CONTINGENT LIABILITIES

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

Note 10 - CONTINGENT LIABILITIES

 During the six months ended June 30, 2014 and 2013, the Company wrote off certain accounts payable and accrued expenses totaling approximately $216,000 and $104,000, respectively, which is included in “Other income” in the accompanying condensed consolidated statements of operations. Such accounts payable and accrued expenses represented amounts that could not be paid in full at the time, or were, in the view of management, unenforceable.  While management believes that such amounts no longer represent recognized liabilities of the Company, such creditors may subsequently assert a claim against the Company.

Employment Agreements

The Company has employment agreements with its Chief Executive Officer, Senior Vice President of Administration and Chief Financial Officer, Chief Technical Officer, and Vice President of Business Development. The Company may terminate the agreements with or without cause. Subject to the conditions and other limitations set forth in each respective employment agreement, each executive will be entitled to the following severance benefits if the Company terminates the executive’s employment without cause or in the event of an involuntary termination  (as defined in the employment agreements) by the Company or by the executive:

Under the terms of the agreement, the Chief Executive Officer will be entitled to the following severance benefits if we terminate his employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to twenty-four months base salary; (ii) continuation of fringe benefits and medical insurance for a period of three years; and (iii) immediate vesting of 50% of outstanding stock options and restricted stock awards. In the event that the Chief Executive Officer’s employment is terminated within six months prior to or thirteen months following a change of control, the Chief Executive Officer is entitled to the severance benefits described above, except that 100% of the Chief Executive Officer’s outstanding stock options and restricted stock awards will immediately vest.

            Under the terms of the employment agreements with our Senior Vice President of Administration and Chief Financial Officer, Chief Technical Officer, and Vice President of Business Development, these executives will be entitled to the following severance benefits if we terminate their employment without cause or in the event of an involuntary termination: (i) a lump sum cash payment equal to six months of base salary; (ii) continuation of their fringe benefits and medical insurance for a period of six months; (iii) immediate vesting of 50% of their outstanding stock options and restricted stock awards. In the event that their employment is terminated within six months prior to or thirteen months following a change of control (defined below), they are entitled to the severance benefits described above, except that 100% of their outstanding stock options and restricted stock awards will immediately vest.

 Litigation

 On August 21, 2012, a complaint for patent infringement was filed against the Company in the United States District Court for the Eastern District of Texas, entitled Blue Spike, LLC v. ImageWare Systems, Inc., Case No. 12-cv-688-LED.  The case is one of approximately 80-plus lawsuits filed by Blue Spike, LLC.  All cases have been consolidated for all pretrial purposes, other than venue, with the first-filed, lead action entitled Blue Spike, LLC v. Texas Instruments, Inc., Case No. 12-cv-499-LED, filed on August 9, 2012.  The four patents-in-suit relate to digital signal abstracting technology.  On March 14, 2014, the Court granted the Company’s motion to sever and transfer its case to the United States District Court for the Southern District of California.  Accordingly, Blue Spike’s case against the Company has been severed from the consolidated action and transferred to the Southern District of California.  The Court also denied without prejudice the Company’s motion to dismiss claims for indirect and willful infringement, without prejudice to re-filing the motion in the Southern District of California. The Company contends that the asserted patents are invalid, unenforceable and/or not infringed and intends to defend against the action vigorously.

 Other than as specifically described above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.  Other than described above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our common stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 Leases

In December 2010, we relocated our corporate headquarters to Rancho Bernardo Road in San Diego, California and entered into a three-year lease agreement. In August 2013, we entered into an amendment effective November 2013, whereby the Company consolidated its existing leases. The Company leased an additional 4,793 square feet of space in the same location while simultaneously vacating 2,560 square feet of space resulting in total rented square feet of 9,927. The lease term commenced on November 1, 2013 and ends on October 31, 2017.  Future minimum rent payments under the amended lease will be approximately $105,000 in 2014 (6 months), $216,000 in 2015, $222,000 in 2016 and $190,000 in 2017.

            In July 2014, we amended our Portland, Oregon office lease by increasing our leased square footage by 1,499 square feet  resulting in 8,045 total leased square footage and extended our lease for 36 months to October 31, 2018.  Future minimum rent payments will be approximately $73,000 in 2014 (6 months), $148,000 in 2015, $152,000 in 2016, $157,000 in 2017 and $134,000 in 2018.

            In addition to the corporate headquarters lease in San Diego, California, we also lease space in Ottawa, Province of Ontario, Canada; and Mexico City, Mexico. 

           At June 30, 2014, future minimum lease payments are as follows:

($ in thousands)
2014 (6 months)	$	214
2015	$	443
2016	$	423
2017	$	386
2018 and thereafter	$	167
	$	1,633

 Rental expense incurred under operating leases for the six months ended June 30, 2014 and 2013, was approximately $209,000 and $227,000, respectively.