Execution Copy

 
The security represented by this instrument was originally issued on October 22,
2004 (“Original Date of Issuance”), and has not been registered under the
Securities Act of 1933, as amended (the “Act”), or under any applicable state
securities laws, and may not be offered, sold or otherwise transferred,
assigned, pledged or hypothecated unless and until registered under the Act and
applicable state securities laws, or unless the Borrower (as defined below) has
received an opinion of counsel satisfactory to the Borrower and its counsel that
such registration is not required.  The transfer of such security is subject to
the conditions specified in that certain Note and Warrant Purchase Agreement,
dated as of October 22, 2004 (as amended, restated or otherwise modified from
time to time), by and among the Borrower, William Blair Mezzanine Capital Fund
III, L.P., a Delaware limited partnership, and the Guarantors party thereto from
time to time.
 
The obligations evidenced hereby are subordinate in the manner and to the extent
set forth in that certain Subordination Agreement, dated as of October 22, 2004,
as amended by that certain First Amendment to Subordination Agreement, dated as
of November 1, 2005, and that certain Reaffirmation and Second Amendment to
Subordination Agreement, dated as of July 31, 2007 (as further amended,
restated, supplemented or otherwise modified from time to time, the
“Subordination Agreement”), among, without limitation, William Blair Mezzanine
Capital Fund III, L.P., a Delaware limited partnership, ISI Security Group,
Inc., a Delaware corporation formerly known as ISI Detention Contracting Group,
Inc. (the “Borrower”), and The PrivateBank and Trust Company
(successor-in-interest to LaSalle Bank National Association) (the “Senior
Lender”), to the obligations (including interest) owed by Borrower to the
holders of all of the notes issued pursuant to that certain Loan and Security
Agreement, dated as of October 3, 2008, between Borrower and Senior Lender, as
such Agreement has been and may hereafter be supplemented, modified, restated or
amended from time to time; and each holder hereof, by its acceptance hereof,
shall be bound by the provisions of the Subordination Agreement.
 
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT AND, AS REQUIRED BY
TREASURY REGULATION §1.1275-3(b)(1), INFORMATION REGARDING THE ISSUE PRICE, THE
AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE AND THE YIELD TO MATURITY MAY
BE OBTAINED FROM THE ISSUER HEREOF AT ISI DETENTION CONTRACTING GROUP, INC.,
12903 DELIVERY DRIVE SAN ANTONIO, TEXAS 78247.
 

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THIRD AMENDED AND RESTATED
SENIOR SUBORDINATED PROMISSORY NOTE
 
January 8, 2009
$5,951,609.00

ISI Security Group, Inc., a Delaware corporation formerly known as ISI Detention
Contracting Group, Inc. and d/b/a “Argyle Security USA” (successor-by-merger to
ISI Security Group, Inc., an unrelated entity) (the “Borrower”), hereby promises
to pay to the order of William Blair Mezzanine Capital Fund III, L.P., a
Delaware limited partnership, or its assignee (the “Holder”), the principal
amount of Five Million Nine Hundred Fifty-One Thousand Six Hundred Nine and
No/100 Dollars ($5,951,609.00) (the “Original Principal Amount”), together with
interest thereon calculated from the date hereof (the “Date of Issuance”), in
accordance with the provisions of this instrument (this “Note”).  For purposes
of this Note, the term “Principal Balance” shall mean an amount equal to (a) the
Original Principal Amount minus (b) all payments of principal made by the
Borrower from time to time pursuant to the terms of this Note plus (c) all
amounts added to the Original Principal Amount pursuant to the terms of this
Note or the Note Purchase Agreement (as defined below).
 
This Note was issued pursuant to the terms of that certain Note and Warrant
Purchase Agreement, dated as of October 22, 2004 (as amended, restated or
otherwise modified from time to time, including, without limitation, pursuant to
that certain Sixth Amendment to Note and Warrant Purchase Agreement, dated as of
January 8, 2009, the “Note Purchase Agreement”), by and among the Borrower, the
Holder and the Guarantors (as defined therein) party thereto from time to
time.  This Note is the “Note” referred to in the Note Purchase Agreement.  The
Note Purchase Agreement contains terms governing the rights and obligations of
the Holder of this Note and all provisions of the Note Purchase Agreement are
hereby incorporated herein in full by reference.  Except as otherwise indicated
herein, capitalized terms used in this Note have the same meanings set forth in
the Note Purchase Agreement.
 
1.
Payment of Interest.  Except as otherwise expressly provided herein or as
specifically provided in the Note Purchase Agreement, the Principal Balance of
this Note shall bear interest (computed on the basis of actual days elapsed in a
360-day year) at the rate of (i) eleven and fifty-eight hundredths percent
(11.58%) per annum from the date hereof through and including September 30, 2010
and (ii) fifteen and fifty-eight hundredths percent (15.58%) per annum from
October 1, 2010 and at all times thereafter (“Current Interest”).  In addition,
default interest shall accrue on the unpaid Principal Balance of this Note at
the rate of two percent (2%) per annum after the occurrence and during the
continuance of an Event of Default.  Current Interest accruing on the Principal
Balance of this Note shall be payable quarterly in arrears in accordance with
the payment schedule on Exhibit A attached hereto and made a part hereof
(assuming for purposes of Exhibit A that no portion of the Principal Balance of
this Note is prepaid and that this Note is not accelerated prior to the Maturity
Date).  In addition, all accrued and unpaid Current Interest on this Note
(together with any accrued and unpaid default interest) shall be paid upon the
payment in full of the entire outstanding Principal Balance of this Note
(whether on the Maturity Date or as a result of the acceleration of the maturity
thereof), or if a prepayment of this Note is made, on the Principal Balance
prepaid, and, if payment in full is not paid when due, thereafter on
demand.  Unless prohibited under applicable law, any accrued interest (whether
Current Interest or default interest) which is not paid on the date on which it
is due and payable shall be capitalized and shall bear interest at the same rate
at which interest is then accruing on the Principal Balance of this Note until
such interest is paid.  Any accrued interest (whether Current Interest or
default interest) which for any reason has not theretofore been paid shall be
paid in full on the date on which the final principal payment on this Note is
made (whether on the Maturity Date or as a result of the acceleration of the
maturity thereof).  Interest shall accrue on any payment due under this Note at
the rates set forth herein until such time as payment therefor is actually
delivered to the Holder.

 
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2.
Payment of Principal on Note.

 
 
(a)
Scheduled Payments.  The Borrower shall pay the outstanding principal amount of
this Note, together with all accrued and unpaid interest on the principal amount
being repaid, on January 31, 2011 (the “Maturity Date”).

 
 
(b)
Optional Prepayments.  At any time after the second (2nd) anniversary of the
Original Date of Issuance (or, in the event of an IPO or a sale of the Borrower
approved by the Holder, at any time after the Original Date of Issuance), the
Borrower, at its option, may prepay all or any portion of this Note on any
scheduled quarterly payment date at a prepayment price of one hundred percent
(100%) of the Principal Balance to be prepaid, plus accrued and unpaid interest
to the prepayment date.

 
 
(c)
[Intentionally Omitted].

 
 
(d)
Notice of Prepayments.  The Borrower shall give notice (which shall be
irrevocable) to the Holder of this Note of each prepayment not later than
1:00 p.m. (Chicago time) on the Business Day immediately preceding the date of
prepayment, specifying the aggregate Principal Balance to be prepaid and the
prepayment date.  Once any such notice has been given, the Principal Balance
specified in such notice, together with all accrued and unpaid interest on the
amount of each such prepayment to the date of payment, and any prepayment
premium, shall become due and payable on such date of payment.

 
3.
Payment Schedule.  Set forth as Exhibit A attached hereto is a schedule which
reflects the amount of Current Interest payable quarterly and the Principal
Balance of this Note at the beginning and at the end of each quarter during the
term of this Note (assuming for purposes of Exhibit A that no portion of the
Principal Balance of this Note is prepaid and that this Note is not accelerated
prior to the Maturity Date).  Upon any voluntary or mandatory prepayment of all
or any portion of the Principal Balance, the Current Interest reflected on
Exhibit A attached hereto shall be recomputed based upon the remaining Principal
Balance.  The Holder shall amend Exhibit A hereto to reflect such recomputation
and deliver the same to the Borrower, and such amended Exhibit A shall
constitute rebuttable presumptive evidence of the Principal Balance owing and
unpaid on this Note and the interest accruing and payable thereafter under this
Note.  The failure to amend Exhibit A hereto or to deliver the same to the
Borrower shall not, however, affect the obligations of the Borrower to pay the
Principal Balance and all accrued and unpaid interest on the Principal Balance
of this Note.

 
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4.
Transfer and Exchange; Replacement; Cancellation.

 
 
(a)
Transfer and Exchange.

 
 
(i)
Subject to any restrictions contained in this Note or the Note Purchase
Agreement, this Note and all rights and obligations hereunder are transferable,
in whole or in part, to any Person (excluding any Person that is a direct or
indirect competitor of the Borrower), without charge to the Holder, upon
surrender of this Note with a properly executed assignment in form and substance
reasonably acceptable to the Borrower at the principal office of the
Borrower.  To facilitate any such transfer, the Borrower hereby covenants to
execute such documents and perform such acts as may be necessary or appropriate
in the Holder’s sole judgment for the Holder to effect any such transfer.

 
 
(ii)
Upon surrender of this Note for transfer or for exchange, the Borrower, at its
expense, will (subject to the conditions set forth herein and in the Note
Purchase Agreement) execute and deliver in exchange therefor a new Note or
Notes, as the case may be, as requested by the Holder or transferee, which
aggregates the Principal Balance of such Note, issued as the Holder or such
transferee may request, dated so that there will be no gain or loss of interest
on such surrendered Note and otherwise of like tenor.  The issuance of new Notes
shall be made without charge to the Holder(s) of the surrendered Note for any
issuance tax in respect thereof or other cost incurred by the Borrower in
connection with such issuance.

 
 
(b)
Replacement.  Upon receipt of evidence reasonably satisfactory to the Borrower
(an affidavit of the Holder of this Note shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of this Note and, in the case of
any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Borrower (provided that if the Holder is a financial
institution or other institutional investor, its own agreement of indemnity
shall be satisfactory), or, in the case of any such mutilation, upon the
surrender of this Note, the Borrower shall (at its expense) execute and deliver,
in lieu thereof, a new Note of the same class and representing the same rights
and obligations represented by such lost, stolen, destroyed or mutilated Note
dated so that there will be no loss of interest on this Note.

 
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5.
Payments.  All payments to be made to the Holder of this Note shall be made by
wire transfer to the Holder in lawful money of the United States of America in
same-day available funds.  Any payment received by the Holder of this Note after
2:00 p.m. (Chicago time) on any day will be deemed to have been received on the
next following Business Day.

 
6.
Place of Payment.  Payments of principal, interest, premium and other amounts
shall be made by wire transfer of immediately available funds to the following
account of the Holder hereof:

 
ABA No.:  026 009 593
Account No.:  5800441577
Account Name:  William Blair Mezzanine Capital Fund III, L.P.
Bank:  Bank of America
 
or to such other account or to the attention of such other Person as specified
by the Holder in a prior written notice to the Borrower.
 
7.
Business Days.  If any payment is due, or any time period for giving notice or
taking action expires, on a day which is not a Business Day, the payment shall
be due and payable on, and the time period shall automatically be extended to,
the next Business Day immediately following, and interest shall continue to
accrue at the required rate hereunder until any such payment is made.

 
8.
Governing Law.  This Note shall be governed and construed in accordance with the
domestic laws of the State of Illinois, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Illinois.

 
9.
Liabilities.  In furtherance and not in limitation of the rights and remedies of
the Holder of this Note hereunder or at law, the Holder of this Note may proceed
under this Note against the Borrower in its absolute and sole discretion for any
of the liabilities of the Borrower under this Note or any other liability or
obligation of the Borrower arising hereunder.

 
10.
Events of Default. Upon the occurrence of any “Event of Default,” as described
and specified in the Note Purchase Agreement, the Holder shall have all of the
rights and remedies in accordance with, and as provided by, the terms of the
Note Purchase Agreement.  In addition, the Holder shall be entitled to recover
from the Borrower any and all costs and expenses, including reasonable
attorneys’ fees and court costs, incurred in enforcing its rights hereunder.

 
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11.
Usury Laws.  It is the intention of the Borrower and the Holder of this Note to
conform strictly to all applicable usury laws now or hereafter in force, and any
interest payable under this Note shall be subject to reduction to an amount not
in excess of the maximum legal amount allowed under the applicable usury laws as
now or hereafter construed by the courts having jurisdiction over such
matters.  If the maturity of this Note is accelerated by reason of an election
by the Holder hereof resulting from an Event of Default, voluntary prepayment by
the Borrower or otherwise, then the earned interest may never include more than
the maximum amount permitted by law, computed from the date hereof until
payment, and any interest in excess of the maximum amount permitted by law shall
be canceled automatically and, if theretofore paid, shall at the option of the
Holder hereof either be rebated to the Borrower or credited on the Principal
Balance of this Note, or if this Note has been paid, then the excess shall be
rebated to the Borrower.  The aggregate of all interest (whether designated as
interest, service charges, points or otherwise) contracted for, chargeable, or
receivable under this Note shall under no circumstances exceed the maximum legal
rate upon the Principal Balance of this Note remaining unpaid from time to
time.  If such interest does exceed the maximum legal rate, it shall be deemed a
mistake and such excess shall be canceled automatically and, if theretofore
paid, at the option of the Holder hereof either be rebated to the Borrower or
credited on the Principal Balance of this Note, or if this Note has been repaid,
then such excess shall be rebated to the Borrower.

 
12.
Waiver.  The Borrower hereby waives diligence, presentment, protest and demand
and notice of protest and demand, dishonor and nonpayment of this Note, and
expressly agrees that this Note, or any payment hereunder, may be extended from
time to time and that the Holder hereof may accept security for this Note or
release security for this Note, all without in any way affecting the liability
of the Borrower hereunder.

 
13.
Section 163 of the Internal Revenue Code.  Notwithstanding any other provisions
contained in this Note, payments under this Note shall not be deferred beyond
any date if deferral beyond such date would result in this Note being treated as
an “applicable high yield discount obligation” under Section 163(e)(5) and
Section 163(i) of the Code.  The preceding sentence shall apply only to the
extent necessary to achieve the objective herein described and shall apply only
to amounts treated as interest or original issue discount under the Code.

 
14.
Amended and Restated.  This Note replaces in its entirety and is in substitution
for but not in payment of that certain Second Amended and Restated Senior
Subordinated Promissory Note, dated as of July 31, 2007 (as amended, restated,
supplemented or otherwise modified from time to time, the “Prior Note”), made by
the Borrower in favor of the Holder in the aggregate maximum principal amount of
$5,951,609.00, and does not and shall not be deemed to constitute a novation
thereof.  Such Prior Note shall be of no further force and effect upon the
execution of this Note; provided, however, that all outstanding indebtedness,
including, without limitation, principal and interest under the Prior Note as of
the date of this Note, is hereby deemed indebtedness evidenced by this Note and
is incorporated herein by this reference.

 
[SIGNATURE PAGE FOLLOWS]
 
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Third Amended and Restated Senior Subordinated Promissory Note Signature Page
 
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and
delivered by a duly authorized officer as of the date first written above.
 

  ISI SECURITY GROUP, INC., a Delaware corporation formerly known as ISI
Detention Contracting Group, Inc. and d/b/a “Argyle Security USA”            
By:
/s/ Sam Youngblood       Name:   Sam Youngblood    
Title:  
Chief Executive Officer  

 

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EXHIBIT A
 

See attached.
 

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