Prior to the Closing Date, the Company will furnish to the
Representatives, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company for
any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(p) The Company agrees to use its best efforts to cause (i)
each of its directors, officers and shareholders and (ii) each person who
acquires Common Stock of the Company pursuant to the exercise of any option,
warrant or right granted under the Company's 1999 Stock Option Plan or 1994
Employee Stock Option Plan to sign an agreement that restricts such person
from selling, making any short sale of, grant any option for the purchase of,
or otherwise transfer or dispose of, any of such Common Stock, or any such
securities convertible into or exercisable or exchangeable for Common Stock,
for a period of one year days after the date of the Prospectus without the
prior written consent of Paulson Investment Company, Inc.; and the Company
will (i) enforce the terms of each such agreement and (ii) issue and impose a
stop-transfer instruction with the Company's transfer agent in order to
enforce the foregoing lock-up agreements.
(q) The Company will (i) enforce the terms of each Lock-up
Agreement, and (ii) issue stop-transfer instructions to the transfer agent
for the Common Stock with respect to any transaction or contemplated
transaction that would constitute a breach of or default under the applicable
Lock-up Agreement. In addition, except with the prior written consent of
Paulson Investment Company, Inc., the Company agrees (i) not to amend or
terminate, or waive any right under, any Lock-up Agreement, or take any other
action that would directly or indirectly have the same effect as an amendment
or termination, or waiver of any right under any Lock-up Agreement, that
would permit any holder of Common Stock, or any securities convertible into,
or exercisable or exchangeable for, Common Stock, to make any short sale of,
grant any option for the purchase of, or otherwise transfer or dispose of,
such Common Stock or other securities, prior to the
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expiration of one year after the date of the Prospectus and (ii) not to consent
to any sale, short sale, grant of an option for the purchase of, or other
disposition or transfer of shares of Common Stock, or securities convertible
into or exercisable or exchangeable for Common Stock, subject to a Lock-up
Agreement.
(r) The Company will, between the date hereof and the date
twenty-five days after the Closing Date, provide the Representatives and
their legal counsel, prior to their release, copies of all press releases,
proposed communications with shareholders or other interested parties and
other public announcements and will permit the Representatives and their
legal counsel to comment thereon prior to release.
5. COSTS AND EXPENSES.
(a) Paulson Investment Company, Inc. shall be entitled to
reimbursement from the Company, for itself alone and not as a Representative
of the Underwriters, to a non-accountable expense allowance equal to 2% of
the aggregate initial public offering price of the Firm Units and any Option
Units purchased by the Underwriters. Paulson Investment Company, Inc. shall
be entitled to withhold this allowance on the Closing Date related to the
purchase of the Firm Units or the Option Units, as the case may be.
(b) In addition to the payment described in Paragraph (a)
of this Section 5, the Company will pay all costs, expenses and fees incident
to the performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses,
the Prospectus, this Agreement, The American Stock Exchange listing
application, the costs of the due diligence investigation of the principals
of the Company, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including any fees and disbursements) incident to securing the required
review by the NASD of the terms and conditions of the underwriting
arrangements; the listing fee of The American Stock Exchange; and the
expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Units
under state securities or Blue Sky laws. Any transfer taxes imposed on the
sale of the Units to the several Underwriters will be paid by the Company.
The Company shall not, however, be required to pay for any of the
Underwriters' expenses (other than those related to qualification under NASD
regulations and state securities or Blue Sky laws) except that, if this
Agreement shall not be consummated, then the Company shall reimburse the
several Underwriters for actual out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Units or in
contemplation of performing their obligations hereunder; but the Company
shall not in any event be liable to any of the several Underwriters for
damages on account of loss of anticipated profits from the sale by them of
the Units.
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6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the
Firm Units on the Closing Date and the Option Units, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, to the performance by the Company
of its covenants and obligations hereunder and to the following additional
conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall have
been made, and any request of the Commission for additional information (to
be included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to its reasonable
satisfaction. No stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, shall have been issued and no
proceedings for that purpose shall have been taken or, to the knowledge of
the Company, shall be contemplated by the Commission and no injunction,
restraining order, or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which
would prevent the issuance of the Units.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Luce,
Forward, Hamilton & Scripps LLP, counsel for the Company, dated the Closing
Date or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) Each of the Company and its subsidiary has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of California, with corporate
power and corporate authority to own or lease its properties and to
conduct its business as described in the Registration Statement; each
of the Company and its subsidiary is duly qualified to transact
business and is in good standing in all jurisdictions in which the
conduct of its business requires such qualification, or in which the
failure to qualify would have a material adverse effect upon the
business of the Company.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; the outstanding shares of Common Stock and Preferred
Stock have been duly authorized and validly issued, are
non-assessable and, to such counsel's knowledge, fully paid, and
have been issued and sold by the Company in compliance in all
material respects with applicable securities laws; all of the
securities of the Company conform to the description thereof
contained in the Prospectus; the certificates for the Common Stock
and Warrants are in due and proper form; the shares of Common Stock
to be sold by the Company pursuant to this Agreement, including
shares of Common Stock to be sold as a part of the Units, have been
duly authorized and, upon issuance and delivery thereof as
contemplated in this Agreement and the Registration Statement, will
be validly issued, fully paid and non-assessable; no preemptive
rights of
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shareholders exist with respect to any of the Common Stock or
Preferred Stock or the issuance or sale thereof pursuant to any
applicable statute or the provisions of the Company's Articles of
Incorporation or Bylaws or, to the knowledge of such counsel, pursuant
to any contractual obligation. The Warrants and the Representatives'
Warrants have been authorized for issuance to the purchasers of
Units or the Representatives, as the case may be, and will, when
issued, possess rights, privileges, and characteristics as
represented in the most recent form of Warrants or Representatives'
Warrants, as the case may be, filed as an exhibit to the
Registration Statement; the securities to be issued upon exercise of
the Warrants and the Representatives' Warrants, as the case may be,
when issued and delivered against payment therefor in accordance
with the terms of the Representatives' Warrants, will be duly and
validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the
authorization and issuance of the Warrants, the Representatives'
Warrants, and the securities to be issued upon their exercise, has
been validly and sufficiently taken.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of capital
stock of the Company and there are no outstanding or authorized
options, warrants or rights of any character obligating the Company to
issue any shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or subscribe for
any shares of such stock; and except as described in the Prospectus, to
the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise,
which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Units or the right to have any
Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no
stop order proceedings with respect thereto have been instituted or are
pending or threatened under the Act.
(v) The conditions for the use of Form SB-2 set forth
in the general instructions thereto have been satisfied, and the
Registration Statement, the Prospectus and each amendment or supplement
thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements and related schedules therein).
(vi) The statements under the captions "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", "Business-intellectual property," "Management-Stock option
plans," "Management-Employment agreements," "Certain Relationships and
Related Transactions," "Description of Securities," and
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"Shares Eligible for Future Sale" in the Prospectus, and Items 24 and
26 of Part II of the Registration Statement, insofar as such statements
constitute a summary of documents referred to therein or matters of
law, fairly summarize in all material respects the information called
for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the Prospectus
which are not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no legal or governmental
proceedings pending or threatened against the Company.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Articles of
Incorporation or Bylaws of the Company, or any agreement or instrument
known to such counsel to which the Company is a party or by which the
Company may be bound.
(x) Each of this Agreement and the Warrant Agreement
by and among the Company, the Warrantholders (defined therein) and
American Stock Transfer & Trust Company, as Warrant Agent, has been
duly authorized, executed and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in connection
with the execution and delivery of this Agreement and the consummation
of the transactions herein contemplated (other than as may be required
by the NASD or as required by state securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this
Agreement, and application of the net proceeds therefrom as described
in the Prospectus, required to register as an investment company under
the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than California or Federal laws on local
counsel in such jurisdictions, provided that in each case such counsel shall
state that they believe that they and the Underwriters are justified in relying
on such other counsel. In addition to the matters set forth above, the opinion
of Luce, Forward, Hamilton & Scripps LLP shall also include a statement to the
effect that nothing has come to the attention of such counsel that has caused
them to believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of
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the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein).
(c) The Representative shall have received from Tonkon Torp
LLP, counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect specified
in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In
rendering such opinion Tonkon Torp LLP may rely as to all matters governed other
than by the laws of the State of Oregon or Federal laws on the opinion of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel that has caused
them to believe that (i) the Registration Statement, or any amendment thereto,
as of the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Tonkon Torp LLP may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(d) The Representative shall have received at or prior to the
Closing Date from Tonkon Torp LLP a memorandum or summary, in form and substance
satisfactory to the Representative, with respect to the qualification for
offering and sale by the Underwriters of the Units under the state securities or
Blue Sky laws of such jurisdictions as the Representative may reasonably have
designated to the Company.
(e) The Representative, on behalf of the several Underwriters,
shall have received, on each of the dates hereof, the Closing Date and the
Option Closing Date, as the case may be, a letter dated the date hereof, the
Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to the Representative, of PricewaterhouseCoopers LLP
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations and containing such other statements and
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information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer
of the Company to the effect that, as of the Closing Date or the Option
Closing Date, as the case may be, each of them severally represents as
follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by the
Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the
Closing Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus and, in his opinion, as of the effective
date of the Registration Statement, the statements contained in the
Registration Statement were true and correct, and such Registration
Statement and Prospectus did not omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representatives
such further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(h) The Units, Common Stock and Warrants have been approved
for quotation upon notice of issuance on The American Stock Exchange.
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(i) The Lock-up Agreements described in Section 4(j) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they
are in all material respects satisfactory to the Representatives and to
Tonkon Torp LLP, counsel for Paulson Investment Company, Inc.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this
Agreement to be fulfilled, the obligations of the Underwriters hereunder may
be terminated by Paulson Investment Company, Inc. by notifying the Company of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion
of the Units required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto; (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; (iii) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (iv) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (v) related to, arising out of, or
in connection with the Directed Share Program; and will reimburse each
Underwriter and each such controlling person upon demand for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending against any such loss, claim, damage
or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Units, whether or not such
Underwriter or controlling person is a party to any
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action or proceeding; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for
use in the preparation thereof. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer or controlling person in connection with
investigating or defending against any such loss, claim, damage, liability,
action or proceeding; provided, however, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and, the indemnifying party shall
pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its
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own expense. Notwithstanding the foregoing, the indemnifying party shall pay
as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention
of such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable period
of time after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one additional separate firm for all such indemnified
parties. Such firm shall be designated in writing by Paulson Investment
Company, Inc. in the case of parties indemnified pursuant to Section 8(a) and
by the Company in the case of parties indemnified pursuant to Section 8(b).
The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party
is an actual or potential party to such claim, action or proceeding) unless
such settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim, action
or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
23
<PAGE>
the Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Units purchased by such Underwriter, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Units and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Units which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the
24
<PAGE>
part of the Company), you, as Representatives of the Underwriters, shall use
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company such amounts
as may be agreed upon and upon the terms set forth herein, the Firm Units or
Option Units, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Units or Option Units, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of Units with respect to which such default shall
occur does not exceed 10% of the Firm Units or Option Units, as the case may
be, covered hereby, the other Underwriters shall be obligated, severally, in
proportion to the respective numbers of Firm Units or Option Units, as the
case may be, which they are obligated to purchase hereunder, to purchase the
Firm Units or Option Units, as the case may be, which such defaulting
Underwriter or Underwriters failed to purchase, or (b) if the aggregate
number of Firm Units or Option Units, as the case may be, with respect to
which such default shall occur exceeds 10% of the Firm Units or Option Units,
as the case may be, covered hereby, the Company or you as the Representatives
of the Underwriters will have the right, by written notice given within the
next 36-hour period to the parties to this Agreement, to terminate this
Agreement without liability on the part of the non-defaulting Underwriters or
of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may
be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section
9 shall not relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telecopied
and confirmed as follows: if to the Underwriters, to the Representatives of
the Underwriters, c/o Paulson Investment Company, Inc., 811 SW Naito Parkway,
Portland, Oregon 97204, Attention: Chester L.F. Paulson; with a copy to
Tonkon Torp LLP, 888 SW Fifth Avenue, Suite 1600, Portland, Oregon 97204,
Attention: Thomas P. Palmer, Esq.; if to the Company, to ImageWare Systems,
Inc., 10883 Thornmint Road, San Diego, California 92127, Attention: S. James
Miller, Jr.; with a copy to Luce, Forward, Hamilton & Scripps LLP, 600 West
Broadway, Suite 2600, San Diego, California 92101, Attention: Dennis J.
Doucette, Esq.
11. TERMINATION.
This Agreement may be terminated by the Representatives by
notice to the Company as follows:
(a) at any time prior to the earlier of (i) the time the
Firm Units are released to the Representatives for sale by notice to the
Underwriters, or (ii) 11:30 a.m. on the first business day following the date
of this Agreement;
25
<PAGE>
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company, the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business, (ii) any outbreak
or escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect on the financial markets of the United
States of such outbreak, escalation, declaration, emergency, calamity, crisis
or change would, in the Representatives' reasonable judgment, make it
impracticable to market the Units or to enforce contracts for the sale of the
Units, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent
or more from its closing price on the day immediately preceding the date that
the Registration Statement is declared effective by the Commission, (iv)
suspension of trading in securities generally on the New York Stock Exchange
or the American Stock Exchange or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such Exchange, (v) the enactment, publication, decree or other promulgation
of any statute, regulation, rule or order of any court or other governmental
authority which in the opinion of the Representatives materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (vi) declaration of a banking moratorium by United
States or New York State authorities, (vii) any downgrading in the rating of
the Company's debt securities by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the
Exchange Act); (viii) the suspension or halt of trading of the Units, the
Common Stock or the Warrants on the American Stock Exchange or (ix) the
taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to the
Company for inclusion in the Prospectus or the Registration Statement consists
of the information set forth in the last paragraph on the front cover page of
the Prospectus (insofar as such information relates to the Underwriters), the
legends required by Item 502(d) of Regulation S-B under the Act, the
26
<PAGE>
information under the caption "Underwriting" in the Prospectus, other than the
offering expenses disclosed thereunder, and the state blue sky legends.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Units under
this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
ImageWare Systems, Inc.
By:_____________________________________
S. James Miller, Jr., President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
As Representatives of the several
Underwriters listed on Schedule I
Paulson Investment Company, Inc.
By: ___________________________________
Authorized Officer
I-Bankers Securities, Inc.
By: ___________________________________
Authorized Officer
27
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
------------------------
<TABLE>
<CAPTION>
Number of Firm Units
Underwriter to be Purchased
----------- ---------------
<S> <C>
Paulson Investment Company, Inc.
Total
</TABLE>
28
<PAGE>
UNIT CERTIFICATE
EACH UNIT CONSISTING OF ONE SHARE OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE,
AND ONE COMON STOCK
PURCHASE WARRANT
U-_____ _________Units
IMAGEWARE SYSTEMS, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA
CUSIP 45245S 20 7
THIS CERTIFIES THAT
or registered assigns (the "Registered Holder") is the owner of the number of
Units specified above, each of which consists of one share of common stock, par
value $0.01 per share, of ImageWare Systems, Inc. (the "Company") and one Common
Stock Purchase Warrant to purchase one share of Common Stock (the "Warrant"). On
or prior to the Separation Time (as defined herein), this Certificate may be
combined, exchanged or transferred only as Units, and the Common Stock and
Warrants evidenced by this Certificate may not be split up, exchanged or traded
separately. The Units may separate into shares of Common Stock and Warrants as
of the close of business on ______________________, 2000 [thirty days after the
consummation of the initial public offering of Units], or at any time after that
date, in the discretion of Paulson Investment Company, Inc. (the "Separation
Time"). The shares of Common Stock and Warrants comprising the Units shall be
separately tradeable commencing on the first day after the Separation Time on
which The American Stock Exchange is open for trading. The Warrants comprising
part of the Units are issued under and pursuant to a certain Warrant and Unit
Agreement dated as of March 10, 2000 (the "Warrant Agreement"), between the
Company and American Stock Transfer & Trust Company, as Transfer Agent (the
"Transfer Agent"), and are subject to the terms and provisions contained therein
and on the face of the certificates covered thereby, to all of which terms and
provisions the holder of this Unit Certificate consents by acceptance hereof.
The Warrant Agreement provides for adjustment in the number of shares of Common
Stock to be delivered upon the exercise of Warrants evidenced hereby and to the
exercise price of such Warrants in certain events therein set forth. Subject to
the foregoing, the number of Warrants and the number of shares of Common Stock
comprising the Units are equal.
Copies of the Warrant Agreement are available for inspection at the
stock transfer office of the Transfer Agent or may be obtained upon written
request addressed to the Company at 10883 Thornmint Road, San Diego, California
92127, Attention: Chief Financial Officer.
This Unit Certificate is not valid unless countersigned by the Transfer
Agent and Registrar of the Company.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Unit Certificate to be
duly executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:_____________________________
IMAGEWARE SYSTEMS, INC.
By: ________________________________
Chief Executive Officer
Attest: ______________________________
Secretary
Countersigned
American Stock Transfer & Trust Company
By: ________________________________
Authorized Officer
<PAGE>
IMAGEWARE SYSTEMS, INC.
The Registered Holder hereby is entitled, at any time after the close
of business on ______________________, 2000, to exchange the Units represented
by this Unit Certificate for Common Stock Certificate(s) representing one share
of Common Stock, for each Unit represented by this Unit Certificate, and Warrant
Certificate(s) representing one Warrant, for each unit represented by this Unit
Certificate upon surrender of this Unit Certificate to the Transfer Agent
together with any documentation required by such Agent.
REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FRONT
SIDE HEREOF AND THE PROVISIONS OF SUCH WARRANT AGREEEMNT SHALL FOR ALL PURPOSES
HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FACE OF THIS CERTIFICATE.
COPIES OF THE WARRANT AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE
TRANSFER AGENT, AMERICAN STOCK TRANSFER & TRUST COMPANY.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenant with right of survivorship
and not as tenants in common
COM PROP - as community property
UNIF GIFT MIN ACT - _________________Custodian________________
(Cust) (minor)
under Uniform Gifts to Minors Act
------------------------------------------
(State)
UNIF TRF MIN ACT - _________________Custodian________________
(Cust) (minor)
under Uniform Gifts to Minors Act
------------------------------------------
(State)
<PAGE>
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned Registered Holder ( )
- ------------------------
(Please insert Social Security or other identification number of Registered
Holder)
hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print Name and Address including Zip Code)
Units evidenced by the within Unit Certificate, and irrevocably constitutes and
appoints
______________________________________________________________________Attorney
to transfer this Unit Certificate on the books of ImageWare Systems, Inc. with
the full power of substitution in the premises.
Dated:__________________, ________
Signature:
__________________________________
(Signature must conform in all respects to the name of Registered Holder as
specified on the face of this Unit Certificate in every particular, without
alteration or any change whatsoever, and the signature must be guaranteed in the
usual manner.)
Signature Guaranteed:
__________________________________
The signature should be guaranteed by an eligible institution (Banks,
Stockbrokers, Savings and Loan Association and Credit Union with membership in
an approved signature Medallion Program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
VOID AFTER 5:00 P.M. PACIFIC TIME ON , 2005
----------
WARRANTS TO PURCHASE COMMON STOCK
W- Warrants
----- ---------
IMAGEWARE SYSTEMS, INC.
CUSIP 45245S 11 6
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of Warrants (the
"Warrants") set forth above. Each Warrant entitles the holder thereof to
purchase from ImageWare Systems, Inc., a corporation incorporated under the laws
of the State of California (the "Company"), subject to the terms and conditions
set forth hereinafter and in the Warrant and Unit Agreement hereinafter more
fully described (the "Warrant Agreement"), at any time on or before the close of
business on __________, 2005 or, if such Warrant is redeemed as provided in the
Warrant Agreement, at any time prior to the effective time of such redemption
(the "Expiration Date"), one fully paid and non-assessable share of Common Stock
of the Company (the "Common Stock") upon presentation and surrender of this
Warrant Certificate, with the instructions for the registration and delivery of
Common Stock filled in, at the stock transfer office in Denver, Colorado, of
American Stock Transfer & Trust Company, Transfer Agent of the Company (the
"Transfer Agent") or of its successor warrant agent or, if there be no successor
warrant agent, at the corporate offices of the Company, and upon payment of the
Exercise Price (as defined in the Warrant Agreement) and any applicable taxes
paid either in cash, or by certified or official bank check, payable in lawful
money of the United States of America to the order of the Company. Each Warrant
initially entitles the holder to purchase one share of Common Stock initially
for 120% of the Initial Public Offering price of the Units. The Exercise Price
shall be adjusted on the first anniversary of the closing of the Company's
initial public offering to 150% of the initial public offering price of the
Units. The number and kind of securities or other property for which the
Warrants are exercisable are subject to further adjustment in certain events,
such as mergers, splits, stock dividends, recapitalizations and the like, to
prevent dilution. After six months following the closing of the Company's
initial public offering, the Company may redeem any or all outstanding and
unexercised Warrants at any time if the Daily Price has exceeded 200% of the
Initial Public offering price of the Units for ten consecutive trading days
immediately preceding the date of notice of such redemption, upon 30 days
notice, at a price equal to $0.25 per Warrant. For the purpose of the foregoing
sentence, the term "Daily Price" shall mean, for any relevant day, the closing
bid price on that day as reported by the principal exchange or quotation system
on which prices for the Common Stock are reported. All Warrants not theretofore
exercised or redeemed will expire on _________, 2005.
<PAGE>
This Warrant Certificate is subject to all of the terms,
provisions and conditions of the Warrant Agreement, dated as of January 20, 2000
(the "Warrant Agreement"), between the Company and the Transfer Agent, to all of
which terms, provisions and conditions the registered holder of this Warrant
Certificate consents by acceptance hereof. The Warrant Agreement is incorporated
herein by reference and made a part hereof and reference is made to the Warrant
Agreement for a full description of the rights, limitations of rights,
obligations, duties and immunities of the Transfer Agent, the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are
available for inspection at the stock transfer office of the Transfer Agent or
may be obtained upon written request addressed to the Company at 10883 Thornmint
Road, San Diego, CA 92127, Attention: Chief Financial Officer.
The Company shall not be required upon the exercise of the
Warrants evidenced by this Warrant Certificate to issue fractions of Warrants,
Common Stock or other securities, but shall make adjustment therefor in cash on
the basis of the current market value of any fractional interest as provided in
the Warrant Agreement.
In certain cases, the sale of securities by the Company upon
exercise of Warrants would violate the securities laws of the United States,
certain states thereof or other jurisdictions. The Company has agreed to use
commercially reasonable efforts to cause a registration statement to continue to
be effective during the term of the Warrants with respect to such sales under
the Securities Act of 1933, as amended, and to take such action under the laws
of various states as may be required to cause the sale of securities upon
exercise to be lawful. However, the Company will not be required to honor the
exercise of Warrants if, in the opinion of the Board of Directors, upon advice
of counsel, the sale of securities upon such exercise would be unlawful. In
certain cases, the Company may, but is not required to, purchase Warrants
submitted for exercise for a cash price equal to the difference between the
market price of the securities obtainable upon such exercise and the exercise
price of such Warrants.
This Warrant Certificate, with or without other Warrant
Certificates, upon surrender to the Transfer Agent, any successor warrant agent
or, in the absence of any successor warrant agent, at the corporate offices of
the Company, may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered. If the Warrants evidenced by this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or
Certificates evidencing the number of Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled
to vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to stockholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of
<PAGE>
stock to no par value, consolidation, conveyance or otherwise) or to receive
notice of meetings or other actions affecting stockholders (except as provided
in the Warrant Agreement) or to receive dividends or subscription rights or
otherwise until the Warrants evidenced by this Warrant Certificate shall have
been exercised and the Common Stock purchasable upon the exercise thereof shall
have become deliverable as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for the Company's Common Stock
or other class of stock purchasable upon the exercise of the Warrants evidenced
by this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.
Every holder of this Warrant Certificate by accepting the same
consents and agrees with the Company, the Transfer Agent, and with every other
holder of a Warrant Certificate that:
(a) This Warrant Certificate is transferable on the registry books
of the Transfer Agent only upon the terms and conditions set forth in the
Warrant Agreement; and
(b) The Company and the Transfer Agent may deem and treat the
person in whose name this Warrant Certificate is registered as the absolute
owner hereof (notwithstanding any notation of ownership or other writing thereon
made by anyone other than the Company or the Transfer Agent) for all purposes
whatever, and neither the Company nor the Transfer Agent shall be affected by
any notice to the contrary.
The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
Warrants evidenced by this Warrant Certificate until any tax which may be
payable in respect thereof by the holder of this Warrant Certificate pursuant to
the Warrant Agreement shall have been paid, such tax being payable by the holder
of this Warrant Certificate at the time of surrender.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Transfer Agent.
WITNESS the facsimile signatures of the proper officers of the
Company and its corporate seal.
Dated:
IMAGEWARE SYSTEMS, INC.
By:
-------------------------------
Chief Executive Officer
Attest:
---------------------------
Secretary
Countersigned
American Stock Transfer & Trust Company
By:
--------------------------------
Authorized Officer
<PAGE>
FORM OF ELECTION TO PURCHASE
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE THE
WARRANTS IN WHOLE OR IN PART)
To: IMAGEWARE SYSTEMS, INC.
The undersigned Registered Holder ( )
- --------------------------------------------------------------
(Please insert Social Security or other identification
number of Registered Holder)
hereby irrevocably elect(s) to exercise the right of purchase represented by the
within this Warrant Certificate for, and to purchase thereunder, _______________
shares of Common Stock provided for therein and tenders payment herewith to the
order of IMAGEWARE SYSTEMS, INC. in the amount of $________________.
The undersigned requests that certificates for such shares of Common Stock be
issued as follows:
Name:
-------------------------------------------------------------------------
Address:
----------------------------------------------------------------------
Deliver to:
-------------------------------------------------------------------
Address:
----------------------------------------------------------------------
and if said number of Warrants being exercised shall not be all the Warrants
evidenced by this Warrant Certificate, that a new Certificate for the balance of
such Warrants as well as the shares of Common Stock represented by this Warrant
Certificate be registered in the name of, and delivered to, the Registered
Holder at the address stated below:
Address:
----------------------------------------------------------------------
Dated: ,
------------- -------
Signature
- ------------------------------------------
(Signature must conform in all respects to the name of Registered Holder as
specified in the case of this Warrant Certificate in every particular, without
alteration or any change whatever.)
Signature Guaranteed:
- ------------------------------------------
The signature should be guaranteed by an eligible institution (Banks,
Stockbrokers, Savings and Loan Association and Credit Union with membership in
an approved signature Medallion Program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned Registered Holder ( )
- --------------------------------------------------------------
(Please insert Social Security or other identification
number of Registered Holder)
hereby sells, assigns and transfers unto
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Please Print Name and Address including Zip Code)
Warrants evidenced by the within Warrant Certificate, and irrevocably
constitutes and appoints_______________________________________________Attorney
to transfer this Warrant Certificate on the books of ImageWare Systems, Inc.
with the full power of substitution in the premises.
Dated: ,
------------------ --------
Signature:
- ---------------------------------------------------
(Signature must conform in all respects to the name
of Registered Holder as on the face of this Unit
Certificate ine very particular, without
alteration or anychange whatsoever, and the
signature must be guaranteed in the usual manner.)
Signature Guaranteed:
- ---------------------------------------------------
The signature should be guaranteed by an eligible
institution (Banks,Stockbrokers, Savings and Loan
Association and Credit Union with membership in
an approved signature Medallion Program),
pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
FORM OF
IMAGEWARE SYSTEMS, INC.
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
and
I-BANKERS SECURITIES, INC.
Exercisable to Purchase
181,339 UNITS
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
Void after __________, 2005
<PAGE>
This is to certify that, for value received and subject to the
terms and conditions set forth below, the Warrantholder (hereinafter defined)
is entitled to purchase, and the Company promises and agrees to sell and
issue to the Warrantholder, at any time on or after ______ ___, 2000 and on
or before __________ ___, 2005, up to 181,339 Units (hereinafter defined) at
the Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, $0.01 par value, of the
Company.
(e) "Company" means ImageWare Systems, Inc., a California
corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one complete Unit (or Securities obtainable in lieu of one complete
Unit) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $_____ per Unit (120% of the
initial public offering price of a Unit). If a Warrant is exercised for a
component of a Unit or Units, then the price payable in connection with such
exercise shall be determined by allocating $0.001 to the Unit Warrant and the
balance of the Exercise Price to the share of Common Stock, or, in each case, to
any securities obtainable in addition to or in lieu of such Unit Warrant or
share of Common Stock by virtue of the application of Section 3 of this Warrant.
(i) "Offering" means the public offering of Units made pursuant to
the Registration Statement.
(j) "Participating Underwriter" means any underwriter participating
in the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement (File No. 333-____), as amended on the Closing Date.
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(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange or conversion of such securities.
(n) "Unit" means, as the case may require, either one of the Units
offered to the public pursuant to the Registration Statement or one of the Units
obtainable on exercise of a Warrant, each Unit consisting of one share of Common
Stock and one Unit Warrant to purchase one share of Common Stock on the terms
and conditions described in the Registration Statement.
(o) "Unit Warrant" means a Common Stock purchase warrant included as
a component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction, the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering on
behalf of the Warrantholder and the denominator of which is the aggregate sales
price of all of the securities sold by such underwriter, underwriting syndicate,
or agent in such offering and (ii) all out-of-pocket expenses of the
Warrantholder, except for the fees and disbursements of one firm retained as
legal counsel for the Warrantholder on behalf of all of the Warrantholders that
will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. EXERCISE OF WARRANTS. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and
ending at 5:00 p.m. (Pacific Time) on the fifth anniversary of the Effective
Date by surrendering this Warrant Certificate, together with appropriate
instructions, duly executed by the Warrantholder or by its duly authorized
attorney, at the office of the Company, 10833 Thornmint Road, San Diego,
California 92127, or at such other office or agency as the Company may
designate. Upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When
such certificates are prepared, the Company shall notify the Warrantholder
and deliver such certificates to the Warrantholder or as per the
Warrantholder's instructions immediately upon payment in full by the
Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased. If the Warrantholder
shall represent and warrant that all applicable registration and prospectus
delivery requirements for their sale have been complied with upon sale
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of the securities received upon exercise of the Warrant, such certificates
shall not bear a legend with respect to the Act.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver
to the Warrantholder a new Warrant Certificate (dated the date hereof), in
form and tenor similar to this Warrant Certificate, evidencing that portion
of the Warrant not exercised. The Securities to be obtained on exercise of
the Warrant will be deemed to have been issued, and any person exercising the
Warrants will be deemed to have become a holder of record of those
Securities, as of the date of the payment of the Exercise Price.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is
then exercisable will be proportionately increased and the Exercise Price
will be proportionately reduced; and, conversely, if the outstanding shares
of Common Stock are combined into a smaller number of shares of Common Stock,
the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately reduced and the Exercise Price will be
proportionately increased. The increases and reductions provided for in this
subsection 3(a) will be made with the intent and, as nearly as practicable,
the effect that neither the percentage of the total equity of the Company
obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or
other change in the capital structure of the Company, then, as a condition of
such change, lawful and adequate provision will be made so that the holder of
this Warrant Certificate will have the right thereafter to receive upon the
exercise of the Warrant the kind and amount of shares of stock or other
securities or property to which he would have been entitled if, immediately
prior to such event, he had held the number of shares of Common Stock
obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to
the end that the provisions set forth herein will thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The
Company will not permit any change in its capital structure to occur unless
the issuer of the shares of stock or other securities to be received by the
holder of this Warrant Certificate, if not the Company, agrees to be bound by
and comply with the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of
shares of Common Stock, other securities, or the property purchasable upon
exercise of the Warrant, the Company will promptly determine the new number of
such shares or other securities or property
Page 3 - Purchase Warrant
<PAGE>
purchasable upon exercise of the Warrant and (i) prepare and retain on file a
statement describing in reasonable detail the method used in arriving at the
new number of such shares or other securities or property purchasable upon
exercise of the Warrant and (ii) cause a copy of such statement to be mailed
to the Warrantholder within thirty (30) days after the date of the event
giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will
be issued in connection with the exercise of the Warrant, but the Company
will pay, in lieu of fractional shares, a cash payment therefor on the basis
of the mean between the bid and asked prices of the Common Stock in the
over-the-counter market or the last sale price of the Common Stock on the
Nasdaq SmallCap Market or a national securities exchange on the day
immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary
of the Company are distributed pro rata to holders of Common Stock, such
number of securities will be distributed to the Warrantholder or his assignee
upon exercise of his rights hereunder as such Warrantholder or assignee would
have been entitled to if this Warrant Certificate had been exercised prior to
the record date for such distribution. The provisions with respect to
adjustment of the Common Stock provided in this Section 3 will also apply to
the securities to which the Warrantholder or his assignee is entitled under
this subsection 3 (e).
(f) Notwithstanding anything herein to the contrary, there will be
no adjustment made hereunder on account of the sale by the Company of the
Common Stock or other Securities purchasable upon exercise of the Warrant.
4. RESERVATION OF SECURITIES. The Company agrees that the number of
shares of Common Stock, Unit Warrants or other Securities sufficient to provide
for the exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for issuance upon exercise of the
Warrant.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT
CERTIFICATE.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. (Pacific Time) on the fifth anniversary
of the Effective Date (the "Registration Period"). The Company will also file
such applications and other documents necessary to permit the sale of the
Securities to the public during the Registration Period in those states
designated by the Warrantholders among those in which the Units were qualified
for sale in the Offering or in such other states as the Company and the
Warrantholder agree to. In order to comply with the provisions of this Section
6(a), the Company is not required to file more than one registration statement
in addition to the Registration Statement.
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<PAGE>
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct
of the registration, including the contents of the registration statement,
will be entirely in the control and at the discretion of the Company. The
Company will file such post-effective amendments and supplements as may be
necessary to maintain the currency of the registration statement during the
Registration Period. In addition, if the Warrantholder participating in the
registration is advised by counsel that the registration statement, in their
opinion, is deficient in any material respect, the Company will use its best
efforts to cause the registration statement to be amended to eliminate the
concerns raised.
(d) The Company will furnish to the Warrantholder the number of
copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as it may
reasonably request in order to facilitate the disposition of Securities owned
by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of
the counsel representing the Company for the purposes of the registration
pursuant to this Section 6, addressed to the Warrantholders and any
Participating Underwriter, (ii) in the event of an underwritten offering,
furnish an appropriate letter from the independent public accountants of the
Company, addressed to the Warrantholders and any Participating Underwriter,
and (iii) make such representations and warranties to the Warrantholders and
any Participating Underwriter as are customarily given to underwriters of
public offerings of equity securities in connection with such offerings. A
request pursuant to this subsection (e) may be made on three occasions. The
documents required to be delivered pursuant to this subsection (e) will be
dated within ten days of the request and will be, in form and substance,
equivalent to similar documents furnished to the underwriters in connection
with the Offering, with such changes as may be appropriate in light of
changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who
controls any selling Warrantholder within the meaning of the Act, and any
Participating Underwriter against any losses, claims, damages, or
liabilities, joint or several, to which any Warrantholder, controlling
person, or Participating Underwriter may be subject under the Act or
otherwise; and it will reimburse each Warrantholder, each controlling person,
and each Participating Underwriter for any legal or other expenses reasonably
incurred by the Warrantholder, controlling person, or Participating
Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action, insofar as such losses, claims, damages,
or liabilities, joint or several (or actions in respect thereof), arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any such
registration statement or any preliminary prospectus or final prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated
Page 5 - Purchase Warrant
<PAGE>
therein or necessary to make the statements therein not misleading; PROVIDED,
HOWEVER, that the Company will not be liable in any case to the extent that
any loss, claim, damage, or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in any registration statement, preliminary prospectus, final prospectus,
or any amendment or supplement thereto, in reliance upon and in conformity
with written information furnished by a Warrantholder for use in the
preparation thereof. The indemnity agreement contained in this subsection
will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Company, such approval not
to be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed any registration
statement or other filing, or any amendment or supplement thereto, and any
person who controls the Company within the meaning of the Act, against any
losses, claims, damages, or liabilities to which the Company or any such
director, officer, or controlling person may become subject under the Act or
otherwise, and will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said registration
statement, any preliminary or final prospectus, or other filing or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in said registration statement,
preliminary or final prospectus, or other filing, or amendment or supplement,
in reliance upon and in conformity with written information furnished by such
Warrantholder for use in the preparation thereof; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection (b) will not apply to
amounts paid to any claimant in settlement of any suit or claim unless such
payment is first approved by the Warrantholder, such approval not to be
unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, notify the indemnifying party of the commencement
thereof; but the omission to notify the indemnifying party will not relieve
it from any liability that it may have to any indemnified party otherwise
than under subsections (a) and (b).
(d) If any such action is brought against any indemnified party
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent
that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; and after notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation.
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8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant
may not be sold, transferred, assigned or hypothecated except for a one-year
period after the Effective Date to underwriters of the Offering or to
individuals who are either a partner or an officer of such an underwriter or
by will or by operation of law. The Warrant may be divided or combined, upon
request to the Company by the Warrantholder, into a certificate or
certificates evidencing the same aggregate number of Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. OPTIONAL CONVERSION.
(a) In addition to and without limiting the right of any Warrantholder
under the terms of this Warrant, the Warrantholder shall have the right (the
"Conversion Right") to convert this Warrant or any portion thereof into
Securities as provided in this Section 10 at any time or from time-to-time after
the first anniversary of the date hereof and prior to its expiration. Upon
exercise of the Conversion Right with respect to a particular number of Units
subject to this Warrant (the "Converted Securities"), the Company shall deliver
to the holder of this Warrant, without payment by the holder of any exercise
price or any cash or other consideration, that number of Units equal to the
quotient obtained by dividing the Net Value (as hereinafter defined) of the
Converted Securities by the sum of the fair market value (as defined in
paragraph (c) below) of a single share of Common Stock plus a single Unit
Warrant, determined in each case as of the close of business on the Conversion
Date (as hereinafter defined). The "Net Value" of the Converted Securities
shall be determined by subtracting the aggregate Exercise Price of the Converted
Securities from the aggregate fair market value of the Converted Securities.
Notwithstanding anything in this Section 10 to the contrary, the Conversion
Right cannot be exercised with respect to a number of Converted Securities
having a Net Value below $100. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the holder of this Warrant an amount in cash equal to the fair
market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Warrant
by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends
to exercise the Conversion Right and indicating the number of Securities
subject to this Warrant which are being surrendered (referred to in paragraph
(a) above as the Converted Securities) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this
Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the "Conversion Date"), but not later than the
expiration date of this Warrant. Certificates for the shares of Common Stock
and Unit Warrants issuable upon exercise of the Conversion Right, together
with a check in payment of any fractional share and, in the case of a partial
exercise, a new Warrant evidencing the Securities remaining subject to this
Warrant, shall be issued as of the Conversion Date, and shall be delivered to
the holder of this Warrant within seven days following the Conversion Date.
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(c) For purposes of this Section 10, the "fair market value" of a share
of Common Stock or Unit Warrant as of a particular date shall be the mean
between the bid and asked price of the Common Stock or Unit Warrant, as the
case may be, as quoted in the over the counter market, or, if applicable, the
closing sale price of the Common Stock or Unit Warrant, as the case may be,
on the Nasdaq Stock Market or a national exchange.
11. NOTICE. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail addressed as
follows:
If to the Company:
10833 Thornmint Road
San Diego, California 92127
Attn: President
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
12. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this
Warrant Certificate shall be tried before the courts of Oregon located in
Multnomah County, Oregon, to the exclusion of all other courts that might have
jurisdiction.
Dated as of _______ ___, 2000.
IMAGEWARE SYSTEMS, INC.
By:________________________________
________________________________
Agreed and Accepted as of ________ ___, 2000
Page 8 - Purchase Warrant
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PAULSON INVESTMENT COMPANY, INC.
By:_______________________________
_______________________________
I-BANKERS SECURITIES, INC.
By:_______________________________
_______________________________
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<PAGE>
WARRANT AND UNIT AGREEMENT ("AGREEMENT")
ImageWare Systems, Inc., 10883 Thornmint Road, San Diego, California 92127, a
California corporation ("Company"), and American Securities Transfer & Trust,
Inc. ("AST"), 12039 West Alameda Parkway, Suite Z-2, Lakewood, Colorado 80228, a
Colorado corporation ("Transfer Agent"), agree as follows:
1. PURPOSE. The Company proposes to publicly offer and issue
2,156,250 units ("Units"). Each Unit will entitle the
registered holder of a Unit ("Unit Holder") to (i) one (1)
share of the Company's $0.01 par value common stock ("Shares")
and (ii) one (1) warrant permitting the purchase of one (1)
Share ("Warrant").
2. WARRANTS. Each Warrant will entitle the registered holder of a
Warrant ("Warrant Holder") to purchase from the Company one
(1) Share at one hundred twenty percent (120%) of the Initial
Public Offering price of the Units during the first year after
the offering and one hundred fifty percent (150%) of the
Initial Public Offering price of the Units thereafter
("Exercise Price"). A Warrant Holder may exercise all or any
number of Warrants resulting in the purchase of a whole number
of Shares.
3. EXERCISE PERIOD. The Warrants may be exercised at any time
during the period commencing thirty (30) days after the
Initial Public Offering ("Exercise Date") and ending at 3:00
p.m., Denver Colorado time on the fifth (5th) anniversary date
of the closing of the offering ("Expiration Date") except as
changed by Section 15 of this Agreement.
4. NON-DETACHABILITY. A Warrant Certificate (as defined below)
may not be detached from a Share certificate contained in a
Unit for at least thirty (30) days following the Initial
Public Offering. Until such time a Warrant Certificate may be
split up, combined, exchanged or transferred on the books of
the Transfer Agent only together with a Share certificate.
Paulson Investment Company, Inc. will then determine when the
Units separate, after which the common stock and public
warrants will trade separately.
5. CERTIFICATES. The Warrant certificates shall be in registered
form only and shall be substantially in the form set forth in
Exhibit A attached to this Agreement ("Warrant Certificate").
The Unit certificates shall be in registered form only and
shall be substantially in the form set forth in Exhibit B
attached to this Agreement ("Unit Certificate"). Warrant and
Unit Certificates shall be signed by, or shall bear the
facsimile signature of, the President or a Vice President of
the Company and the Secretary or an Assistant Secretary of the
Company and shall bear a facsimile of the Company's corporate
seal. If any person, whose facsimile signature has been placed
upon any Warrant or Unit Certificate or the signature of an
officer of the Company, shall have ceased to be such officer
before such Warrant or Unit Certificate is countersigned,
issued and delivered, such Warrant or Unit Certificate shall
be countersigned, issued and delivered with the same effect as
if such person had not ceased to be such officer. Any Warrant
or Unit Certificate may be signed by, or made to bear the
facsimile signature of, any person who at the actual date of
the preparation of such Warrant or Unit Certificate shall be a
proper officer of the Company to sign such Warrant or Unit
Certificate, even though such person was not such an officer
upon the date of the Agreement.
6. ISSUANCE OF NEW CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or the several Warrant or Unit
Certificates to the contrary, the
1
<PAGE>
Company may, at its option, issue new Warrant or Unit
Certificates in such form as may be approved by its Board of
Directors to reflect any adjustment or change in the Exercise
Price or the number or kind of shares purchasable under the
several Warrant or Unit Certificates made in accordance with
the provisions of this Agreement.
7. COUNTERSIGNING. Warrant and Unit Certificates shall be
manually countersigned by the Transfer Agent and shall not be
valid for any purpose unless so countersigned. The Transfer
Agent hereby is authorized to countersign and deliver to, or
in accordance with the instructions of, any Warrant or Unit
Holder any Warrant or Unit Certificate, respectively, which is
properly issued.
8. REGISTRATION OF TRANSFER AND EXCHANGES. The Transfer Agent
will keep or cause to be kept books for registration of
ownership or transfer of Warrant and Unit Certificates issued
hereunder. Such registers shall show the names and addresses
of the respective holders of the Warrant and Unit Certificates
and the number of Warrants and Units evidenced by each such
Warrant or Unit Certificate. Subject to the provisions of
Section 4, the Transfer Agent shall from time to time register
the transfer of any outstanding Warrant or Unit Certificate
upon records maintained by the Transfer Agent for such purpose
upon surrender of such Warrant or Unit Certificate to the
Transfer Agent for transfer, accompanied by appropriate
instruments of transfer in form satisfactory to the Company
and the Transfer Agent and duly executed by the Warrant or
Unit Holder or a duly authorized attorney. Upon any such
registration of transfer, a new Warrant or Unit Certificate
shall be issued in the name of and to the transferee and the
surrendered Warrant or Unit Certificate shall be cancelled.
9. EXERCISE OF WARRANTS.
a. Any one Warrant or any multiple of one Warrant
evidenced by any Warrant Certificate may be exercised
on or after the Exercise Date, and on or before the
Expiration Date. A Warrant shall be exercised by the
Warrant Holder by surrendering to the Transfer Agent
the Warrant Certificate evidencing such Warrant with
the exercise form on the reverse of such Warrant
Certificate duly completed and executed and
delivering to the Transfer Agent, by good check or
bank draft payable to the order of the Company, the
Exercise Price for each Share to be purchased.
b. Upon receipt of a Warrant Certificate with the
exercise form thereon duly executed together with
payment in full of the Exercise Price (and an amount
equal to any applicable taxes or government charges)
for the Shares for which Warrants are then being
exercised, the Transfer Agent shall requisition from
any transfer agent for the Shares, and upon receipt
shall make delivery of, certificates evidencing the
total number of whole Shares for which Warrants are
then being exercised in such names and denominations
as are required for delivery to, or in accordance
with the instructions of, the Warrant Holder. Such
certificates for the Shares shall be deemed to be
issued, and the person whom such Shares are issued of
record shall be deemed to have become a holder of
record of such Shares, as of the date of the
surrender of such Warrant Certificate and payment of
the Exercise Price (and an amount equal to any
applicable taxes or government charges), whichever
shall
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<PAGE>
last occur, provided that if the books of the Company
with respect to the Shares shall be deemed to be
issued, and the person to whom such Shares are issued
of record shall be deemed to have become a record
holder of such Shares, as of the date on which such
books shall next be open (whether before, on or after
the Expiration Date) but at the Exercise Price (and
an amount equal to any applicable taxes or government
charges), whichever shall have last occurred, to the
Transfer Agent. The Company covenants and agrees that
it shall not cause its stock transfer books to be
closed for a period of more than twenty (20)
consecutive business days except upon consolidation,
merger, sale of all of its assets, dissolution or
liquidation or as otherwise provided by law.
c. In addition, if it is required by law and upon
instruction by the Company, the Transfer Agent will
deliver to each Warrant Holder a prospectus that
complies with the provisions of Section 5 of the
Securities Act, as amended, and the Company agrees to
supply the Transfer Agent with a sufficient number of
prospectuses to effectuate that purpose.
d. Any Warrant Certificate or Certificates may be
exchanged at the option of the holder thereof for
another Warrant Certificate or Certificates of
different denominations, of like tenor and
representing in the aggregate the same number of
Warrants, upon surrender of such Warrant Certificate
or Certificates, with the Form of Assignment duly
filled in and executed, to the Transfer Agent, at any
time or from time-to-time after the close of business
on the date hereof and prior to the close of business
on the Expiration Date. The Transfer Agent shall
promptly cancel the surrendered Warrant Certificate
and deliver the new Warrant Certificate pursuant to
the provisions of this Section.
e. If less than all the Warrants evidenced by a Warrant
Certificate are exercised upon a single occasion, a
new Warrant Certificate for the balance of the
Warrants not so exercised shall be issued and
delivered to, or in accordance with, transfer
instructions properly given by the Warrant Holder
until the Expiration Date.
f. All Warrant Certificates surrendered upon exercise of
the Warrants shall be cancelled.
g. Upon the exercise, or conversion of any Warrant, the
Transfer Agent shall account promptly to the Company
with respect to Warrants exercised and concurrently
pay to the Company all moneys received by the
Transfer Agent for the purchase of securities or
other property through the exercise of such Warrants.
h. Expenses incurred by American Securities Transfer &
Trust, Inc. while acting in the capacity as Transfer
Agent, in accordance with this Agreement, will be
paid by the Company. A detailed accounting statement
relating to the number of shares exercised, names of
registered Warrant Holder(s) and the net amount of
exercised funds remitted will be given to the Company
with the payment of each exercise amount.
10. REDEMPTION. Following six (6) months after the closing of the
Company's initial public offering, the Warrants outstanding at
the time of a redemption may be
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redeemed at the option of the Company, in whole or in part on
a pro-rata basis, at any time if, at the time notice of such
redemption is given by the Company as provided in subsection
a., below, the Daily Price has exceeded two hundred percent
(200%) of the Initial Public Offering Price for the ten (10)
consecutive trading days immediately preceding the date of
such notice, at a price of $0.25 per Warrant (the "Redemption
Price"). For the purpose of the foregoing sentence, the term
"Daily Price" shall mean, for any relevant day, the closing
bid price on that day as reported by the principal exchange or
quotation system on which prices for the Common Stock are
reported. On the redemption date the holders of record of
redeemed Warrants shall be entitled to payment of the
Redemption Price upon surrender of such redeemed Warrants to
the Company at the principal office of the Transfer Agent in
Denver, Colorado.
a. Notice of redemption of Warrants shall be given at
least thirty (30) days prior to the redemption date
by mailing, by registered or certified mail, return
receipt requested, a copy of such notice to the
Transfer Agent and by first class mail to all of
the holders of record of Warrants at their
respective addresses appearing on the books or
transfer records of the Company or such other
address designated in writing by the holder of
record to the Transfer Agent not less than forty
(40) days prior to the redemption date.
b. From and after the redemption date, all rights of the
Warrant Holders (except the right to receive the
Redemption Price) shall terminate, but only if (i) no
later than one day prior to the redemption date the
Company shall have irrevocably deposited with the
Transfer Agent as paying agent a sufficient amount to
pay on the redemption date the Redemption Price for
all Warrants called for redemption and (ii) the
notice of redemption shall have stated the name and
address of the Transfer Agent and the intention of
the Company to deposit such amount with the Transfer
Agent no later than one day prior to the redemption
date.
c. The Transfer Agent shall pay to the holders of record
of redeemed Warrants all monies received by the
Transfer Agent for the redemption of Warrants to
which the holders of record of such redeemed Warrants
who shall have surrendered their Warrants are
entitled.
d. Any amounts deposited with the Transfer Agent that
are not required for redemption of Warrants may be
withdrawn by the Company. Any amounts deposited with
the Transfer Agent that shall be unclaimed after six
(6) months after the redemption date may be withdrawn
by the Company, and thereafter the holders of the
Warrants called for redemption for which such funds
were deposited shall look solely to the Company for
payment. The Company shall be entitled to the
interest, if any, on funds deposited with the
Transfer Agent and the holders of redeemed Warrants
shall have no right to any such interest.
e. If the Company fails to make a sufficient deposit
with the Transfer Agent as provided above, the holder
of any Warrants called for redemption may at the
option of the holder (i) by notice to the Company
declare the notice of redemption a nullity as to such
holder, or (ii) maintain an action against the
Company for the Redemption Price. If the holder
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brings such an action, the Company will pay
reasonable attorneys' fees of the holder. If the
holder fails to bring an action against the Company
for the Redemption Price within sixty (60) days after
the redemption date, the holder shall be deemed to
have elected to declare the notice of redemption to
be a nullity as to such holder and such notice shall
be without any force or effect as to such holder.
Except as otherwise specifically provided in this
subsection e., a notice of redemption, once mailed by
the Company, as provided in subsection a., shall be
irrevocable.
11. TAXES. The Company will pay all taxes attributable to the
initial issuance of Shares upon exercise of Warrants. The
Company shall not, however, be required to pay any tax which
may be payable in respect to any transfer involved in any
issue of Warrant or Unit Certificates or in the issue of any
certificates of Shares in the name other than that of the
Warrant or Unit Holder upon the exercise of any Warrant or
Unit, as the case may be.
12. MUTILATED OR MISSING CERTIFICATES. If any Warrant or Unit
Certificate is mutilated, lost, stolen or destroyed, the
Company and the Transfer Agent may, on such terms as to
indemnity or otherwise as they may in their discretion impose
(which shall, in the case of a mutilated Warrant or Unit
Certificate, include the surrender thereof), and upon receipt
of evidence satisfactory to the Company and the Transfer Agent
of such mutilation, loss, theft or destruction, issue a
substitute Warrant or Unit Certificate, respectively, of like
denomination or tenor as the Warrant or Unit Certificate so
mutilated, lost, stolen or destroyed. Applicants for
substitute Warrant or Unit Certificates shall comply with such
other reasonable regulations and pay any reasonable charges as
the Company or the Transfer Agent may prescribe.
13. SUBSEQUENT ISSUE OF CERTIFICATES. Subsequent to their original
issuance, no Warrant or Unit Certificates shall be reissued
except (i) such Certificates issued upon transfer thereof in
accordance with Section 8 hereof, (ii) such Certificates
issued upon any combination, split-up or exchange of Warrant
or Unit Certificates pursuant to Section 8 hereof, (iii) such
Certificates issued in replacement of mutilated, destroyed,
lost or stolen Warrant or Unit Certificates pursuant to
Section 12 hereof, (iv) Warrant Certificates issued upon the
partial exercise of Warrant Certificates pursuant to Section 9
hereof, and (v) Warrant Certificates issued to reflect any
adjustment or change in the Exercise Price or the number or
kind of shares purchasable thereunder pursuant to Section 6
hereof. The Transfer Agent is hereby irrevocably authorized to
countersign and deliver, in accordance with the provisions of
said Sections 6, 8, 9 and 12, the new Warrant or Unit
Certificates, as the case may be, required for purposes
thereof, and the Company, whenever required by the Transfer
Agent, will supply the Transfer Agent with Warrant and Unit
Certificates duly executed on behalf of the Company for such
purposes.
14. RESERVATION OF SHARES. For the purpose of enabling the Company
to satisfy all obligations to issue Shares upon exercise of
Warrants, the Company will at all times reserve and keep
available free from preemptive rights, out of the aggregate of
its authorized but unissued shares, the full number of Shares
which may be issued upon the exercise of the Warrants. The
Company covenants all shares which shall be so issuable, will
upon issue be fully paid and nonassessable by the Company and
free from all taxes, liens, charges and security interests
with respect to the issue thereof. In the case of a Warrant
exercisable solely for securities listed on a securities
exchange or for which
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there are at least two (2) independent market makers, in lieu
of obtaining such registration or approval, the Company may
elect to redeem Warrants submitted to the Transfer Agent for
exercise for a price equal to the difference between the
aggregate low asked price, or closing price, as the case may
be, of the securities for which such Warrant is exercisable on
the date of such submission and the Exercise Price of such
Warrants; in the event of such redemption, the Company will
pay to the holder of such Warrants the above-described
redemption price in cash within ten (10) business days after
receipt of notice from the Transfer Agent that such Warrants
have been submitted for exercise.
15. GOVERNMENTAL RESTRICTIONS. If any Shares issuable upon the
exercise of Warrants require registration or approval of any
governmental authority, the Company will use commercially
reasonable efforts to secure such registration or approval
and, to the extent practicable, take action in anticipation of
and prior to the exercise of the Warrants necessary to permit
a public offering of the securities underlying the Warrants
during the term of this Agreement; provided that in no event
shall such Shares be issued, and the Company shall have the
authority to suspend the exercise of all Warrants, until such
registration or approval shall have been obtained; but all
Warrants, the exercise of which is requested during any such
suspension, shall be exercisable at the Exercise Price. If any
such period of suspension continues past the Expiration Date,
all Warrants, the exercise of which have been requested on or
prior to the Expiration Date, shall be exercisable upon the
removal of such suspension until the close of business on the
business day immediately following the expiration of such
suspension.
16. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND
EXERCISE PRICE. The number and kind of securities or other
property purchasable upon exercise of a Warrant shall be
subject to adjustment from time to time upon the occurrence,
after the date hereof, of any of the following events:
a. In case the Company shall (i) pay a dividend in, or
make a distribution of, shares of capital stock on
its outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater
number of such shares or (iii) combine its
outstanding shares of Common Stock into a smaller
number of such shares, the total number of shares of
Common Stock purchasable upon the exercise of each
Warrant outstanding immediately prior thereto shall
be adjusted so that the holder of any Warrant
Certificate thereafter surrendered for exercise shall
be entitled to receive at the same aggregate Exercise
Price the number of shares of capital stock (of one
or more classes) which such holder would have owned
or have been entitled to receive immediately
following the happening of any of the events
described above had such Warrant been exercised in
full immediately prior to the record date with
respect to such event. Any adjustment made pursuant
to this subsection shall, in the case of a stock
dividend or distribution, become effective as of the
record date therefor and, in the case of a
subdivision or combination, be made as of the
effective date thereof. If, as a result of an
adjustment made pursuant to this subsection, the
holder of any Warrant Certificate thereafter
surrendered for exercise shall become entitled to
receive shares of two or more classes of capital
stock of the Company, the Board of Directors of the
Company (whose determination shall be conclusive and
shall be evidenced by a Board resolution filed with
the Transfer Agent) shall determine the allocation of
the adjusted
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Exercise Price between or among shares of such
classes of capital stock.
b. In the event of a capital reorganization or a
reclassification of the Common Stock (except as
provided in subsection a. above or subsection e.
below), any Warrant Holder, upon exercise of
Warrants, shall be entitled to receive, in
substitution for the Common Stock to which he would
have become entitled upon exercise immediately prior
to such reorganization or reclassification, the
shares (of any class or classes) or other securities
or property of the Company (or cash) that he would
have been entitled to receive at the same aggregate
Exercise Price upon such reorganization or
reclassification if such Warrants had been exercised
immediately prior to the record date with respect to
such event; and in any such case, appropriate
provision (as determined by the Board of Directors of
the Company, whose determination shall be conclusive
and shall be evidenced by a certified Board
resolution filed with the Transfer Agent) shall be
made for the application of this Section with respect
to the rights and interests thereafter of the Warrant
Holders (including but not limited to the allocation
of the Exercise Price between or among shares of
classes of capital stock), to the end that this
Section (including the adjustments of the number of
shares of Common Stock or other securities
purchasable and the Exercise Price thereof) shall
thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of the
Warrants for any shares or securities or other
property (or cash) thereafter deliverable upon the
exercise of the Warrants.
c. Whenever the number of shares of Common Stock or
other securities purchasable upon exercise of a
Warrant is adjusted as provided in this Section, the
Company will promptly file with the Transfer Agent a
certificate signed by a Chairman or co-Chairman of
the Board or the President or a Vice President of the
Company and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary
of the Company setting forth the number and kind of
securities or other property purchasable upon
exercise of a Warrant, as so adjusted, stating that
such adjustments in the number or kind of shares or
other securities or property conform to the
requirements of this Section, and setting forth a
brief statement of the facts accounting for such
adjustments. Promptly after receipt of such
certificate, the Company, or the Transfer Agent at
the Company's request, will deliver, by first-class,
postage prepaid mail, a brief summary thereof (to be
supplied by the Company) to the registered holders of
the outstanding Warrant Certificates; provided,
however, that failure to file or to give any notice
required under this subsection, or any defect
therein, shall not affect the legality or validity of
any such adjustments under this Section; and
provided, further, that, where appropriate, such
notice may be given in advance and included as part
of the notice required to be given pursuant to
Section 18 hereof.
d. In case of any consolidation of the Company with, or
merger of the Company into, another corporation
(other than a consolidation or merger which does not
result in any reclassification or change of the
outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of
the Company as an entirety or substantially as an
entirety, the corporation formed by such
consolidation or merger or the corporation which
shall have acquired such assets, as the case may be,
shall execute and deliver to the
7
<PAGE>
Transfer Agent a supplemental warrant agreement
providing that the holder of each Warrant then
outstanding shall have the right thereafter (until
the expiration of such Warrant) to receive, upon
exercise of such Warrant, solely the kind and amount
of shares of stock and other securities and property
(or cash) receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares
of Common Stock of the Company for which such Warrant
might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for
adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided in
this Section. The above provision of this subsection
shall similarly apply to successive consolidations,
mergers, sales or transfers.
The Transfer Agent shall not be under any
responsibility to determine the correctness of any
provision contained in any such supplemental warrant
agreement relating to either the kind or amount of
shares of stock or securities or property (or cash)
purchasable by holders of Warrant Certificates upon
the exercise of their Warrants after any such
consolidation, merger, sale or transfer or of any
adjustment to be made with respect thereto, but
subject to the provisions of Section 23 hereof, may
accept as conclusive evidence of the correctness of
any such provisions, and shall be protected in
relying upon, a certificate of a firm of independent
certified public accountants (who may be the
accountants regularly employed by the Company) with
respect thereto.
e. Irrespective of any adjustments in the number or kind
of shares issuable upon exercise of Warrants, Warrant
Certificates theretofore or thereafter issued may
continue to express the same price and number and
kind of shares as are stated in the similar Warrant
Certificates initially issuable pursuant to this
Agreement.
f. The Company may retain a firm of independent public
accountants of recognized standing, which may be the
firm regularly retained by the Company, selected by
the Board of Directors of the Company or the
Executive Committee of said Board, and not
disapproved by the Transfer Agent, to make any
computation required under this Section, and a
certificate signed by such firm shall, in the absence
of fraud or gross negligence, be conclusive evidence
of the correctness of any computation made under this
Section.
g. For the purpose of this Section, the term "Common
Stock" shall mean (i) the Common Stock or (ii) any
other class of stock resulting from successive
changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from
par value to no par value, or from no par value to
par value. In the event that at any time as a result
of an adjustment made pursuant to this Section, the
holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive any shares
of capital stock of the Company other than shares of
Common Stock, thereafter the number of such other
shares so receivable upon exercise of any Warrant
shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as
practicable to the provisions with respect to the
Common Stock contained in this Section, and all other
provisions of this Agreement,
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<PAGE>
with respect to the Common Stock, shall apply on like
terms to any such other shares.
h. The Company may, from time to time and to the extent
permitted by law, reduce the exercise price of the
Warrants by any amount for a period of not less than
twenty (20) days. If the Company so reduces the
exercise price of the Warrants, it will give not less
than fifteen (15) days' notice of such decrease,
which notice may be in the form of a press release,
and shall take such other steps as may be required
under applicable law in connection with any offers or
sales of securities at the reduced price.
17. REDUCTION OF EXERCISE PRICE BELOW PAR VALUE. Before taking any
action that would cause an adjustment pursuant to Section 16
hereof reducing the portion of the Exercise Price required to
purchase one share of capital stock below the then par value
(if any) of a share of such capital stock, the Company will
use its best efforts to take any corporate action which, in
the opinion of its counsel, may be necessary in order that the
Company may validly and legally issue fully paid and
non-assessable shares of such capital stock.
18. NOTICE TO WARRANT HOLDERS. In case the Company after the date
hereof shall propose (i) to offer to the holders of Common
Stock, generally, rights to subscribe to or purchase any
additional shares of any class of its capital stock, any
evidences of its indebtedness or assets, or any other rights
or options or (ii) to effect any reclassification of Common
Stock (other than a reclassification involving merely the
subdivision or combination of outstanding shares of Common
Stock) or any capital reorganization, or any consolidation or
merger to which the Company is a party and for which approval
of any stockholders of the Company is required, or any sale,
transfer or other disposition of its property and assets
substantially as an entirety, or the liquidation, voluntary or
involuntary dissolution or winding-up of the Company, then, in
each such case, the Company shall file with the Transfer Agent
and the Company, or the Transfer Agent on its behalf, shall
mail (by first-class, postage prepaid mail) to all registered
holders of the Warrant Certificates notice of such proposed
action, which notice shall specify the date on which the books
of the Company shall close or a record be taken for such offer
of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale,
transfer, other disposition, liquidation, voluntary or
involuntary dissolution or winding-up shall take place or
commence, as the case may be, and which shall also specify any
record date for determination of holders of Common Stock
entitled to vote thereon or participate therein and shall set
forth such facts with respect thereto as shall be reasonably
necessary to indicate any adjustments in the Exercise Price
and the number or kind of shares or other securities
purchasable upon exercise of Warrants which will be required
as a result of such action. Such notice shall be filed and
mailed in the case of any action covered by clause (i) above,
at least ten (10) days prior to the record date for
determining holders of the Common Stock for purposes of such
action or, if a record is not to be taken, the date as of
which the holders of shares of Common Stock of record are to
be entitled to such offering; and, in the case of any action
covered by clause (ii) above, at least twenty (20) days prior
to the earlier of the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution
or winding-up is expected to become effective and the date on
which it is expected that holders of shares of Common Stock of
record on such date shall be entitled to exchange their shares
for securities or other property
9
<PAGE>
deliverable upon such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition,
liquidation, voluntary or involuntary dissolution or
winding-up.
Failure to give any such notice or any defect therein shall
not affect the legality or validity of any transaction listed
in this Section.
19. NO FRACTIONAL WARRANTS, UNITS OR SHARES. The Company shall not
be required to issue fractions of Warrants or Units upon the
reissue of Warrants or Units, any adjustments as described in
Section 16 or otherwise; but the Company in lieu of issuing
any such fractional interest, shall adjust the fractional
interest by payment to the Warrant or Unit Holder an amount,
in cash, equal to the current market value of any such
fraction or interest. If the total Warrants or Units
surrendered by exercise would result in the issuance of a
fractional Share, the Company shall not be required to issue a
fractional Share but rather the resulting fractional interest
shall be adjusted by payment in an amount, in cash, equal to
the current market value of such fractional interest.
20. RIGHTS OF WARRANT HOLDERS. No Warrant Holder, as such, shall
have any rights of a shareholder of the Company, either at law
or equity, and the rights of the Warrant Holders, as such, are
limited to those rights expressly provided in this Agreement
or in the Warrant Certificates. The Company and the Transfer
Agent may treat the registered Warrant Holder in respect of
any Warrant Certificates as the absolute owner thereof for all
purposes notwithstanding any notice to the contrary.
21. RIGHT OF ACTION. All rights of action in respect to this
Agreement are vested in the respective registered holders of
the Warrant and Unit Certificates; and any registered holder
of any Warrant or Unit Certificate, without the consent of the
Transfer Agent or of any other holder of a Warrant or Unit
Certificate, may, in his own behalf for his own benefit,
enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or
otherwise in respect of, his right to exercise the Warrants
evidenced by such Warrant Certificate, for the purchase of
shares of the Common Stock in the manner provided in the
Warrant Certificate and in this Agreement.
22. AGREEMENT OF WARRANT AND UNIT HOLDERS. Every holder of a
Warrant or Unit Certificate by accepting the same consents and
agrees with the Company, the Transfer Agent and with every
other holder of a Warrant or Unit Certificate, respectively,
that:
a. The Warrant and Unit Certificates are transferable on
the registry books of the Transfer Agent only upon
the terms and conditions set forth in this Agreement;
and
b. The Company and the Transfer Agent may deem and treat
the person in whose name the Warrant or Unit
Certificate is registered as the absolute owner of
the Warrant or Unit, as the case may be,
(notwithstanding any notation of ownership or other
writing thereon made by anyone other than the Company
or the Transfer Agent) for all purposes whatever and
neither the Company nor the Transfer Agent shall be
affected by any notice to the contrary.
23. TRANSFER AGENT. The Company hereby appoints the Transfer Agent
to act as the agent of the Company and the Transfer Agent
hereby accepts such
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<PAGE>
appointment upon the following terms and conditions by all of
which the Company and every Warrant and Unit Holder, by
acceptance of his Warrants or Units, shall be bound:
a. Statements contained in this Agreement and in the
Warrant and Unit Certificates shall be taken as
statements of the Company. The Transfer Agent assumes
no responsibility for the correctness of any of the
same except such as describes the Transfer Agent or
for action taken or to be taken by the Transfer
Agent.
b. The Transfer Agent shall not be responsible for any
failure of the Company to comply with any of the
Company's covenants contained in this Agreement or in
the Warrant or Unit Certificates.
c. The Transfer Agent may consult at any time with
counsel satisfactory to it (who may be counsel for
the Company) and the Transfer Agent shall incur no
liability or responsibility to the Company or to any
Warrant or Unit Holder in respect of any action
taken, suffered or omitted by it hereunder in good
faith and in accordance with the opinion or the
advice of such counsel, provided the Transfer Agent
shall have exercised reasonable care in the selection
and continued employment of such counsel.
d. The Transfer Agent shall incur no liability or
responsibility to the Company or to any Warrant or
Unit Holder for any action taken in reliance upon any
notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument
believed by it to be genuine and to have been signed,
sent or presented by the proper party or parties.
e. The Company agrees to pay to the Transfer Agent
reasonable compensation for all services rendered by
the Transfer Agent in the execution of this
Agreement, to reimburse the Transfer Agent for all
expenses, taxes and governmental charges and all
other charges of any kind or nature incurred by the
Transfer Agent in the execution of this Agreement and
to indemnify the Transfer Agent and save it harmless
against any and all liabilities, including judgments,
costs and counsel fees, for this Agreement except as
a result of the Transfer Agent's negligence, bad
faith or willful misconduct.
f. The Transfer Agent shall be under no obligation to
institute any action, suit or legal proceeding or to
take any other action likely to involve expense
unless the Company or one or more Warrant or Unit
Holders shall furnish the Transfer Agent with
reasonable security and indemnity for any costs and
expenses which may be incurred in connection with
such action, suit or legal proceeding, but this
provision shall not affect the power of the Transfer
Agent to take such action as the Transfer Agent may
consider proper, whether with or without any such
security or indemnity. All rights of action under
this Agreement or under any of the Warrants or Units
may be enforced by the Transfer Agent without the
possession of any of the Warrant or Unit Certificates
or the production thereof at any trial or other
proceeding relative thereto, and any such action,
suit or proceeding instituted by the Transfer Agent
shall be brought in its name as Transfer Agent, and
any recovery of judgement shall be for the ratable
benefit of the Warrant or Unit Holders as their
respective rights or interest may appear.
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<PAGE>
g. The Transfer Agent and any shareholder, director,
officer or employee of the Transfer Agent may buy,
sell or deal in any of the Warrants, Units or other
securities of the Company or become pecuniarily
interested in any transaction in which the Company
may be interested, or contract with or lend money to
the Company or otherwise act as fully and freely as
though it were not Transfer Agent under this
Agreement. Nothing herein shall preclude the Transfer
Agent from acting in any other capacity for the
Company or for any other legal entity.
24. SUCCESSOR TRANSFER AGENT. Any corporation into which the
Transfer Agent may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Transfer Agent shall
be a party, or any corporation succeeding to the corporate
trust business of the Transfer Agent, shall be the successor
to the Transfer Agent hereunder without the execution or
filing of any paper or any further act of a party or the
parties hereto provided such corporation is eligible to be
appointed under Section 25 below. In any such event or if the
name of the Transfer Agent is changed, the Transfer Agent or
such successor may adopt the countersignature of the original
Transfer Agent and may countersign such Warrant or Unit
Certificates either in the name of the predecessor Transfer
Agent or in the name of the successor Transfer Agent.
25. CHANGE OF TRANSFER AGENT. The Transfer Agent may resign or be
discharged by the Company from its duties under this Agreement
by the Transfer Agent or the Company, as the case may be,
giving notice in writing to the other, and by giving a date
when such resignation or discharge shall take effect, which
notice shall be sent at least thirty (30) days prior to the
date so specified. If the Transfer Agent shall resign, be
discharged or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Transfer Agent. If
the Company shall fail to make such appointment within a
period of thirty (30) days after it has been notified in
writing of such resignation or incapacity by the resigning or
incapacitated Transfer Agent or by any Warrant or Unit Holder
or after discharging the Transfer Agent, then the Company
agrees to perform the duties of the Transfer Agent hereunder
until a successor Transfer Agent is appointed. Any successor
Transfer Agent shall be a bank or a trust company, in good
standing, organized under the laws of any state of the United
States of America, having a combined capital and surplus of at
least $4,000,000.00 at the time of its appointment as Transfer
Agent. After appointment, the successor Transfer Agent shall
be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as
Transfer Agent without further act or deed, and the former
Transfer Agent shall deliver and transfer to the successor
Transfer Agent any property at the time held by it thereunder,
and execute and deliver any further assurance, conveyance, act
or deed necessary for effecting the delivery or transfer.
Failure to give any notice provided for in this Section,
however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Transfer
Agent or the appointment of the successor Transfer Agent, as
the case may be.
26. NOTICES. Any notice or demand authorized by this Agreement to
be given or made by the Transfer Agent or by any Warrant or
Unit Holder to or on the Company shall be sufficiently given
or made if sent by mail, first class, certified or registered,
postage prepaid, addressed (until another address is filed in
writing by the Company with the Transfer Agent), as follows:
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<PAGE>
ImageWare Systems, Inc.
10883 Thornmint Road
San Diego, California 92127
Any notice or demand authorized by this Agreement to be given
or made by any Warrant or Unit Holder or by the Company to or
on the Transfer Agent shall be sufficiently given or made if
sent by mail, first class, certified or registered, postage
prepaid, addressed (until another address is filed in writing
by the Transfer Agent with the Company), as follows:
American Securities Transfer & Trust, Inc.
12039 West Alameda Parkway Suite Z-2
Denver, Colorado 80228
Any distribution, notice or demand required or authorized by
this Agreement to be given or made by the Company or the
Transfer Agent to or on the Warrant or Unit Holders shall be
sufficiently given or made if sent by mail, first class,
certified or registered, postage prepaid, addressed to the
Warrant or Unit Holders at their last known addresses as they
shall appear on the registration books for the Warrant or Unit
Certificates maintained by the Transfer Agent.
27. SUPPLEMENTS AND AMENDMENTS. The Company and the Transfer Agent
may from time to time supplement or amend this Agreement
without the approval of any Warrant or Unit Holders in order
to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or
inconsistent with any other provisions herein, or to make any
other provisions in regard to matters or questions arising
hereunder which the Company and the Transfer Agent may deem
necessary or desirable.
28. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Transfer Agent
shall bind and inure to the benefit of their respective
successors and assigns hereunder.
29. TERMINATION. This Agreement shall terminate at the close of
business on the Expiration Date or such earlier date upon
which all Warrants have been exercised; provided, however,
that if exercise of the Warrants is suspended pursuant to
Section 15 and such suspension continues past the Expiration
Date, this Agreement shall terminate at the close of business
on the business day immediately following expiration of such
suspension. The provisions of Section 23 shall survive such
termination.
30. GOVERNING LAW. This Agreement and each Warrant and Unit
Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of California and for all
purposes shall be construed in accordance with the laws of
said State.
31. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give any person or corporation other than the
Company, the Transfer Agent and the Warrant and Unit Holders
any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Transfer Agent and the
Warrant and Unit Holders.
32. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes
be deemed to be an original and all such counterparts shall
together constitute but one and the
13
<PAGE>
same instrument.
33. INTEGRATION. As of the date hereof, this Agreement contains
the entire and only agreement, understanding, representation,
condition, warranty or covenant between the parties hereto
with respect to the matters herein, supersedes any and all
other agreements between the parties hereto relating to such
matters, and may be modified or amended only by a written
agreement signed by both parties hereto pursuant to the
authority granted by Section 27.
34. DESCRIPTIVE HEADINGS. The descriptive headings of the Sections
of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of
the provisions hereof.
Date: January , 2000
------
ImageWare Systems, Inc.
a California corporation
By:
---------------------------------
Its President and CEO
SEAL
ATTEST:
----------------------------------
Secretary: Anne Hoversten
American Securities Transfer & Trust,
Inc.
a Colorado corporation
By:
---------------------------------
Vice President:
SEAL
ATTEST:
----------------------------------
Secretary:
14
<PAGE>
EXHIBIT A
[WARRANT CERTIFICATE]
<PAGE>
EXHIBIT B
[UNIT CERTIFICATE]
<PAGE>
[REGISTRATION OPINION]
March 15, 2000
ImageWare Systems, Inc.
10883 Thronmint Road
San Diego, California 92127
Re: REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
Ladies and Gentlemen:
We are counsel for ImageWare Systems, Inc., a California corporation
("ImageWare"), in connection with its proposed public offering under the
Securities Act of 1933, as amended, of 1,875,000 units ("Units") consisting
of 1,875,000 shares of Common Stock (the "Shares") and 1,875,000 Warrants
(the "Warrants") (2,156,250 Units if the overallotment option is exercised in
full), through an amended Registration Statement on Form SB-2 as to which
this opinion is a part, to be filed with the Securities and Exchange
Commission (the "Commission").
In connection with rendering our opinion as set forth below, we have reviewed
and examined originals or copies of such corporate records and other documents
and have satisfied ourselves as to such other matters as we have deemed
necessary to enable us to express our opinion hereinafter set forth.
Based on the foregoing, it is our opinion that:
The Units covered by the Registration Statement, when issued in accordance with
the terms and conditions set forth therein, will be duly authorized and validly
issued and the Shares covered by the Registration Statement, when issued in
accordance with the terms and conditions set forth therein, will be duly
authorized, validly issued, fully paid, and non-assessable.
The shares of Common Stock underlying the Warrants covered by the Registration
Statement, when issued in accordance with the terms and conditions set forth
therein, will by duly authorized, validly issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Luce, Forward, Hamilton & Scripps
<PAGE>
SOFTWARE DEVELOPMENT AND TECHNOLOGY LICENSE AGREEMENT
AGREEMENT, made and entered into as of the 20th day of October 1998 (the
"Effective Date"), by and between PANASONIC COMPUTER PERIPHERALS COMPANY,
UNIT OF MATSUSHITA ELECTRIC CORPORATION OF AMERICA, a Delaware corporation
which has its principal offices at One Panasonic Way, Secaucus, New Jersey
07094 ("PCPC"), and IMAGEWARE SOFTWARE, INC., a California corporation which
has its principal offices at 15373 Innovation Drive, Suite 120, San Diego,
California 92128 ("ImageWare").
WHEREAS, PCPC is engaged in the marketing and distribution of a series
of motion image printers; and
WHEREAS, PCPC desires to have developed a software program that will
take advantage of the capabilities of such motion image printers; and
WHEREAS, ImageWare represents that it has the expertise to develop such
a software program; and
WHEREAS, ImageWare represents that it owns certain object layering
technology useful in the development of such a software program; and
WHEREAS, ImageWare desires to develop such a software program for, and
license its object layering technology to, PCPC, upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein set forth, the parties hereby agree as follows:
1. DEFINITIONS
The following capitalized terms, when used in this Agreement, shall have the
meanings ascribed to them in this Section 1:
1.1 "Bundled Product" shall mean a Motion Printer combined with one copy of
the Product in object code form and shipped with the Motion Printer in the
same packaging.
1.2 "Intellectual Property" shall mean all intellectual property other
than the Technology owned by ImageWare prior to the Effective Date or
licensed to ImageWare by a third party, and used in the development of the
Product.
1.3 "Motion Printer" shall mean the Panasonic motion image printer described
in Exhibit A hereto.
[Confidential treatment requested for certain portions of this Exhibit]
<PAGE>
1.4 "Motion Printer DLL" shall mean a certain dynamic link library to be
lent to ImageWare by PCPC pursuant hereto.
1.5 "Product" shall mean the software program to be developed by ImageWare
pursuant to this Agreement in accordance with the Specifications,
together with user manuals, other documentation and any other ancillary
materials to be developed by ImageWare pursuant hereto.
1.6 "Specifications" shall mean the specifications for the Product set forth
in Exhibit B hereto, together with any additional specifications or
modifications to the specifications set forth in Exhibit B that may be
agreed to in writing by the parties during the term of this Agreement.
1.7 "Technology" shall mean the object layering technology described and
claimed in U.S. Patent No. 5,577,179.
1.8 Other capitalized terms shall have the meanings ascribed to them in the
body of this Agreement.
2. TERM AND TERMINATION
2.1 This Agreement shall have an Initial Term of three years, commencing
with the Effective Date. Each contract year shall commence with the
Effective date or the anniversary thereof. Provided that PCPC provides
written notice to ImageWare at least 60 days before the expiration of
the Initial Term of its desire to renew the Agreement, ImageWare shall
negotiate in good faith with PCPC the terms for renewal of the Agreement
for periods beyond the Initial Term. As long as such negotiations
continue, the Agreement shall remain in effect upon the terms applicable
to the third contract year, notwithstanding the expiration of the
Initial Term.
2.2 PCPC may, at its sole option and election, TERMINATE this Agreement
effective AS OF THE END OF ANY CONTRACT YEAR upon written notice to
ImageWare, provided that PCPC shall have tendered to ImageWare the
minimum Per-Copy Fee FOR THE SUBSEQUENT CONTRACT YEAR.
2.3 Either party may terminate this Agreement immediately upon written
notice and without further obligation in the event of a material breach
of this Agreement by the other party, which breach is not cured within
30 days after the nonbreaching party shall have given written notice of
such breach.
3. DEVELOPMENT.
3.1 ImageWare shall undertake and complete development of the Product in
accordance with the Specifications set forth in Exhibit B hereto, as
well as any other applicable Specifications.
3.2 PCPC shall lend to ImageWare all hardware reasonably required for
testing the Product, including at minimum a printer, scanner and video
capture card. ImageWare shall maintain
<PAGE>
such hardware in the same condition in which it was furnished, normal wear
and tear excepted, and shall return such hardware to PCPC upon Acceptance
of the Product by PCPC, unless otherwise agreed upon by the parties based
upon the need to have ImageWare perform additional support and testing of
the Product. ImageWare shall maintain all-risk insurance insuring such
hardware for its replacement value. PCPC shall retain all right, title and
interest in such hardware, and ImageWare shall not encumber such hardware
in any way nor make it available to any third party except for approved
subcontractors.
3.3 ImageWare shall use all commercially reasonable efforts to complete the
development of the Product within 60 days of the Effective Date. PCPC shall
provide such support and assistance as may be reasonably required by
ImageWare. Upon completion of the development of the Product, ImageWare
shall deliver the Product to PCPC. In the event that ImageWare fails to
develop and deliver the Product within such 60-day period, provided that
PCPC has fulfilled all of its obligations hereunder, (a) the Development
Fee, as defined below, shall be reduced by the amount of $5,000.00, up to a
maximum of $40,000; (b) the Annual Fee, as defined below, shall be reduced
by the amount of $1,250.00, up to a maximum of $10,000.00; and (c) the
Per-Copy Fee, as defined below, shall be reduced by the amount of $1.00, up
to a maximum of $7.50, for each week after the expiration of such 60-day
period during which the Product has not been delivered. In the event that
the Product has not been developed and delivered within 150 days of the
Effective Date, PCPC may, at its sole option and election, terminate this
Agreement without further obligation, in which case, ImageWare shall refund
all monies paid by PCPC.
3.4 Upon ImageWare's delivery of the Product to PCPC, PCPC shall have a period
of 30 days (the "Acceptance Period") to test the Product for conformity to
the Specifications. In the event that the Product operates in conformity
with the Specifications during the Acceptance Period, PCPC shall notify
ImageWare in writing that Acceptance has occurred. In the event that the
Product does not operate in conformity with the Specifications, PCPC shall
so notify ImageWare in writing setting forth with reasonable specificity
the nature of such nonconformity. In such event, ImageWare shall correct
the nonconformity within 30 days of receipt of such notice, and shall
deliver the corrected Product to PCPC, and the Acceptance Period shall
recommence. In the event that the Product still fails to operate in
conformity with the Specifications after the second Acceptance Period has
run, PCPC may, at its sole option and election, (a) afford ImageWare
additional opportunities to correct the nonconformity, to be followed by
additional Acceptance Periods, subject to the procedure set forth in this
paragraph, or (b) terminate this Agreement without further obligation, in
which case, ImageWare shall refund all monies paid by PCPC.
4. OWNERSHIP OF INTELLECTUAL PROPERTY.
4.1 Except for such rights as are expressly granted to PCPC in this Agreement,
ImageWare shall retain all right, title and interest in the Technology and
the Intellectual Property, including such elements and portions of the
Technology or the Intellectual Property as may be incorporated into the
Product, and this Agreement conveys no other right, title or interest in
the Technology or the Intellectual Property.
<PAGE>
4.2 PCPC shall provide to ImageWare hereunder the Motion Printer DLL for use in
the development of, and for inclusion in, the Product. ImageWare agrees to
treat the Motion Printer DLL as confidential in accordance with the
provisions of Section 11 hereof; (b) to use the Motion Printer DLL only for
the purposes set forth in this Agreement; and (c) not to reverse engineer,
reverse compile or disassemble the Motion Printer DLL. Upon the expiration
or termination of this Agreement, ImageWare shall return to PCPC or destroy
all copies of the Motion Printer DLL then in its possession, including
without limitation copies stored on computers and magnetic or optical
media. Except for such rights as are expressly granted to ImageWare in this
Agreement, PCPC or its licensor shall retain all right, title and interest
in and to the Motion Printer DLL, and this Agreement conveys no other
right, title or interest in the Motion Printer DLL.
4.3 The parties expressly recognize that additional intellectual or other
property rights may be created in the performance of this Agreement. The
parties expressly agree that all right, title and interest (including
patent rights, copyrights, trade secret rights and any other rights
throughout the world) in and to the Product and in and to any object code,
source code, inventions, works of authorship, mask works, derivative or
collective works and any ideas or information created, conceived or reduced
to practice by ImageWare or PCPC relating to the Product in the course of
performance of this Agreement (the "Work Product") shall belong to PCPC.
The Work Product shall be deemed work made for hire pursuant to the
copyright laws of the United States.
4.4 To the extent that PCPC does not obtain all right, title and interest in
the Work Product pursuant to the foregoing paragraph, ImageWare agrees to
assign, or cause its employees, agents and contractors to assign all such
Work Product to PCPC and to execute all documents and perform all acts, or
cause its employees, agents and contractors to execute all documents and
perform all acts require to effectuate such assignment. ImageWare shall
cooperate with PCPC to patent, copyright or otherwise protect the Work
Product in the United States and elsewhere. PCPC shall bear the costs of
applying for, prosecuting, securing and maintaining such protection. PCPC
shall have the exclusive right to enforce and defend the intellectual
property rights in the Work Product.
4.5 All applicable PCPC and ImageWare patent and copyright notices relating to
the Product will be incorporated as part of the Product and displayed
prominently when the application is initially started by a user.
5. LICENSE OF THE TECHNOLOGY
5.1 ImageWare acknowledges that PCPC intends to engage in the following
activities with respect to the Product:
(a) combine copies of the Product, in object code form, with Motion
Printers to create Bundled Products;
<PAGE>
(b) distribute Bundled Products to distributors, other resellers and end
users;
(c) distribute the Product, in object code form only, to distributors and
resellers and permit such distributors and resellers to reproduce
copies of the Product and combine such copies with Motion Printers
supplied by PCPC for resale to resellers and end users;
(d) distribute the Product, in object code form only, to end users and
permit such end users to reproduce copies of the Product for use with
Motion Printers purchased from PCPC;
(e) use the Product for demonstration and internal business purposes and
to support, maintain, modify, enhance, upgrade and update the Product;
(f) reproduce copies of the Product to make possible or facilitate any of
the activities described in this paragraph;
(g) sublicense to affiliates of PCPC, any or all of the rights granted in
this Section, provided that such affiliates shall agree to be bound by
the terms of this Agreement.
5.2 ImageWare hereby grants to PCPC an exclusive license in the United States,
its territories and Canada to use the Technology to the extent necessary
for PCPC or its distributors, resellers, end users and sublicensees to
perform any of the activities described in the preceding paragraph.
ImageWare further agrees that it shall extend the foregoing license,
without additional charge, to a list of additional territories
substantially identical to the list of territories set forth in Exhibit C
hereto, as soon as ImageWare shall have reasonably determined the
appropriate territorial scope of its intellectual property protection for
the Technology, but in no event more than 90 days from the latest date of
execution of this Agreement unless the parties shall have agreed in writing
to a later date. In the event that ImageWare has not provided written
confirmation of the extension of such license within such 90-day period,
such license shall be deemed to have been extended to the territories set
forth in Exhibit C as of the date of expiration of such 90-day period.
ImageWare further agrees that it shall not during the term of this
Agreement make the Technology available to any third party for use in
connection with products competitive with the Product. ImageWare further
grants to PCPC a nonexclusive license everywhere in the world to use the
Intellectual Property to the extent necessary for PCPC or its distributors,
resellers, end users and sublicensees to perform any of the activities
described in the preceding paragraph.
6. PAYMENT AND PAYMENT SCHEDULE.
6.1 PCPC shall pay ImageWare for the development and other services
performed hereunder and for the rights granted by ImageWare hereunder, as
follows:
<PAGE>
(a) A Development Fee of [Confidential Treatment requested by ImageWare
Systems, Inc.], payable in three installments, as follows:
As of the Effective Date: [Confidential Treatment requested
by ImageWare Systems, Inc.]
30 days after the Effective Date: [Confidential Treatment requested
by ImageWare Systems, Inc.]
30 days after Acceptance [Confidential Treatment requested
by ImageWare Systems, Inc.]
(b) An Exclusivity Fee of [Confidential Treatment requested by ImageWare
Systems, Inc.] per year, payable at the commencement of each contract
year; the initial Exclusivity Fee payment shall be due upon Acceptance
of the Product by PCPC.
(c) A fee of [Confidential Treatment requested by ImageWare Systems, Inc.]
Per-Copy Fee for each copy of the Product distributed by PCPC or
reproduced by PCPC's distributors, resellers, end users or
sublicensees with PCPC's permission. This Per-Copy Fee shall be
subject to a minimum payment for each contract year, as follows:
Contract year 1: [Confidential Treatment requested
by ImageWare Systems, Inc.]
Contract year 2: [Confidential Treatment requested
by ImageWare Systems, Inc.]
Contract year 3: [Confidential Treatment requested
by ImageWare Systems, Inc.]
PCPC shall remit the accrued Per-Copy Fees at the end of each
contract-year quarter. At the conclusion of each contract year, PCPC
shall remit any remaining difference between the Per-Copy Fees
remitted during such contract year and the minimum payment for such
contract year.
(d) Travel and living expenses of ImageWare's employees incurred in the
performance of ImageWare's obligations under this Agreement. Such
expenses shall be subject to PCPC's prior approval, and shall conform
to PCPC's internal travel and living expense policies.
7. SUPPORT.
During the first contract year, ImageWare shall provide up to 100 hours of
programming and support services as requested in writing from time to time by
PCPC. Upon any such request from PCPC, ImageWare shall promptly furnish PCPC
with a written statement of the timetable for providing such services. Services
in excess of 100 hours shall be billable at the rate of $110.00 per hour, except
as otherwise agreed in writing by the parties. Any portion of the 100 hours not
used during the first contract year will not be carried over to subsequent
contract year.
8. WARRANTIES AND REPRESENTATIONS
8.1 ImageWare warrants for a period of ninety (90) days following the first
shipment of the Product to an end user that the Product will substantially
conform to the Specifications. ImageWare will correct at its own expense
any nonconformity that occurs during such ninety (90)-day period.
8.2 ImageWare warrants that the services performed hereunder will be performed
in a professional and workmanlike manner in accordance with the highest
industry standards.
<PAGE>
8.3 Each party represents and warrants to the other that the execution,
delivery and performance of this Agreement do not require the
authorization or approval of any third party and do not violate any
contract or other obligation of such party and that such party knows of
no circumstances existing as of the Effective Date or the date on which
it executes this Agreement that would prevent its performance of this
Agreement.
9. INDEMNIFICATION
9.1 Except to the extent set forth to the contrary in this Section 9,
ImageWare agrees to indemnify and hold PCPC harmless against all claims
that the Technology, the Intellectual Property and/or the Product
infringes any patent, copyright, trade secret, mask work or any other
property rights of third parties. ImageWare hereby represents that it
has no knowledge of any such claim of infringement. ImageWare shall
assume the defense of any suit, action, proceeding or objection based on
any such claim of infringement brought against PCPC specifically
relating to the Technology, the Intellectual Property and/or the
Product, by counsel retained at ImageWare's own expense, and shall pay
any damages assessed against or otherwise payable by PCPC in any such
suit as a result of the final disposition of any such claim, suit,
action, proceeding or objection, provided PCPC, upon receiving notice
thereof, promptly notifies ImageWare of such claim or of the
commencement of any such suit, action, proceeding or objection, or
threats thereof, and ImageWare is afforded the opportunity, in its sole
and absolute discretion, to determine the manner in which such claim,
suit, action, proceeding or objection shall be handled or otherwise
disposed of. PCPC shall give ImageWare the cooperation ImageWare
requires, at ImageWare's sole cost and expense for all reasonable and
direct costs and expenses incurred by PCPC, except for salaries of the
employees of PCPC and fees and expenses of any counsel retained by PCPC
in the defense of any such claim, suit, action, proceeding or objection.
9.2 Notwithstanding the foregoing, PCPC may be represented in any such suit
by its own counsel at its own cost and expense; provided, however, that
PCPC shall not consent to any judgment or decree in any such suit or pay
or agree to pay any sum of money or agree to do any other act in
compromise of any such claim of a third party without first obtaining
ImageWare's consent thereto in writing.
9.3 In the event that the use or sale of the Technology, the Intellectual
Property and/or the Product, or any part thereof, is preliminarily or
permanently enjoined by reason of infringement of any third party
patent, copyright, trade secret, mask work or other property right,
ImageWare shall, at ImageWare's sole cost and expense, take any one of
the following actions in ImageWare's sole and absolute discretion: (a)
procure for PCPC the right to continue the use and/or sale of the
Technology, the Intellectual Property and/or the Product; or (b) modify
the Technology, the Intellectual Property and/or the Product so it
becomes non-infringing; or (c) authorize PCPC to return the enjoined
Technology, the Intellectual Property and/or the Product theretofore
paid for by PCPC and agree to refund to PCPC the full price paid by PCPC
hereunder and any reasonable and necessary direct transportation costs
associated with such return.
<PAGE>
9.4 Notwithstanding any other provision of this Agreement, the provisions of
this Section 9 shall not apply to any designs, specifications or
modifications originating with PCPC, whether or not accepted by
ImageWare, or performed by PCPC without ImageWare's written approval, or
to the combination of the Technology, the Intellectual Property and/or
the Product with other products not supplied by ImageWare; but, rather,
PCPC shall indemnify and hold ImageWare harmless and defend ImageWare
against all claims that the same infringe any patent, copyright, trade
secret, mask work or other property rights of third parties in
accordance with the terms and provisions of this Section 9.
9.5 ImageWare's and PCPC's obligations set forth in this Section 9 shall
survive the expiration or termination of this Agreement.
10. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOSS OF PROFIT, OR
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, ARISING UNDER THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREUNDER, EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES OR LOSS.
11. NONDISCLOSURE
11.1 Each party agrees to keep, and to cause it employees, agents and
contractors to keep, any information that is disclosed to it hereunder
by the other party, and which is designated in writing as confidential
or which is or should in good faith be known by the other party to be
confidential ("Confidential Information"), confidential, and to use such
information only for the purposes described herein. The parties further
agree that both the Motion Printer DLL and all information developed by
ImageWare for PCPC hereunder (including without limitation the Work
Product, but excluding the Technology and the Intellectual Property)
shall be deemed to be the Confidential Information of PCPC without the
requirement of a written designation. Each party shall take, and shall
cause its employees, agents and contractors to take, all reasonable
steps necessary to safeguard the confidentiality of such information
from and against disclosures thereof. Neither party shall make, nor
permit anyone to make, any copies of such information without the other
party's prior written consent, and the other party shall return, and
shall cause its employees to return, all copies of such information in
its possession to the other party upon request therefor or upon any
termination or cancellation of this Agreement. Nothing contained in this
Agreement shall be construed as granting or conferring any rights on
either party, by license or otherwise, with respect to any of such
information. Each party's obligations under this paragraph shall survive
indefinitely the termination of this Agreement or until such information
is made public other than through the acts of either party.
<PAGE>
11.2 The obligations of this Section 11 shall not apply to information that
either party can demonstrate (a) is or has become readily available
without restriction through no fault of that party or its employees or
agents; (b) is received without restriction from a third party lawfully
in possession of such information and lawfully empowered to disclose
such information, (c) was rightfully in the possession of either party
without restriction prior to its disclosure by the other party; or (d)
was independently developed by employees or consultants of either party
without access to Confidential Information of the other party.
12. INDEPENDENT CONTRACTOR
The parties are, and shall at all times during the term of this Agreement be
deemed to be, independent contractors, and nothing in this Agreement shall in
any way be deemed or construed to constitute either party as an agent or
employee of the other, nor shall either party have the right or authority to
act for, incur, assume or create any obligation, responsibility or liability,
express or implied, in the name of, or on behalf of, the other party, or to
bind the other party in any manner whatsoever. The employees of one party
shall be deemed to be the agents, servants and employees of that party only,
and the other party shall incur no obligations or liabilities of any kind,
nature or sort, express or implied, by virtue of, or with respect to, the
conduct of such employees.
13. ASSIGNMENT; MODIFICATION
13.1 Neither this Agreement, nor any of the rights or interests of either
party hereunder, may be assigned, transferred or, by operation of law or
otherwise, except upon the express prior written consent of the other
party.
13.2 None of the terms of this Agreement can be waived or modified, except in
writing signed by both parties. The failure of either party hereto to
enforce, or the delay by either party in enforcing, any of its rights
under this Agreement shall not be deemed a continuing waiver or a
modification thereof and either party may, within the time provided by
applicable law, commence appropriate legal proceedings to enforce any or
all such rights.
14. ENTIRE AGREEMENT
This Agreement sets forth the entire understanding, and hereby supersedes any
and all prior agreements, oral or written, heretofore made, between the
parties with respect to the subject matter of this Agreement, and there are
no representations, warranties, covenants, agreements or understandings, oral
or otherwise, express or implied, affecting this Agreement not expressly set
forth herein.
15. GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York, without regard to its conflict-of-laws rules.
<PAGE>
16. SEVERABILITY
Both parties agree that the provisions of this Agreement are severable and
should any of the provisions be finally held by a court of proper
jurisdiction to be invalid, the remainder of this Agreement shall be in full
force and effect.
17. DISPUTE RESOLUTION
In the event of a dispute hereunder, the parties agree to use reasonable
efforts to negotiate a resolution to such dispute for a period of 30 days, or
such longer period as the parties may agree upon. If no resolution is agreed
upon after 15 days of such negotiation, each party shall involve a senior
executive of such party in the negotiation for the remainder of the 30-day or
other agreed-upon period.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals.
IMAGEWARE SOFTWARE, INC. PANASONIC COMPUTER PERIPHERALS
COMPANY, UNIT OF MATSUSHITA
ELECTRIC CORPORATION OF AMERICA
By: /s/ Jim Miller By: /s/ J.H. Cullen
------------------------------- -------------------------------
Name: Jim Miller Name: J.H. Cullen
----------------------------- -----------------------------
Title: President & CEO Title: VP & GM
---------------------------- ----------------------------
Date: Oct. 20, 1998 Date: 11-12-98
----------------------------- -----------------------------
<PAGE>
ORIGINAL
SPECIFICATIONS FOR PANASONIC MIP PROGRAM.
This RFP is an adjunct to the current Swing Studio Program. Panasonic
believes the current Swing Studio application contains the basic tools
required for an MIP Studio System. The implementation of the GUI is/may not
suited best considering our target user. Several usability features need to
be improved. There are also other key features which need to be added. This
RFQ includes current Swing Studio functionality, and requirements for an
upgrade to that application.
APPLICATION SCOPE
It is our intent to eventually have three tiers of application scope. First
is to fully develop the Swing Studio type application. Secondly we will
create a distinct, idiot proof, path through the application. Third will be
to strip it down to deliver a kiosk based system.
STUDIO SYSTEM TARGET USER:
Little or no Computer Experience.
Learning curve should be several hours
SYSTEM REQUIREMENTS:
Windows 98 or Windows NT Operating System
Minimum RAM (TBD)
Pentium 266 MHz or better Higher
Possible Multiple VGA Display Support Under Windows 98 (Windows NT?)
Display 1 is operator, Display 2 is Audience / Attract Screen
Consider GUI resolution, Kiosk have support for "NTSC grade monitor? Graphics
development?
Highly Efficient Print Spooling / Buffer
"Smart" Multiple MIP Printer Support
Hide-able Tool Bar
Status Bar
Direct menu access any module screen
Floating Toolbars (if applicable)
Undo Function where applicable
Cursor change to "Busy" during any system processing
GUI DESIGN REQUIREMENTS:
GENERAL LOOK & FEEL
Two operation modes. Standard and step through card creation.
Kiosk mode may be developed independently.
Textured Background Graphics (user changeable for each module)
User selectable button Fonts & some System Colors
Bright colors, fun fonts,
3D Buttons, animated/not animated
Auto Hi-Lite Selections
"Mouse-Over" Action descriptions.
Audible response to user input (could be theme oriented)
Customizable scrolling marquee - subtle attract loop during work in progress
Basic application designed in 640x480. When running in 800x600 remainder of
desktop becomes attract loop area.
<PAGE>
ORIGINAL
SPECIFIC USER INTERFACE REQUIREMENTS
Print UI displays slide based graphical representation of up to six frames
which will be output to the MIP.
Card Editor should also support less than six frames (Still frame modes for 2
or 3 images.
Support for these graphic functions required:
Ability to easily load pre-designed "Template" frames and backgrounds
Key, Layer & Overlay, Move to front & back of imported sprites
Moveable sprites, Path Based Animation
Copy & Paste a sprite from one frame to another (keep relative position &
display position coordinates in status bar)
maintain exact size & position from one frame to another
Output Preview Function
Basic Image Painting tools
Rotateable & Resizable Text & sprite insertion
Additional
Simple Image Morphing Engine (IE Power Goo)
Label print option (adhesive label on back of card)
Key Function
Easily paste a face, captured from the scanner or video, into a cutout card.
Luminance key is required, chroma key may be desirable in future.
Editing Functions
When a card is "saved" and closed, the user should be able to re-open the
card and have the ability to continue editing the objects on the card.
Sprites, pictures and text must remain individual objects. Only output
should be converted to bitmap.
STANDARD GUI SCREENS FOR OPERATOR MODE:
TEMPLATE SELECTION SCREEN
Similar to Swing Studio
Six to nine templates displayed
Selected Frame or background animates in left hand pane when selected.
NAME\DATE TEXT ENTRY SCREEN (DEPENDS ON EVENT OR ATTRACTION)
Text can be positioned in default location or moved by dragging. Cursor
nudging should be supported.
Random text insertion, right click to select applied frames.
Supports all available fonts on system including symbols
"Jiggle" text supported (nudging between frames, "Simpsons Effect")
Text for optional label printer would be entered here also.
VIDEO CAPTURE SCREEN
Video for Windows or WDM Driver model
Microsoft Direct Show Compliant or upgrade
Supports PCI, Parallel & USB camera technologies
Multiple video source selection.
Video Key Function
Input Selection (based on capture device)
Capture Frame Rate Selection
Step capture mode with audible cue (beep-beep-bong). Used for "X marks the
spot" staged motion
Manual Image Selection will show up to 30 thumbnails of
captured video.
Operator selects frames by highlighting them with the mouse
Access to all VFW video adjustment controls
Real time display of image in preview mode, access to adjustment of,
brightness. Contrast saturation,
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SCANNING SCREEN
Preview\Pre-scan of 8.5x11" page. Click & Drag multiple image selections
(up to 4) of image.
Aspect ratio constraints may need to be applied for selection process.
Automated scanning tool to resizes "selections" to constrained dimensions of the
MIP Card Array of standard image scanning tools may include:
Crop, Resize, Selection, Free-Rotate, Color saturation, Brightness,
Contrast, Sharpen, Edge blur etc.
Support Current Twain, and new proposed twain I/F
Provide Scanner bin to hold recently imported images, which will be used to
create a card
Thumnails with displayed filenames
ADJUSTEMENT/EDITING SCREENS
For Video Capture
For Scanning Function
Position Adjustment for Foreground, Key Image, and Background
Image Enhancement Screen(s) TBD Image ware recommendations
SPECIAL IMAGE EFFECTS
Place where appropriate within the application
Composite, Blend, Tone, Find Contour, Color reduction, Smooth/Sharpen, Merge,
Morph, Brightness/Contrast, Gamma,
OUTPUT PREVIEW SCREEN
Supports Image Re-ordering
Multiple Copy Selection
Individual card "image" may be double clicked and edited with specified Windows
Image editing program.
MIP Card Print Preview will simulate Lenticular lens effect.
DATABASE SCREEN
Simple Flat File text Boolean searchable database
Application will retain card images & text information
Database fields to be determined
Card creation timer (start to finish) may required
Other statistical information may need to be added to dataset
Database should be prugable
Images from MIP Card could be sold to customer on
a floppy screen save, postcard, etc.
<PAGE>
SYSTEM RELATED OPERATIONS
SYSTEM SETTINGS - OPERATOR SETUP SCREEN
Capture & Scanning setup
Video Board setup & Key color selection
Event Triggering setup
Multimedia selections
Background music (MIDI Files)
System Event Sounds Setup (Wav or Midi Files)
Module "Wallpaper" Background setup-preset or random changing
Printer Setup Selections
Restore System Default Settings
STANDARD WINDOWS HELP SYSTEM
Windows Balloon Help - Mouse-Over where applicable
Application Status Bar - Button Function or User action hint/recommendation
User can toggle on or off
Multimedia Training Tutorial Module
IMAGE ENHANCEMENT:
Edge Smoothing
Compositing
Luminance Key
Chroma Key
Adaptive Key (Image Ware Propriety)
GENERAL PURPOSE INTERFACE - INPUT OUTPUT CONTROL
Lighting During Capture (Relay closure for Kiosk)
Attraction Look GPI (Relay closure(s) for Kiosk)
VCR MCI Control (Studio System)
Camera Zoom (Studio System - Low Priority)
Coin acceptor mechanism input interface (Kiosk Only)
We expect ImageWare recommendation for GPI interface card selection.
OTHER EXTERNAL CONTROL
Modem Callout for Supply replenishment
Joystick support (for Kiosk, possibly Studio System also)
Other Kiosk input support (Kiosk Buttons could be GPI or L & R Mouse clicks??)
Support For label printer (for back of card or customer information, mailing
label, custom message, etc.)
Should support Seiko label printer or standard windows printer.
SCANNER CONTROL (STUDIO SYSTEM)
Twain Compliant
Full page scan preview
Selection tool for auto save and auto resize of scanned image for MIP card
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[LETTERHEAD]
PROPOSAL FOR PANASONIC COMPUTER PERIPHERAL COMPANY
SWING STUDIO MIP SOFTWARE APPLICATION
SCOPE OF WORK
As defined in following outline from T. Meyerhoff. This proposal is for the
first and second phase of the "three tiers" of application scope. That is to
fully develop the Swing Studio application that contains the basic tools
required for a MIP Studio System and create a distinct, "idiot proof", path
through the application. The third phase for a kiosk based system will best be
finalized after the initial phases are completed and user feedback is
considered. Also there are a number of additional issues to consider such as
coin mechanisms, I/O control, etc. We believe that we will be very well
positioned to carry out this task, but it is our understanding that the manned
applications are of priority.
In order to quote the timeframe required, we must take exception to a few items
on the list. The following will not be part of the developed product, but could
be added a later time:
1. No Morphing capability
2. Limited Sprite support
3. Twain scanning only
4. No modem call-out for supply replenishment
5. No kiosk or Studio System components
6. We require additional details to understand how a "MIP Card Print Preview
will simulate Lenticular lens effect" feature
7. Win 95 or NT version 4.0
<PAGE>
[LETTERHEAD]
EXHIBIT C
IMAGEWARE SOFTWARE, INC.
Patent Number 5,577,179
Title: Image Editing System
Status:
Issued - United States
Pending - Japan
Application in Process: Western Europe
Canada
New Zealand
Australia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to the Registration
Statement on Form SB-2 of our report dated February 25, 2000 relating to the
financial statements of ImageWare Systems, Inc. which appears in such
Registration Statement. We also consent to references to us under the
headings "Experts" and "Selected Financial Information" in such Registration
Statement.
PricewaterhouseCoopers LLP
San Diego, California
March 14, 2000
