Exhibit 10.1


 


THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. NEITHER THIS
NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION
WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN OPINION OF COUNSEL
FOR THE INVESTOR, REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH REGISTRATION
AND 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 Two
Hundred Fifty Thousand Dollars ($250,000) or such lesser amount as shall equal
the outstanding principal amount hereof together with interest from the date of
this 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 compounded
monthly on the last day of each calendar month. Unpaid principal, together with
any then unpaid and accrued interest and other amounts payable hereunder, shall
be due and payable on the earlier of  (i)
the Maturity Date, or (ii) when, upon or after the occurrence of an Event of
Default (as defined below), such amounts are declared due and payable by the
Investor or made automatically due and payable in accordance with the terms
hereof. This Note is issued pursuant to the Secured Promissory Note Purchase
Agreement dated as of March 17, 2006 (as amended, modified or supplemented, the
“Note Purchase Agreement”) among the Company, the Investor and the other
Purchasers 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, AND
EXECUTED BY COMPANY IN FAVOR OF THE LENDERS’ AGENT IDENTIFIED THEREIN FOR THE
BENEFIT OF INVESTOR AND THE OTHER PURCHASERS OF NOTES. THE OBLIGATIONS DUE
UNDER THIS NOTE ARE ALSO SECURED BY THE SUBSIDIARY GUARANTEES, WHICH IN TURN
ARE SECURED BY THE GUARANTOR SECURITY AGREEMENTS. ADDITIONAL RIGHTS OF INVESTOR
ARE SET FORTH IN


 


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


 


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


 


1.             Definitions. As used in this Note, the following capitalized
terms have the following meanings (capitalized terms used and not defined
herein shall have the meanings in the Note Purchase Agreement):


 


(a)           “Company” means
ImageWare Systems, Inc. a Delaware corporation. As used in this Agreement, the
term “Company” shall also include, unless the context otherwise requires, the
Subsidiaries of the Company.


 


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


 


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


 


(d)           “Indebtedness”
shall mean indebtedness owed to banks, commercial finance Investors, insurance
companies, leasing or equipment financing institutions or other lending
institutions regularly engaged in the business of lending money (excluding
venture capital, investment banking or similar institutions which sometimes
engage in lending activities but which are primarily engaged in investments in
equity securities), which is for money borrowed or the deferred purchase price
or leasing of equipment, whether or not secured.


 


(e)           “Investor” shall
mean the person specified in the introductory paragraph of this Note who shall
at the time be the registered Investor of this Note.


 


(f)            “Lien” shall
mean, with respect to any property, any security interest, mortgage, pledge,
lien, claim, charge or other encumbrance in, of, or on such property or the
income therefrom, including, without limitation, the interest of a vendor or
lessor under a conditional sale agreement, capital lease or other title
retention agreement, or any agreement to provide any of the foregoing, and the
filing of any financing statement or similar instrument under the Uniform
Commercial Code or comparable law of any jurisdiction.


 


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


 


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


 


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


 


(i)            “Note Purchase
Agreement” has the meaning given in the introductory paragraph hereof.


 


(j)            “Obligations”
shall mean all loans, advances, debts, liabilities and obligations, howsoever
arising, owed by Company to Investor of every kind and description (whether or
not evidenced by any note or instrument and whether or not for the payment of
money), now existing or hereafter arising under or pursuant to the terms of
this Note and the other Financing Documents (as identified in the Note Purchase
Agreement), including, all interest, fees, charges, expenses, attorneys’ fees
and costs and accountants’ fees and costs chargeable to and payable by Company
hereunder and thereunder, in each case, whether direct or indirect, absolute or
contingent, due or to become due, and whether or not arising after the
commencement of a proceeding under Title 11 of the United States Code (11 U.
S. C. Section 101 et  seq.), as amended from time to time
(including post-petition interest) and whether or not allowed or allowable as a
claim in any such proceeding.


 


(k)           “Person” shall
mean and include an individual, a partnership, a corporation (including a business
trust), a joint stock company, a limited liability company, an unincorporated
association, a joint venture or other entity or a governmental authority.


 


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


 


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


 


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


 


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


 


(i)            Payments received by
the Company in connection with contracts with Grupo Inffinix and Argus
Solutions or any affiliate thereof, or any extension, renewal or amendment of
such contracts; or


 


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


 


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


 


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


 


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debt instruments, including lines of credit.


 


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


 


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


 


4.             Certain Covenants.


 


(a)           Furnishing
of Information. As long as any Investor owns securities, the Company
covenants to timely file (or obtain extension in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act. As long as any
Investor owns securities, if the Company is not required to file reports
pursuant to such laws, it will prepare and furnish to the Investors and make publicly
available in accordance with Rule 144(c) such information is as required for
the Investors to sell the securities under Rule 144.


 


(b)           Notice of
Default. The Company agrees to give prompt written notice to the
Investor and to Lenders’ Agent of the occurrence of any Event of Default
hereunder.


 


5.             Events of Default. The occurrence of any of the following shall
constitute an “Event of Default” under this Note and the other Financing
Documents:


 


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


 


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


 


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


 


(d)           Representations
and Warranties. Any representation, warranty, certificate or other
statement (financial or otherwise) made or furnished by or on behalf of the
Company to Investor in writing in connection with this Note, the Security
Agreement, the Subsidiary Guarantees,


 


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the Guarantor
Security Agreements or any of the other Financing Documents, or as an
inducement to Investor to enter into this Note, the Security Agreement and the
other Financing Documents, shall be false, incorrect, incomplete or misleading
in any material respect when made or furnished; or


 


(e)           Voluntary Bankruptcy or Insolvency Proceedings. Company
shall (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 its
property, (ii) be unable, or admit in writing its inability, to pay its
debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated,
(v) become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or consent to any such relief or to the appointment of or
taking possession of its property by any official in an involuntary case or
other proceeding commenced against it, or (vii) take any action for the
purpose of effecting any of the foregoing; or


 


(f)            Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order
for relief entered or such proceeding shall not be dismissed or discharged
within thirty (30) days of commencement.


 


(g)           Financing
Documents. Any Financing Document or any material term thereof shall
cease to, or be asserted by the Company not to be, a legal valid and binding
obligation of the Company enforceable in accordance to this term, or if the
liens of Investor in any of the assets of the Company shall cease to be or
shall not be valid, first priority perfected liens or the Company shall assert
that such liens are not valid, first priority and perfected liens; and


 


(h)           Material
Adverse Effect. One or more conditions exist or events have occurred
which could reasonably indicate, or reasonably result in a Material Adverse
Effect (as defined in the Note Purchase Agreement).


 


6.             Rights of Investor upon Default. Upon the occurrence or existence of any Event of
Default (other than an Event of Default, referred to in Sections 3(e) and
3(f)) and at any time thereafter during the continuance of such Event of
Default, the Lenders’ Agent may, by written notice to Company, declare all
outstanding Obligations payable by Company hereunder to be immediately due and
payable without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived. Upon the occurrence or existence of
any Event of Default described in Sections 3(e) and 3(f), immediately and
without notice, all outstanding Obligations payable by Company hereunder shall
automatically become immediately due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived. In addition to the foregoing remedies, upon the occurrence or existence
of any Event of Default, Investor may exercise any other right, power or remedy
granted 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.


 


5

















 


7.             Successors and Assigns. Subject to the restrictions on transfer
described in Sections 9 and 10 below, the rights and obligations of
Company and Investor of this Note shall be binding upon and benefit the
successors, assigns, heirs, administrators and transferees of the parties.


 


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


 


9.             Transfer of this Note. This Note may not be sold, assigned or
transferred by the Investor, except to an affiliate thereof. Subject to the
foregoing, transfers of this Note shall be registered upon registration books
maintained for such purpose by or on behalf of Company. Prior to presentation
of this Note, Company shall treat the registered Investor hereof as the owner
and holder of this Note for the purpose of receiving all payments of principal
and interest hereon and for all other purposes whatsoever, whether or not this
Note shall be overdue and Company shall not be affected by notice to the
contrary.


 


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


 


11.           Notices. All notices, requests, demands, consents,
instructions or other communications required or permitted hereunder shall in
writing and faxed, mailed or delivered to each party at the respective
addresses of the parties as set forth in the Secured Promissory Note and
Purchase Agreement, or at such other address or facsimile number as Company
shall have furnished to Lender in writing. All such notices and communications
shall be effective (a) when sent by Federal Express or other overnight service
of recognized standing, on the business day following the deposit with such
service; (b) when mailed, by registered or certified mail, first class postage
prepaid 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.


 


12.           Usury. In the event any interest is paid on this Note
that is deemed to be in excess of the then legal maximum rate, then that
portion of the interest payment representing an amount in excess of the then
legal maximum rate shall be deemed a payment of principal and applied against
the principal of this Note.


 


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


 


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


 


15.           Lenders’ Agent. The Company
acknowledges that pursuant to the Lenders’ Agent Agreement, dated as of the
date hereof, among the Lenders’ Agent, the Investor and the other


 


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


 


[Remainder of page
intentionally left blank.]


 


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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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