**Exhibit 10.1**

 

**THIS NOTE HAS NOT BEEN REGISTERED UNDER THESECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATESECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH AVIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. NEITHER THISNOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD OROTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATIONWITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN OPINION OF COUNSELFOR THE INVESTOR, REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH REGISTRATIONAND QUALIFICATION ARE NOT REQUIRED.**

 

 

**IMAGEWARE SYSTEMS, INC.**

** **

**SECURED PROMISSORY NOTE**

 
| $250,000 |   | March 17, 2006 |
|----------|--------|----------------|

 

San Diego, CA

 

FOR VALUE RECEIVED, ImageWare Systems, Inc., a Delaware corporation (“Company”),promises to pay to Cranshire Capital, (“Investor”) or its registered assigns,in lawful money of the United States of America, the principal sum of TwoHundred Fifty Thousand Dollars ($250,000) or such lesser amount as shall equalthe outstanding principal amount hereof together with interest from the date ofthis Note on the unpaid principal balance at a rate equal to eight percent (8%)per year, computed on the basis of a year consisting of 360 days and compoundedmonthly on the last day of each calendar month. Unpaid principal, together withany then unpaid and accrued interest and other amounts payable hereunder, shallbe due and payable on the earlier of  (i)the Maturity Date, or (ii) when, upon or after the occurrence of an Event ofDefault (as defined below), such amounts are declared due and payable by theInvestor or made automatically due and payable in accordance with the termshereof. This Note is issued pursuant to the Secured Promissory Note PurchaseAgreement dated as of March 17, 2006 (as amended, modified or supplemented, the“Note Purchase Agreement”) among the Company, the Investor and the otherPurchasers identified therein.

 

THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT(THE “SECURITY AGREEMENT”), DATED AS OF MARCH 17, 2006, AS AMENDED, ANDEXECUTED BY COMPANY IN FAVOR OF THE LENDERS’ AGENT IDENTIFIED THEREIN FOR THEBENEFIT OF INVESTOR AND THE OTHER PURCHASERS OF NOTES. THE OBLIGATIONS DUEUNDER THIS NOTE ARE ALSO SECURED BY THE SUBSIDIARY GUARANTEES, WHICH IN TURNARE SECURED BY THE GUARANTOR SECURITY AGREEMENTS. ADDITIONAL RIGHTS OF INVESTORARE SET FORTH IN

 

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THE SECURITY AGREEMENT, THE SUBSIDIARY GUARANTEES, THE GUARANTORSECURITY AGREEMENTS AND THE NOTE PURCHASE AGREEMENT.

 

The followingis a statement of the rights of Investor and the conditions to which this Noteis subject, and to which Investor, by the acceptance of this Note, agrees:

 

# 1.             **Definitions**. As used in this Note, the following capitalizedterms have the following meanings (capitalized terms used and not definedherein shall have the meanings in the Note Purchase Agreement):

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## (a)           “Company” meansImageWare Systems, Inc. a Delaware corporation. As used in this Agreement, theterm “Company” shall also include, unless the context otherwise requires, theSubsidiaries of the Company.

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## (b)           “Event of Default”has the meaning given in Section 5 hereof.

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## (c)           “FinancialStatements” shall mean, with respect to any accounting period for theCompany, statements of operations, retained earnings and cash flow of theCompany for such period, and balance sheets of the Company as of the end ofsuch period, setting forth in each case in comparative form figures for thecorresponding period in the preceding fiscal year if such period is less than afull fiscal year or, if such period is a full fiscal year, correspondingfigures from the preceding fiscal year, all in accordance with the books andrecords of the Company, which have been maintained in accordance with goodbusiness practices. Unless otherwise indicated, each reference to FinancialStatements of the Company shall be deemed to refer to Financial Statementsprepared on a consolidated basis.

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## (d)           “Indebtedness”shall mean indebtedness owed to banks, commercial finance Investors, insurancecompanies, leasing or equipment financing institutions or other lendinginstitutions regularly engaged in the business of lending money (excludingventure capital, investment banking or similar institutions which sometimesengage in lending activities but which are primarily engaged in investments inequity securities), which is for money borrowed or the deferred purchase priceor leasing of equipment, whether or not secured.

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## (e)           “Investor” shallmean the person specified in the introductory paragraph of this Note who shallat the time be the registered Investor of this Note.

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## (f)            “Lien” shallmean, with respect to any property, any security interest, mortgage, pledge,lien, claim, charge or other encumbrance in, of, or on such property or theincome therefrom, including, without limitation, the interest of a vendor orlessor under a conditional sale agreement, capital lease or other titleretention agreement, or any agreement to provide any of the foregoing, and thefiling of any financing statement or similar instrument under the UniformCommercial Code or comparable law of any jurisdiction.

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## (g)           “Material AdverseEffect” shall mean a material adverse effect on (i) the business,prospects, assets, operations or financial condition of Company; (ii) theability of Company to pay or perform the Obligations in accordance with theterms of this Note and the other Financing

 

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## Documents; or (iii) the rights andremedies of Investor under this Note and the other Financing Documents.

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## (h)           “Maturity Date”shall mean March 16, 2007.

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## (i)            “Note PurchaseAgreement” has the meaning given in the introductory paragraph hereof.

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## (j)            “Obligations”shall mean all loans, advances, debts, liabilities and obligations, howsoeverarising, owed by Company to Investor of every kind and description (whether ornot evidenced by any note or instrument and whether or not for the payment ofmoney), now existing or hereafter arising under or pursuant to the terms ofthis Note and the other Financing Documents (as identified in the Note PurchaseAgreement), including, all interest, fees, charges, expenses, attorneys’ feesand costs and accountants’ fees and costs chargeable to and payable by Companyhereunder and thereunder, in each case, whether direct or indirect, absolute orcontingent, due or to become due, and whether or not arising after thecommencement of a proceeding under Title 11 of the United States Code (11 U.S. C. Section 101 etseq.), as amended from time to time(including post-petition interest) and whether or not allowed or allowable as aclaim in any such proceeding.

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## (k)           “Person” shallmean and include an individual, a partnership, a corporation (including a businesstrust), a joint stock company, a limited liability company, an unincorporatedassociation, a joint venture or other entity or a governmental authority.

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## (l)            “Security Agreement”has the meaning given in Section 2(a) of the Note Purchase Agreement.

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## (m)          “Warrant” has themeaning given in the recitals of the Note Purchase Agreement.

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# 2.             **Interest**. Accrued interest on this Note shall be payableon the last business day of each calendar quarter until the outstandingprincipal amount hereof shall be paid in full at Maturity, or as otherwise withthe first such payment due on March 31, 2006.

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# 3.             **Pre-Payment**. (a) Pre-Payments of this Note shall automatically be due and payable uponthe occurrence of any of the following events (collectively “ Principal PaymentTriggers”);

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### (i)            Payments received bythe Company in connection with contracts with Grupo Inffinix and ArgusSolutions or any affiliate thereof, or any extension, renewal or amendment ofsuch contracts; or

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### (ii)           Payments made againstany new contract signed by the Company which contract amount is in excess of$1,500,000; or

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### (iii)          The receipt by theCompany of proceeds from the sale of equity or equity-linked securities by theCompany; or

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# (iv)          Receipt of proceeds from the issuance by theCompany of any type of

 

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# debt instruments, including lines of credit.

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# (b) In addition, upon five (5) days prior written notice to Investor,Company may prepay this Note in whole or in part.

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# (c) Any prepayment of this Note may only be made in connection with theprepayment of all Notes issued under the Note Purchase Agreement and on a prorata basis, based on the respective aggregate outstanding principal amounts ofeach such Notes, and (ii) any such prepayment shall be applied first to thepayment of expenses due under this Note and all Notes, second to interestaccrued on this Note and all Notes and third, if the amount of prepaymentexceeds the amount of all such expenses at accrued interest, to the payment ofprincipal of this Note and all Notes.

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# 4.             **Certain Covenants**.

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## (a)           *Furnishingof Information*. As long as any Investor owns securities, the Companycovenants to timely file (or obtain extension in respect thereof and filewithin the applicable grace period) all reports required to be filed by theCompany after the date hereof pursuant to the Exchange Act. As long as anyInvestor owns securities, if the Company is not required to file reportspursuant to such laws, it will prepare and furnish to the Investors and make publiclyavailable in accordance with Rule 144(c) such information is as required forthe Investors to sell the securities under Rule 144.

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## (b)           *Notice ofDefault*. The Company agrees to give prompt written notice to theInvestor and to Lenders’ Agent of the occurrence of any Event of Defaulthereunder.

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# 5.             **Events of Default**. The occurrence of any of the following shallconstitute an “Event of Default” under this Note and the other FinancingDocuments:

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## (a)           *Failure to Pay*. If the Company fails topay any principal or interest payment or any other payment required under theterms of this Note within five (5) days of the due date of such payment;

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## (b)           *Failure to Comply With Covenants*. Companyshall have failed to perform, keep, or observe any other material term,provision, condition, covenant, or agreement contained in this Note, theSecurity Agreement, the Note Purchase Agreement, the Subsidiary Guarantees, theGuarantor Security Agreements or any other Financing Document and has failed tocure such default within fifteen (15) days after Company’s receipt of writtennotice from the Investor of such default;

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## (c)           *Loss of Priority of Lien*. Investor’s Lienin the Collateral (as defined in the Security Agreement or the GuarantorSecurity Agreements) shall not be a first priority security interest, subjectto Permitted Liens (as defined in the Security Agreement or the GuarantorSecurity Agreements);

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## (d)           *Representationsand Warranties*. Any representation, warranty, certificate or otherstatement (financial or otherwise) made or furnished by or on behalf of theCompany to Investor in writing in connection with this Note, the SecurityAgreement, the Subsidiary Guarantees,

 

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## the GuarantorSecurity Agreements or any of the other Financing Documents, or as aninducement to Investor to enter into this Note, the Security Agreement and theother Financing Documents, shall be false, incorrect, incomplete or misleadingin any material respect when made or furnished; or

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## (e)           *Voluntary Bankruptcy or Insolvency Proceedings.*Companyshall (i) apply for or consent to the appointment of a receiver, trustee,liquidator or custodian of itself or of all or a substantial part of itsproperty, (ii) be unable, or admit in writing its inability, to pay itsdebts generally as they mature, (iii) make a general assignment for thebenefit of its or any of its creditors, (iv) be dissolved or liquidated,(v) become insolvent (as such term may be defined or interpreted under anyapplicable statute), (vi) commence a voluntary case or other proceedingseeking liquidation, reorganization or other relief with respect to itself orits debts under any bankruptcy, insolvency or other similar law now orhereafter in effect or consent to any such relief or to the appointment of ortaking possession of its property by any official in an involuntary case orother proceeding commenced against it, or (vii) take any action for thepurpose of effecting any of the foregoing; or

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## (f)            *Involuntary Bankruptcy or Insolvency Proceedings.*Proceedingsfor the appointment of a receiver, trustee, liquidator or custodian of Companyor of all or a substantial part of the property thereof, or an involuntary caseor other proceedings seeking liquidation, reorganization or other relief withrespect to Company or the debts thereof under any bankruptcy, insolvency orother similar law now or hereafter in effect shall be commenced and an orderfor relief entered or such proceeding shall not be dismissed or dischargedwithin thirty (30) days of commencement.

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## (g)           *FinancingDocuments*. Any Financing Document or any material term thereof shallcease to, or be asserted by the Company not to be, a legal valid and bindingobligation of the Company enforceable in accordance to this term, or if theliens of Investor in any of the assets of the Company shall cease to be orshall not be valid, first priority perfected liens or the Company shall assertthat such liens are not valid, first priority and perfected liens; and

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## (h)           *MaterialAdverse Effect*. One or more conditions exist or events have occurredwhich could reasonably indicate, or reasonably result in a Material AdverseEffect (as defined in the Note Purchase Agreement).

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# 6.             **Rights of Investor upon Default**. Upon the occurrence or existence of any Event ofDefault (other than an Event of Default, referred to in Sections 3(e) and3(f)) and at any time thereafter during the continuance of such Event ofDefault, the Lenders’ Agent may, by written notice to Company, declare alloutstanding Obligations payable by Company hereunder to be immediately due andpayable without presentment, demand, protest or any other notice of any kind,all of which are hereby expressly waived. Upon the occurrence or existence ofany Event of Default described in Sections 3(e) and 3(f), immediately andwithout notice, all outstanding Obligations payable by Company hereunder shallautomatically become immediately due and payable, without presentment, demand,protest or any other notice of any kind, all of which are hereby expresslywaived. In addition to the foregoing remedies, upon the occurrence or existenceof any Event of Default, Investor may exercise any other right, power or remedygranted to it by the Financing Documents or otherwise permitted to it by law,either by suit in equity or by action at law, or both.

 

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# 7.             **Successors and Assigns**. Subject to the restrictions on transferdescribed in Sections 9 and 10 below, the rights and obligations ofCompany and Investor of this Note shall be binding upon and benefit thesuccessors, assigns, heirs, administrators and transferees of the parties.

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# 8.             **Waiver and Amendment**. Any provision of this Note may be amended,waived or modified upon the written consent of Company and the Lenders’ Agentor if there is no Lenders’ Agent, by the Majority Holders (as defined in theNote Purchase Agreement).

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# 9.             **Transfer of this Note**. This Note may not be sold, assigned ortransferred by the Investor, except to an affiliate thereof. Subject to theforegoing, transfers of this Note shall be registered upon registration booksmaintained for such purpose by or on behalf of Company. Prior to presentationof this Note, Company shall treat the registered Investor hereof as the ownerand holder of this Note for the purpose of receiving all payments of principaland interest hereon and for all other purposes whatsoever, whether or not thisNote shall be overdue and Company shall not be affected by notice to thecontrary.

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# 10.           **Assignment by Company**. Neither this Note nor any of the rights,interests or obligations hereunder may be assigned, by operation of law orotherwise, in whole or in part, by Company without the prior written consent ofLenders’ Agent, or if there is no Lenders’ Agent, the Majority Holders.

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# 11.           **Notices**. All notices, requests, demands, consents,instructions or other communications required or permitted hereunder shall inwriting and faxed, mailed or delivered to each party at the respectiveaddresses of the parties as set forth in the Secured Promissory Note andPurchase Agreement, or at such other address or facsimile number as Companyshall have furnished to Lender in writing. All such notices and communicationsshall be effective (a) when sent by Federal Express or other overnight serviceof recognized standing, on the business day following the deposit with suchservice; (b) when mailed, by registered or certified mail, first class postageprepaid and addressed as aforesaid through the United States Postal Service,upon receipt; (c) when delivered by hand, upon delivery; and (d) when faxed,upon confirmation of receipt.

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# 12.           **Usury**. In the event any interest is paid on this Notethat is deemed to be in excess of the then legal maximum rate, then thatportion of the interest payment representing an amount in excess of the thenlegal maximum rate shall be deemed a payment of principal and applied againstthe principal of this Note.

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# 13.           **Waivers**. Company hereby waives notice of default,presentment or demand for payment, protest or notice of nonpayment or dishonorand all other notices or demands relative to this instrument.

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# 14.           **Governing Law**. This Note and all actions arising out of or inconnection with this Note shall be governed by and construed in accordance withthe laws of the State of Delaware, without regard to the conflicts of lawprovisions of the State of Delaware, or of any other state.

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15.           **Lenders’ Agent**. The Companyacknowledges that pursuant to the Lenders’ Agent Agreement, dated as of thedate hereof, among the Lenders’ Agent, the Investor and the other

 

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Purchasers under the NotePurchase Agreement, the Lenders’ Agent shall have the right to act on behalf ofthe Investor with respect to matters involving this Note and the other Notes.

 

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**IN WITNESS WHEREOF,**Company has caused this Note to be issued as of the date first written above.

 
|   | **IMAGEWARE SYSTEMS,  INC.** |
|--------|------------------------------|
|   | A Delaware Corporation       |
|   |                         |
|   |                         |
|   | By:                          |   |   |
|   |                         | S. James Miller, Chairman and CEO |
|        |                              |  |  |  |

 

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