**Exhibit10.1**

 

**THESECURITIES REPRESENTED BY THIS CONVERTIBLE SUBORDINATED PROMISSORY NOTE HAVENOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THESECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER JURISDICTION.THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED INTHE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR ANOPINION OF COUNSEL FOR THE HOLDER SATISFACTORY TO THE COMPANY THAT SUCHREGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY STATE SECURITIES LAWS ORRECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION ANDANY APPLICABLE STATE AUTHORITY.**

 

**CONVERTIBLE SUBORDINATED PROMISSORY NOTE**

 
| $**                       ** |   | **March       , 2003** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                                                                                            |   | **San Diego, CA**                                    |

 

For value received, **ImageWare Systems, Inc****.**, aCalifornia corporation (***“******Payor”***), hereby promises topay to the order of **                       **(the ***“Holder”***)the principal sum of **                       **Dollars ($**                  **)together with accrued and unpaid interest thereon, each due and payable on thedates and in the manner set forth below.

 

The term ***“******Note”***and all references thereto, as used throughout this instrument, shall mean thisinstrument as originally executed, or if later amended or supplemented, then asso amended or supplemented.  This Noteis being issued by Payor along with similar convertible notes designated asConvertible Subordinated Promissory Notes (together with this Note, the ***“******Notes”***).  Holders of the Notes shall collectively bereferred to herein as the ***“Holders”***.

 

**1.             Principal and Interest; Pro RataPayments; Place and Application of Payments.**  Unless this Note has been converted inaccordance with the terms of Section 2 below, the entire outstandingprincipal amount of this Note shall be due and payable on April 15, 2005 (the ***“Maturity Date”***).  Payor further promises to pay interest onthe outstanding principal amount hereof from the date hereof until this Note isconverted pursuant to Section 2 below or paid in full (whichever is earlier),which interest shall be payable at the rate of eight and one-half percent (81⁄2%)per annum or the maximum rate permissible by law (which under the laws of theState of California shall be deemed to be the laws relating to permissiblerates of interest on commercial loans), whichever is less.  Interest shall be due and payablesemi-annually in arrears on each April 15th and October 15thand shall be calculated on the basis of a 365-day year for the actual number ofdays elapsed.  All payments of interestand principal shall be in lawful money of the United States of America andshall be made pro rata among all Holders of Notes.  All amounts payable hereunder shall be payable at the office ofHolder,                                              ,unless another place of payment shall be specified in writing by Holder.  Payment on this Note shall be applied firstto accrued interest, and thereafter to the outstanding principal balancehereof.

 

 

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**2.             Conversion.**

 

**(a)          **On or before theMaturity Date, at the election of the Holder, the principal amount of this Note(and all accrued and unpaid interest thereon) (the ***“Conversion Amount”***)may be converted into a number of fully paid and nonassessable shares ofPayor’s common stock (the ***“CommonStock”***). The number of shares of Common Stock issuable uponconversion of this Note shall be determined by the following formula:

 

**Conversion Amount**

**Conversion Price (defined below)**

 

**(b)          **Upon conversion ofthis Note, the Holder shall surrender or cause to be surrendered this Note,duly endorsed, as soon as practicable thereafter to Payor. Upon receipt byPayor of a facsimile copy of this Note from the Holder, Payor shall immediatelysend, via facsimile, a confirmation to the Holder stating that this Note hasbeen received, the date upon which Payor expects to deliver the Common Stockissuable upon such conversion and the name and telephone number of a contactperson of Payor regarding the conversion. Payor shall not be obligated to issue shares of Common Stock upon aconversion unless either this Note is delivered to Payor, or the Holdernotifies Payor that this Note has been lost, stolen or destroyed and deliversthe documentation to Payor required by Section 6 hereof.

 

**(c)          **Upon the surrenderof this Note pursuant to subsection (b) above, Payor shall, as soon aspracticable, issue and deliver to the Holder the number of shares of CommonStock issuable upon conversion of the Note. Payor shall deliver to the Holder physical certificates representing theCommon Stock issuable upon conversion.

 

**(d)          **If the conversionof this Note would result in the issuance of a fractional share of CommonStock, such fractional share shall be payable in cash based upon the ConversionPrice, and the number of shares of Common Stock issuable upon conversion ofthis Note shall be the next lower whole number of shares.

 

**(e)          **The ConversionPrice shall initially be $1.90, and shall be subject to adjustment from time totime as follows:

 

**(i)           **If, at any timeafter the date of issuance of this Note (the ***“Issue Date”***), the number of outstandingshares of Common Stock is increased by a stock split, stock dividend,combination, reclassification or other similar event, the Conversion Priceshall be proportionately reduced, or if the number of outstanding shares ofCommon Stock is decreased by a reverse stock split, combination orreclassification of shares, or other similar event, the Conversion Price shallbe proportionately increased.  In suchevent, Payor shall notify Payor’s transfer agent of such change on or beforethe effective date thereof.

 

**(ii)          **If, at any timeafter the Issue Date, there shall be (i) any reclassification or change of theoutstanding shares of Common Stock (other than a change in par value, or frompar value to no par value, or from no par value to par value, or as a result ofa subdivision or combination), (ii) any consolidation or merger of Payor withany other entity (other than a merger in which Payor is the surviving orcontinuing entity and its capital stock is unchanged), (iii) any sale ortransfer of all or substantially all of the assets of Payor or (iv) any

 

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share exchange pursuant towhich all of the outstanding shares of Common Stock are converted into othersecurities or property (each of (i) - (iv) above being a ***“Corporate Change”***),then appropriate provisions (in form and substance reasonably satisfactory tothe Holders of a majority of the principal amount of the Notes thenoutstanding) shall be made with respect to the rights and interests of theHolders of the Notes to the end that the economic value of the Notes are in noway diminished by such Corporate Change and that the provisions hereof(including, without limitation, in the case of any such consolidation, mergeror sale in which the successor entity or purchasing entity is not Payor, animmediate adjustment of the Conversion Price so that the Conversion Priceimmediately after the Corporate Change reflects the same relative value ascompared to the value of the surviving entity’s common stock that existedbetween the Conversion Price and the value of the Common Stock immediatelyprior to such Corporate Change) shall thereafter be applicable, as nearly asmay be practicable in relation to any shares of stock or securities thereafterdeliverable upon the conversion thereof.

 

**(iii)        **Upon the occurrenceof each adjustment or readjustment of the Conversion Price pursuant to thisSection 2 amounting to a more than a $.01 change in such Conversion Price,Purchaser, at its expense, shall promptly compute such adjustment orreadjustment and prepare and furnish to each Holder a certificate setting forthsuch adjustment or readjustment and showing in detail the facts upon which suchadjustment or readjustment is based.

 

**3.            **In the event ofany default hereunder, Payor shall pay all reasonable attorneys’ fees and courtcosts incurred by the Holder in enforcing and collecting this Note.

 

**4.            **Payor may prepaythis Note without penalty, in whole or in part, at any time prior to theMaturity Date upon five (5) business days notice to Holder at the address setforth in Section 1 above.

 

**5.            **If there shall beany Event of Default hereunder, at the option and upon the declaration of the Holderof this Note and upon written notice to Payor, this Note shall accelerate andall principal and unpaid accrued interest shall become due and payable. Theoccurrence of any one or more of the following shall constitute an Event ofDefault:

 

**(a)          **Payor fails to payany of the principal amount due under this Note or any accrued interest orother amounts due and payable under this Note, in each case within fivebusiness days after written notice from Holder that such payment is due andpayable;

 

**(b)          **Payor files anypetition or action for relief under any bankruptcy, reorganization, insolvencyor moratorium law or any other law for the relief of, or relating to, debtors,now or hereafter in effect, or makes any assignment for the benefit ofcreditors or takes any corporate action in furtherance of any of the foregoing;or

 

**(c)          **An involuntarypetition is filed against Payor (unless such petition is dismissed ordischarged within ninety (90) days under any bankruptcy statute now orhereafter in effect, or a custodian, receiver, trustee, assignee for thebenefit of creditors (or other similar official) is appointed to takepossession, custody or control of any property of Payor.

 

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**6.            **Upon receipt byPayor of (i) evidence of the loss, theft, destruction or mutilation of any Noteand (ii) (y) in the case of loss, theft or destruction, of indemnity reasonablysatisfactory to Payor, or (z) in the case of mutilation, upon surrender andcancellation of any Note, Payor shall execute and deliver a new Note of liketenor and date.

 

**7.            **This Note shallbe governed by construed under the laws of the State of California, as appliedto agreements among California residents, made and to be performed entirelywithin the State of California, without giving effect to conflicts of lawsprinciples.  This Note and theRegistration Rights Agreement, dated March     , 2003, byand among the Payor and the Holders constitute the full and entireunderstanding and agreement between Payor and Holder with regard to the subjectmatter hereof, and supersede any other agreements or promises between or madeby Payor or Holder to each other, whether oral or written, including but notlimited to that certain document entitled “JMR, Inc. Summary of Terms/PrivatePlacement” dated January 29, 2003.  Noparty shall be liable or bound to any other in any manner by any oral orwritten representations, warranties, covenants and agreements except asspecifically set forth herein and therein. Each party expressly represents and warrants that it is not relying onany oral or written representations, warranties, covenants or agreementsoutside of this Note and the Registration Rights Agreement.

 

**8.            **The indebtednessevidenced by this Note is hereby expressly subordinated, to the extent and inthe manner hereinafter set forth, in right of payment to the prior payment infull of the Senior Indebtedness.

 

***“SeniorIndebtedness”*** shall mean, unless expressly subordinatedto or made on a parity with the amounts due under this Note, the principal of,unpaid interest on and amounts reimbursable, fees, expenses, costs ofenforcement and other amounts due in connection with (a) indebtedness of Payorto banks or commercial finance or other lending institutions regularly engagedin the business of lending money (including venture capital, investment bankingor similar institutions and their affiliates which sometimes engage in lendingactivities but which are primarily engaged in investments in equitysecurities), whether or not secured, and (b) any such indebtedness or anydebentures, notes or other evidence of indebtedness issued in exchange for suchSenior Indebtedness, or any indebtedness arising from the satisfaction of suchSenior Indebtedness by a guarantor.

 

**(a)           Insolvency Proceedings.**  If there shall occur any receivership,insolvency, assignment for the benefit of creditors, bankruptcy,reorganization, or arrangements with creditors (whether or not pursuant tobankruptcy or other insolvency laws), sale of all or substantially all of theassets, dissolution, liquidation, or any other marshaling of the assets andliabilities of Payor, (a) no amount shall be paid by Payor in respect of theprincipal of, interest on or other amounts due with respect to this Note at thetime outstanding, unless and until the principal of and interest on the SeniorIndebtedness then outstanding shall be paid in full, and (b) no claim or proofof claim shall be filed by or on behalf of Holder which shall assert any rightto receive any payments in respect of the principal of and interest on thisNote except subject to the payment in full of the principal of and interest onall of the Senior Indebtedness then outstanding.

 

**(b)           Default on Senior Indebtedness.**  If there shall occur an event of defaultwhich has been declared in writing with respect to any Senior Indebtedness, asdefined therein,

 

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or in the instrument underwhich it is outstanding, permitting the holder to accelerate the maturity thereofand Holder shall have received written notice thereof from the holder of suchSenior Indebtedness, then, unless and until such event of default shall havebeen cured or waived or shall have ceased to exist, or all Senior Indebtednessshall have been paid in full, no payment shall be made in respect of theprincipal of or interest on this Note unless within one hundred eighty (180)days after the happening of such event of default the maturity of such SeniorIndebtedness shall not have been accelerated.  Not more than one notice may be given to Holder pursuant to theterms of this Section 8(b)during any 360 day period.

 

**(c)           Further Assurances.**  By acceptance of this Note, Holder agrees toexecute and deliver customary forms of subordination agreement requested fromtime to time by the holders of Senior Indebtedness and, as a condition toHolder’s rights hereunder, Payor may require that Holder execute such forms ofsubordination agreement, provided that such forms shall not impose on Holderterms less favorable than those provided herein.

 

**(d)           No Impairment.**  Nothing contained in this Section 8 shall impair the Holder’sright to convert the principal and interest of this Note into equity securitiesof Payor.

 

**(e)           Lien Subordination.**  Any lien or security interest of Holder,whether now or hereafter existing in connection with the amounts due under thisNote, on any assets or property of Payor or any proceeds or revenues therefromwhich Holder may have at any time as security for any amounts due and obligationsunder this Note, shall be subordinate to all liens or security interests now orhereafter granted to a holder of Senior Indebtedness by Payor or by lawnotwithstanding the date, order or method of attachment or perfection of anysuch lien or security interest or the provisions of any applicable law.

 

**(f)            Applicability of Priorities.**  The priority of the holder of the SeniorIndebtedness provided for herein with respect to security interests and liensare applicable only to the extent that such security interests and liens areenforceable and perfected and have not been avoided; if a security interest orlien is judicially determined to be unenforceable or unperfected or isjudicially avoided with respect to any claim of the holder of the SeniorIndebtedness or any part thereof, the priority provided for herein shall not beavailable to such security interest or lien to the extent that it is avoided ordetermined to be unenforceable or unperfected. The foregoing notwithstanding, Holder covenants and agrees that it shallnot challenge, attack or seek to avoid any security interest or lien to theextent that it secures any holder of the Senior Indebtedness.  Nothing in this Section 8(f) affects the operation of any subordination ofindebtedness or turnover of payment provisions hereof, or of any otheragreements among any of the parties hereto.

 

**(g)           Reliance of Holders of SeniorIndebtedness.**  Holder,by its acceptance hereof, shall be deemed to acknowledge and agree that theforegoing subordination provisions are, and are intended to be, an inducementto and a consideration of each holder of Senior Indebtedness, whether suchSenior Indebtedness was created or acquired before or after the creation of theindebtedness evidenced by this Note, and each such holder of SeniorIndebtedness shall be deemed conclusively to have relied on such subordinationprovisions in acquiring and holding, or in continuing to hold, such SeniorIndebtedness.

 

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**9.            **Any term of thisNote may be amended or waived with the written consent of Payor and the Holdersof a majority of the then-outstanding principal amount of all Notes.  Upon the effectuation of such waiver oramendment in conformance with this Section9, Payor shall promptly give written notice thereof to the recordholders of the Notes who have not previously consented thereto in writing.

 

 
|                          | **ImageWare Systems, Inc.** |
|-------------------------------|-----------------------------|
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|                          | By:                         |   |   |
|                          | Name:                       |
|                          | Title:                      |
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| **Acknowledged and  Agreed:** |                        |   |
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| By:                           |                        |   |   |   |
| Name:                         |                        |   |   |   |
| Title:                        |                        |   |   |   |
| Date:                         |                        |   |   |   |
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