Document:

Exhibit

10.2

 

SENIOR

SECURED CONVERTIBLE PROMISSORY NOTE

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS.  IT MAY NOT BE SOLD OR OFFERED FOR SALE IN

THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND

COMPLIANCE WITH SUCH STATE SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER

THE SECURITIES ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO

THE COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.

 

	

  $2,650,000.00

  	

   

  	

  June 13, 2003

  
	

   

  	

   

  	

  San Diego,

  California

  

 

FOR VALUE RECEIVED, IMAGEWARE SYSTEMS, INC., a

California corporation (the “Company”), promises to pay to the order of L.F.

Global Holdings, LLC (the “Lender”) or its registered assigns (the “Holder”),

the principal sum of Two Million Six Hundred Fifty Thousand Dollars

($2,650,000.00), or such lesser amount as shall then equal the outstanding

principal amount hereof, together with interest thereon at a rate equal to

12.5% per annum, compounding quarterly and computed on the basis of a year

consisting of 360 days and four quarterly periods each consisting of 90

days.  All unpaid principal, together

with any accrued but unpaid interest and other amounts payable hereunder, shall

be due and payable on the earlier of (i) May 22, 2005 (the “Maturity

Date”); or (ii) when such amounts are declared due and payable by the

Holder or made automatically due and payable upon or after (A) the occurrence

of an Event of Default (as defined below), (B) the liquidation or dissolution

of the Company, (C) any merger, consolidation, reorganization or other

business combination involving the Company, in which the stockholders of the

Company immediately prior thereto do not own, directly or indirectly,

outstanding voting securities representing more than fifty percent (50%) of the

combined outstanding voting power of the surviving entity in such merger,

consolidation or similar transaction, (D) the sale of all, or

substantially all, of the assets of the Company, or (E) the sale of voting

securities of the Company to any person (or group of persons acting in concert)

that results in such person (or group of persons) (together with their

affiliates) owning more than 50% of the outstanding voting securities of the

Company.  Interest on this Note shall be

payable in arrears on each January 1, April 1, July 1, and October 1 after the

date of issuance of this Note as follows: 

(a) through the payment due January 1, 2004, and so long as no

uncured Event of Default exists, interest, at the election of the Company and

subject to shareholder approval as provided in this Note, may be paid by the

issuance of an additional senior secured convertible promissory note identical

in all respects to this Note except that it shall have a principal amount equal

to such interest payment; or if not so paid shall be payable in lawful money of

the United States of America and (b) thereafter shall be payable in lawful

money of the United States of America.

 

This Note, along with the Senior Secured Convertible

Promissory Note dated June 13, 2003, between Company and Laurus Master Fund,

Ltd. (“Laurus”) (the “Laurus

 

 

Note”), shall amend and restate the note issued pursuant to the Note

and Warrant Purchase Agreement (the ”Purchase Agreement”) dated as of

May 22, 2002 by and between the Company and Perseus 2000, L.L.C.  This Note is amended and restated pursuant

to the Consent to Assignment and Amendment Agreement dated as of June 13, 2003,

by and between Company, Lender and Laurus (“Consent Agreement”).

 

The following is a statement of the rights of the

Holder and the conditions to which this Note is subject, and to which the

Holder hereof, by the acceptance of this Note, agrees:

 

1.                                       Definitions.  Capitalized terms defined in the Purchase

Agreement and used herein without definition have the same meaning herein as in

the Purchase Agreement.  In addition, as

used in this Note, the following capitalized terms have the following meanings:

 

(a)                                  “Business

Day” means any day other than a Saturday, Sunday or other day on which the

national or state banks located in the State of New York, State of California

or the District of Columbia are authorized to be closed.

 

(b)                                 “Common

Stock” means the common stock, par value $0.01 per share, of the Company.

 

(c)                                  “Company

Notes” means any of this Note, the Laurus Note or any note issued in payment of

Closing Fees (as defined in the Consent Agreement) or interest on any Company

Note.

 

(d)                                 

“Obligations” means the principal, interest and other amounts payable under

this Note.

 

(e)                                  “Transaction

Documents” shall mean each of the Company Notes, the Purchase Agreement, the

Registration Rights Agreement, the Pledge and Security Agreements securing the

Company Notes, as amended, the Company’s Officer’s Certificate dated June 13,

2003, the Purchaser’s Warrants (as defined in the Consent Agreement) and  the Consent Agreement.

 

2.                                       Events

of Default.  The occurrence of any

of the following shall constitute an “Event of Default” under this Note:

 

(a)                                  Failure

to Pay.  The Company shall fail to

pay when due any principal payment on this Note or any interest or other

payment required under the terms of this Note or any other Transaction Document

if such nonpayment is not cured by the Company within five (5) days immediately

after the date on which such payment became due and payable; or

 

(b)                                 Breaches

of Representations and Warranties. 

Any representation or warranty made by the Company herein or in any of

the other Transaction Documents shall prove false or misleading in any material

respect when made or deemed made; or

 

2

 

(c)                                  Breaches

of Other Covenants.  The Company

shall fail to observe or to perform any other material covenant, obligation,

condition or agreement contained in this Note or the other Transaction

Documents, other than those specified in Section 2(a) hereof, and such

failure shall continue for thirty (30) days after written notice thereof is

delivered to the Company; or

 

(d)                                 Cross-Default.  The Company or any of its subsidiaries shall

default under (i) any Company Note or (ii) any other bond, debenture,

note or other evidence of indebtedness for money borrowed, under any guarantee

or under any mortgage, or indenture pursuant to which there shall be issued or

by which there shall be secured or evidenced any indebtedness for money

borrowed by the Company or any of its subsidiaries, whether such indebtedness

now exists or shall hereafter be created, which default (other than a default

under a Company Note) shall have resulted in indebtedness of at least $100,000

being due and payable prior to the date on which it would otherwise become due

and payable and shall not have been cured by the Company or waived by the

lender; or

 

(e)                                  Undischarged

Judgment.  One or more judgments for

the payment of money in an amount in excess of $100,000 in the aggregate,

outstanding at any one time, shall be rendered against the Company or any of

its subsidiaries (or any combination thereof) and shall remain undischarged for

a period of thirty (30) consecutive days during which execution shall not be

effectively stayed, or any action is legally taken by a judgment creditor to

levy upon any such judgment; or

 

(f)                                    Voluntary

Bankruptcy or Insolvency Proceedings. 

The Company (and any subsidiary thereof) 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 in full or in part, (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

 

(g)                                 Involuntary

Bankruptcy or Insolvency Proceedings. 

Proceedings for the appointment of a receiver, trustee, liquidator or

custodian of the Company (and any subsidiary thereof) 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

the Company (and any subsidiary thereof) 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 case or proceeding shall not

be dismissed, discharged or stayed within ninety (90) days of commencement.

 

3

 

3.                                       Rights

of Holder Upon Default.

 

(a)                                  Upon

the occurrence or existence of any Event of Default (other than an Event of

Default referred to in Sections 2(f) or 2(g) hereof) and at any time thereafter

during the continuance of such Event of Default, the Holder may declare all

outstanding Obligations payable by the 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, anything contained herein or in

the other Transaction Documents to the contrary notwithstanding. Upon the

occurrence or existence of any Event of Default described in Sections 2(f) or

2(g) hereof, immediately and without notice, all outstanding Obligations

payable by the 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, anything contained herein or in the

other Transaction Documents to the contrary notwithstanding.  In addition to the foregoing remedies, upon

the occurrence or existence of any Event of Default, the Holder may exercise

any other right, power or remedy granted to it by the Transaction Documents or

otherwise permitted to it by law, either by suit in equity or by action at law,

or both.

 

(b)                                 In

addition to the rights of the Holder specified in subsection (a) of this

Section 3, on the date an Event of Default under this Note occurs, the

interest rate on this Note shall increase, from that date forward, to the

lesser of 15% and the maximum legally permissible interest rate, with such

interest payable solely in lawful money of the United States.

 

4.                                       Seniority;

Collateral.  To secure the Company’s

payment and performance of the Obligations and to secure the Company’s prompt,

full and faithful performance and observance of all of the provisions under

this Note and the other Transaction Documents, the Company hereby grants the

Holder the rights set forth in the Pledge and Security Agreement.  The security interest granted by the Company

under the Pledge and Security Agreement securing the indebtedness evidenced by

this Note, including all Obligations, is senior to all other liens, security

interests or encumbrances securing any other indebtedness of the Company,

subject only to Permitted Liens (as defined in the Pledge and Security

Agreement) to the extent such Permitted Liens by their express terms or

applicable law have priority equal or superior to such security interest.

 

5.                                       Prepayment

and Effect on Conversion Rights. 

This Note may be prepaid as a whole or in part at any time prior to the

Maturity Date at the election of the Company upon at least thirty (30) days

prior written notice to the Holder (the “Prepayment Notice Period”); provided

that any such prepayment shall include a prepayment premium equal to a

percentage of the amount of principal so prepaid, as determined by the date of

such prepayment, as follows:

 

4

 

	

  Prepayment Date

  	

   

  	

  Prepayment Premium %

  	

   

  
	

  May 22, 2003 –

  August 22, 2003

  	

   

  	

  5%

  	

   

  
	

  August 22, 2003

  – November 22, 2003

  	

   

  	

  4%

  	

   

  
	

  November 22,

  2003 – February 22, 2004

  	

   

  	

  3%

  	

   

  
	

  February 22,

  2004 – May 22, 2004

  	

   

  	

  2%

  	

   

  
	

  May 22, 2004 –

  August 22, 2004

  	

   

  	

  1%

  	

   

  
	

  August 22, 2004

  or later

  	

   

  	

  0%

  	

   

  

 

Any such prepayment shall

be applied first to the payment of expenses due under this Note, second to any

prepayment premium, third to interest accrued on the portion of this Note so

prepaid and fourth, if the amount of prepayment exceeds the amount of all such

expenses, prepayment penalties and accrued interest, to the payment of

principal of this Note.  Notwithstanding

the foregoing or anything to the contrary herein, any such election to prepay

the Note shall not extinguish or otherwise effect the conversion rights set

forth in Section 6 hereof with respect to the amount of principal so elected to

prepaid until after the expiration of the Prepayment Notice Period.

 

6.                                       Conversion.

 

(a)                                  Conversion

by Holder.  At any time, and from

time to time, the Holder may, at its sole and exclusive option, convert all or

any part of the principal and accrued interest outstanding under this Note into

shares of Common Stock at a conversion price per share of Common Stock equal to

$2.11 (“Conversion Shares”), subject to adjustment as provided in Section 7

hereof (the ”Conversion Price”).

 

(b)                                 Transfer

of Shares.  The Company shall cause

the transfer agent to transmit the certificates representing the Conversion

Shares to the Holder by crediting the account of the Holder’s designated broker

with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal

Agent Commission (“DWAC”) system

within three (3) business days after receipt by the Company of the Notice of

Conversion (as defined below) (the “Delivery Date”), unless in the reasonable

opinion of Company’s counsel such Conversion Shares must bear a restrictive

legend to be issued in compliance with the Securities Act of 1933, as amended,

in which case, certificates shall be delivered to Holder on or before the

Delivery Date.

 

(c)                                  Conversion

by Company.  At any time following

the date hereof, the Company may, at its sole and exclusive option, convert all

of the principal and accrued interest outstanding under this Note into shares

of Common Stock at a conversion price per share of Common Stock equal to the

Conversion Price, provided that each of the following two conditions is

satisfied:  (i) the volume weighted

average price of the Company’s Common Stock, as reported by Bloomberg Financial

LP (or, in the event that such price is not available from Bloomberg Financial

LP, a comparable nationally recognized financial reporting service), using the

VAP function for the fifteen trading days immediately prior to the date on

which the Company provides the Conversion Notice (as defined below), is equal

to or greater than $12.93 and (ii) the

 

5

 

Company’s aggregate EBITDA for the two full calendar quarters

immediately preceding the date on which the Company provides the Conversion

Notice, as set forth in the Company’s Forms 10-QSB or 10-Q and/or 10-KSB or

10-K filed with the United States Securities and Exchange Commission for such

calendar quarters, is equal to or greater than $3,750,000.  If the Company elects to exercise its

conversion right pursuant to this Section 6(b), it shall provide the Holder

with written notice of such election at least five (5) but no more than ten

(10) Business Days prior to the date of such conversion (the “Conversion

Notice”) together with evidence reasonably establishing that all conditions

precedent to such conversion have been satisfied.

 

(d)                                 Mechanics

and Effect of Conversion.  No

fractional shares of Common Stock shall be issued upon conversion of this

Note.  Upon the conversion of all of the

principal outstanding under this Note, in lieu of the Company issuing any

fractional shares to the Holder, the Company shall pay to the Holder the amount

of outstanding principal that is not so converted in cash.  On partial conversion of this Note, the

Company shall issue to the Holder (i) the shares of Common Stock into which a

portion of this Note is converted and (ii) a new senior secured convertible

promissory note having identical terms to this Note, except that the principal

amount thereof shall equal the difference between (A) the principal amount of

this Note immediately prior to such conversion minus (B) the portion of such principal

amount converted into Common Stock. 

Upon conversion of this Note pursuant to this Section 6, the Holder

shall surrender this Note, duly endorsed, at the principal office of the

Company.  At its expense, the Company

shall, as soon as practicable thereafter, issue and deliver to such Holder at

such principal office a certificate or certificates for the number of shares of

Common Stock, to which the Holder shall be entitled upon such conversion

(bearing such legends as are required by the Purchase Agreement and applicable

state and federal securities laws in the opinion of counsel to the Company),

together with any other securities and property to which the Holder is entitled

upon such conversion under the terms of this Note.  Upon full conversion of this Note, the Company shall be forever

released from all its obligations and liabilities under this Note.

 

(e)                                  Reservation

of Stock Issuable Upon Conversion. 

The Company shall at all times reserve and keep available out of its

authorized but unissued shares of capital stock, solely for the purpose of

effecting the conversion of this Note, such number of its shares of capital

stock of the Company as shall from time to time be sufficient to effect the

conversion of this Note; and if at any time the number of authorized but

unissued shares of capital stock of the Company shall not be sufficient to

effect the conversion of this Note, the Company hereby covenants and agrees to

take such corporate action as may, in the opinion of its counsel, be necessary

to increase its authorized but unissued shares of capital stock to such number

of shares as shall be sufficient for such purpose.

 

(f)                                    Payment

of Expenses and Taxes on Conversion. 

The Company shall pay all expenses, taxes and other charges payable in

connection with the preparation, execution, issuance and delivery of stock

certificates and new promissory notes pursuant to this Section 6 hereof,

except that, in the event such stock certificates or new promissory notes shall

be registered in a name or names other than the name of the

 

6

 

holder of this Note, funds sufficient to pay all stock transfer fees,

which shall be payable upon the execution and delivery of such stock

certificate or certificates or new promissory notes, shall be paid by the

holder hereof to the Company at the time of delivering this Note to the Company

upon conversion.

 

7.                                       Conversion

Price Adjustments.

 

(a)                                  Adjustment

for Stock Splits and Combinations. 

If the Company shall at any time or from time to time after June 13,

2003 effect a stock split or subdivision of the outstanding Common Stock, the

Conversion Price in effect immediately before that subdivision shall be

proportionately decreased, and, conversely, if the Company shall at any time or

from time to time after June 13, 2003 combine the outstanding shares of Common

Stock into a smaller number of shares, the Conversion Price in effect

immediately before the combination shall be proportionately increased.  Any adjustment under this Section 7(a)

shall become effective at the close of business on the date the stock split,

subdivision or combination becomes effective.

 

(b)                                 Adjustment

for Common Stock Dividends and Distributions.  If the Company at any time or from time to time after June 13, 2003

issues, or fixes a record date for the determination of holders of Common Stock

entitled to receive, a dividend or other distribution payable solely in

additional shares of Common Stock, the Conversion Price that is then in effect

shall be decreased as of the time of such issuance or, in the event such record

date is fixed, as of the close of business on such record date, by multiplying

the Conversion Price by a fraction (i) the numerator of which is the total

number of shares of Common Stock issued and outstanding immediately prior to

the time of such issuance or the close of business on such record date, and

(ii) the denominator of which is the sum of the total number of shares of

Common Stock issued and outstanding immediately prior to the time of such

issuance or the close of business on such record date plus the number of shares

of Common Stock issuable in payment of such dividend or distribution; provided,

however, that if such record date is fixed and such dividend is not fully paid

or if such distribution is not fully made on the date fixed therefor, the

Conversion Price shall be recomputed accordingly as of the close of business on

such record date and thereafter the Conversion Price shall be adjusted pursuant

to this Section 7(b) to reflect the actual payment of such dividend or

distribution.

 

(c)                                  Adjustments

for Other Dividends and Distributions. 

If the Company at any time or from time to time after June 13, 2003

issues, or fixes a record date for the determination of holders of Common Stock

entitled to receive, a dividend or other distribution payable in securities of

the Company other than shares of Common Stock or in other property, in each

such event provision shall be made so that the Holder of this Note shall

receive upon conversion hereof, in addition to the number of shares of Common

Stock receivable hereupon, the amount of securities of the Company or other

property which such Holder would have received had this Note been converted

into Common Stock on the date of such event and had it thereafter, during the

period from the date of such event to and including the conversion date,

retained such securities or other property receivable by it as aforesaid during

such period, subject to all other adjustments called for during such period under

this Section 7 with respect to the rights of the Holders

 

7

 

of this Note or with respect to such other securities or other property

by their terms.  As used herein, the

term “other property” does not include cash.

 

(d)                                 Adjustment

for Reclassification, Exchange and Substitution.  If at any time or from time to time after June 13, 2003, the

Common Stock issuable upon the conversion of this Note is changed into the same

or a different number of shares of any class or series of stock, whether by

recapitalization, reclassification or otherwise (other than a subdivision or

combination of shares or stock dividend or a reorganization, merger,

consolidation or sale of assets provided for elsewhere in this Section 7),

then in any such event the Holder shall have the right thereafter to convert

this Note into the kind and amount of stock and other securities and property

receivable upon such recapitalization, reclassification or other change by

holders of the number of shares of Common Stock into which this Note could have

been converted immediately prior to such recapitalization, reclassification or

change, all subject to further adjustment as provided herein or with respect to

such other securities or property by the terms thereof.

 

(e)                                  Sale

of Shares Below Conversion Price. 

Subject to obtaining shareholder approval, if required, pursuant to

subsection (iv) below:

 

(i)                                     If

at any time or from time to time after June 13, 2003, the Company issues or

sells, or is deemed by the provisions of clause (iii) of this Section 7(e)

to have issued or sold, Additional Shares of Common Stock (as hereinafter

defined), other than a subdivision or combination of shares of Common Stock or

as a dividend or other distribution of Common Stock as provided for elsewhere

in this Section 7, for an Effective Price (as hereinafter defined) less

than the then effective Conversion Price, then and in each such case the then

existing Conversion Price shall be reduced as of the close of business on the date

of such issue or sale to a price equal to the lowest such Effective Price.

 

(ii)                                  For

the purpose of making any adjustment required under this Section 7(e):

 

(A)                              “Additional

Shares of Common Stock” means all shares of Common Stock issued by the

Company, whether or not subsequently reacquired or retired by the Company, or

capital stock of the Company issued upon the exercise or conversion of

Convertible Securities outstanding on June 13, 2003, other than shares of

Common Stock issued or issuable:

 

(1)                                  to

employees, officers or directors of the Company, pursuant to stock purchase or

stock option plans or other arrangements that are approved by the Company’s

Board of Directors;

 

(2)                                  pursuant

to any rights, agreements, options or warrants outstanding as of the date

hereof and disclosed in writing to the Holder; and stock issued pursuant to any

such rights or agreements granted after the date hereof;

 

8

 

(3)                                  in

connection with any stock split, stock dividend or recapitalization by the

Company;

 

(4)                                  upon

conversion of any Company Notes or the Company’s Series B Preferred Stock or

upon exercise or conversion of the Purchaser’s Warrants or the Warrants issued

pursuant to the Purchase Agreement;

 

(5)                                  for

consideration other than cash pursuant to a merger, consolidation, strategic

alliance, acquisition or similar business combination approved by the Board of

Directors;

 

(6)                                  pursuant

to any equipment leasing, real property leasing or loan arrangement, or debt

financing from a bank or similar financial or lending institution approved by

the Company’s Board of Directors, the principal purpose of which is not to

raise equity capital; or

 

(7)                                  by

the Company in connection with joint ventures, manufacturing, marketing or

distribution arrangements or technology transfer or development arrangements; provided

that such strategic transactions and the issuance of shares in connection

therewith have been approved by the Company’s Board of Directors and the

principal purpose thereof is not to raise equity capital.

 

(B)                                “Aggregate

Consideration Received” by the Company for any issue or sale of securities

shall (1) to the extent it consists of cash, be computed at the gross amount of

cash received by the Company before deduction of any underwriting or similar

commissions, compensation or concessions paid or allowed by the Company in

connection with such issue or sale and without deduction of any expenses

payable by the Company, (2) to the extent it consists of property other than

cash, be computed at the fair value of that property as determined in good

faith by the Board of Directors of the Company, and (3) if Additional Shares of

Common Stock or Convertible Securities are issued or sold together with other

stock or securities or other assets of the Company for a consideration which

covers both, be computed as the portion of the consideration so received that

may be reasonably determined in good faith by the Board of Directors of the

Company to be allocable to such Additional Shares of Common Stock or

Convertible Securities.

 

(C)                                “Convertible

Securities” means stock or other securities (including options, warrants

and other rights) of the Company ultimately convertible into shares of Common

Stock.

 

(D)                               “Effective

Price” of Additional Shares of Common Stock means the quotient determined

by dividing the total number of Additional Shares of Common Stock issued or

sold, or deemed to have been issued or sold by the Company under this

Section 7(e), into the Aggregate Consideration Received, or deemed to have

been received by the Company for such issue under this Section 7(e), for

such Additional Shares of Common Stock.

 

9

 

(iii)                               For

the purpose of making any adjustment to the Conversion Price required under

this Section 7(e), if the Company issues or sells any Convertible

Securities and if the Effective Price of the shares of Common Stock issuable

upon conversion of the Convertible Securities is less than the Conversion Price

then in effect, the Company shall be deemed to have issued at the time of the

issuance of such Convertible Securities that number of Additional Shares of

Common Stock equal to the maximum number of shares of Common Stock issuable

upon conversion thereof and to have received as consideration for the issuance

of such shares an amount equal to the total amount of the consideration, if

any, received by the Company for the issuance of such Convertible Securities,

plus the minimum amounts of consideration, if any, payable to the Company (other

than by cancellation of liabilities or obligations evidenced by such

Convertible Securities) upon the conversion thereof; provided that:

 

(A)                              if

the minimum amounts of such consideration cannot be ascertained, but are a

function of antidilution or similar protective clauses, the Company shall be

deemed to have received the minimum amounts of consideration without reference

to such clauses;

 

(B)                                if

the minimum amount of consideration payable to the Company upon the conversion

of Convertible Securities is reduced over time or on the occurrence or

non-occurrence of specified events other than by reason of antidilution

adjustments, the Effective Price shall be recalculated using the figure to

which such minimum amount of consideration is reduced;

 

(C)                                if

the minimum amount of consideration payable to the Company upon the conversion

of Convertible Securities is subsequently increased, the Effective Price shall

be again recalculated using the increased minimum amount of consideration

payable to the Company upon the conversion of Convertible Securities; and

 

(D)                               no

further adjustment of the Conversion Price, adjusted or subject to adjustment

upon the issuance of such Convertible Securities, shall be made as a result of

the actual issuance of shares of Common Stock on the conversion of any such

Convertible Securities.  If the

conversion privilege represented by any such Convertible Securities shall

expire without having been exercised, the Conversion Price adjusted upon the

issuance of such Convertible Securities shall be readjusted to the Conversion

Price which would have been in effect had an adjustment been made on the basis

that the only shares of Common Stock so issued were the shares of Common Stock,

if any, actually issued or sold on the exercise of such rights of conversion of

such Convertible Securities, and such shares of Common Stock, if any, were

issued or sold for the consideration received for issuing or selling the

Convertible Securities actually converted, plus the  consideration, if any, actually received by the Company (other

than by cancellation of liabilities or obligations evidenced by such

Convertible Securities) on the conversion of such Convertible Securities,

provided that such readjustment shall not apply to prior conversions of this

Note.

 

(iv)                              Notwithstanding

anything to the contrary in this Note, unless and until the Company obtains

shareholder approval, interest shall not be paid in

 

10

 

kind and no adjustment will be made under Subsection 7(e)(i) of this

Note if such adjustment would cause the maximum number of shares of Common

Stock issuable pursuant to this Note, any other Company Note, the Purchaser

Warrants and the warrants issued pursuant to the Purchase Agreement

(collectively the “Convertible Securities”), to exceed the maximum number of

shares of Common Stock that the Company is permitted to issue, without such

shareholder approval, pursuant to and in compliance with the American Stock

Exchange Listing Standards, Policies and Requirements, or any successor

provisions so long as the Common Stock is listed on such Exchange or a

successor exchange.

 

(f)                                    Certificate

of Adjustment.  In each case of an

adjustment or readjustment of the Conversion Price for the number of shares of

Common Stock or other securities issuable upon conversion of this Note, the

Company, at its own expense, shall cause its Treasurer to compute such

adjustment or readjustment in accordance with the provisions hereof and prepare

a certificate showing such adjustment or readjustment, and shall mail such

certificate, by first class mail, postage prepaid, to the Holder at the

Holder’s address as shown in the Company’s books.  The certificate shall set forth such adjustment or readjustment,

showing in detail the facts upon which such adjustment or readjustment is

based.  No adjustment in the Conversion

Price shall be required to be made unless it would result in an increase or

decrease of at least one cent, but any adjustments not made because of this

sentence shall be carried forward and taken into account in any subsequent

adjustment otherwise required hereunder.

 

(g)                                 Notices

of Record Date.  Upon (i) the

establishment by the Company of a record of the holders of any class of

securities for the purpose of determining the holders thereof who are entitled

to receive any dividend or other distribution, or (ii) any capital

reorganization of the Company, any reclassification or recapitalization of the

capital stock of the Company, any merger or consolidation of the Company with

or into any other Company, or any transfer of all or substantially all the

assets of the Company to any other person or any voluntary or involuntary

dissolution, liquidation or winding up of the Company, the Company shall mail

to the Holder at least 20 days prior to the record date specified therein a

notice specifying (A) the date on which any such record is to be taken for the

purpose of such dividend or distribution and a description of such dividend or

distribution, (B) the date on which any such reorganization, reclassification,

transfer, consolidation, merger, dissolution, liquidation or winding up is

expected to become effective, and (C) the date, if any, that is to be fixed as

to when the holders of record of Common Stock (or other securities), shall be

entitled to exchange their shares of Common Stock (or other securities), for

securities or other property deliverable upon such reorganization,

reclassification transfer, consolidation, merger, dissolution, liquidation or

winding up.

 

(h)                                 No

Impairment.  The Company shall not

amend its Articles of Incorporation or participate in any reorganization,

transfer of assets, consolidation, merger, dissolution, issue or sale of

securities or any other voluntary action for the purpose of avoiding or seeking

to avoid the observance or performance of any of the terms to be observed or

performed hereunder by the Company, but shall at all times in good faith assist

in carrying out all such action as may be reasonably necessary or

 

11

 

appropriate in order to protect the conversion rights of the Holders of

this Note against dilution or other impairment as provided herein.

 

8.                                       Successors

and Assigns.  Subject to the

restrictions on transfer described in Sections 10 and 11 hereof, the rights and

obligations of the Company and the Holder of this Note shall be binding upon

and benefit the successors, assigns, heirs, administrators and transferees of

the parties.

 

9.                                       Waiver

and Amendment.  Any provision of

this Note may be amended, waived or modified upon the written consent of the

Company and the Holder.

 

10.                                 Transfer

of this Note or Securities Issuable on Conversion Hereof.  This Note may not be transferred in

violation of any restrictive legend set forth hereon.  Each new Note issued upon transfer of this Note or securities

issuable on conversion of this Note shall bear a legend as to the applicable

restrictions on transferability in order to ensure compliance with the

Securities Act, unless in the opinion of counsel for the Company such legend is

not required in order to ensure compliance with the Securities Act.  The Company may issue stop transfer

instructions to its transfer agent in connection with such restrictions.  Subject to the foregoing, transfers of this

Note shall be registered upon registration books maintained for such purpose by

or on behalf of the Company.  Prior to

presentation of this Note for registration of transfer, the Company shall treat

the registered holder 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 the

Company shall not be affected by notice to the contrary.

 

11.                                 Assignment

by the 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 the Company, without the

prior written consent of the Holder.

 

12.                                 Treatment

of Note.  To the extent permitted by

generally accepted accounting principles, the Company will treat, account and

report the Note as debt and not equity for accounting purposes and with respect

to any returns filed with federal, state or local tax authorities.

 

13.                                 Notices.  Any notice, request or other communication

required or permitted hereunder shall be in writing and shall be deemed to have

been duly given if personally delivered or mailed by registered or certified

mail, postage prepaid, or by recognized overnight courier, personal delivery or

facsimile transmission at the respective addresses or facsimile number of the

parties as set forth in or otherwise designated by either party pursuant to the

Purchase Agreement or on the register maintained by the Company.  Any party hereto may by notice so given

change its address or facsimile number for future notice hereunder.  Notice shall conclusively be deemed to have

been given when received.

 

12

 

14.                                 Expenses;

Waivers.  If action is instituted to

collect this Note, the Company promises to pay all costs and expenses,

including, without limitation, reasonable attorneys’ fees and costs, incurred

in connection with such action.  The

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.

 

15.                                 Governing

Law; Exclusive Jurisdiction; Jury Waiver. 

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

New York.  IN THE EVENT OF ANY DISPUTE

AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE TERMS OF

THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE

COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED

STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF

SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO

TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE

COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE

PROCEDURES SET FORTH IN SECTION 13. 

THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR

PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE.

 

[signature

appears on following page]

 

13

 

IN WITNESS WHEREOF,

the Company has caused this Note to be amended and restated as of the date

first written above.

 

	

   

  	

  IMAGEWARE SYSTEMS, INC.

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By:

  	

  /s/  S. James Miller, Jr.

  	

   

  	 

	

   

  	

   

  	

  Name:

  	

  S. James Miller, Jr.

  	 

	

   

  	

   

  	

  Title:

  	

  Chairman, CEO and

  President

  	 

							

 

14Exhibit

10.3

 

SENIOR

SECURED CONVERTIBLE PROMISSORY NOTE

 

THIS NOTE HAS NOT BEEN

REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),

OR ANY APPLICABLE STATE SECURITIES LAWS. 

IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE

REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH SUCH STATE

SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR AN

OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH

REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED.

 

	

  $1,500,000.00

  	

  June 13, 2003 

  
	

   

  	

  San Diego,

  California

  

 

FOR VALUE RECEIVED,

IMAGEWARE SYSTEMS, INC., a California corporation (the “Company”), promises to

pay to the order of Laurus Master Fund, Ltd. (the “Lender”) or its registered

assigns (the “Holder”), the principal sum of One Million Five Hundred Thousand

Dollars ($1,500,000.00), or such lesser amount as shall then equal the

outstanding principal amount hereof, together with interest thereon at a rate

equal to 12.5% per annum, compounding quarterly and computed on the basis of a

year consisting of 360 days and four quarterly periods each consisting of 90

days.  All unpaid principal, together

with any accrued but unpaid interest and other amounts payable hereunder, shall

be due and payable on the earlier of (i) May 22, 2005 (the “Maturity

Date”); or (ii) when such amounts are declared due and payable by the

Holder or made automatically due and payable upon or after (A) the occurrence

of an Event of Default (as defined below), (B) the liquidation or dissolution

of the Company, (C) any merger, consolidation, reorganization or other

business combination involving the Company, in which the stockholders of the

Company immediately prior thereto do not own, directly or indirectly,

outstanding voting securities representing more than fifty percent (50%) of the

combined outstanding voting power of the surviving entity in such merger,

consolidation or similar transaction, (D) the sale of all, or

substantially all, of the assets of the Company, or (E) the sale of voting

securities of the Company to any person (or group of persons acting in concert)

that results in such person (or group of persons) (together with their

affiliates) owning more than 50% of the outstanding voting securities of the

Company.  Interest on this Note shall be

payable in arrears on each January 1, April 1, July 1, and October 1 after the

date of issuance of this Note as follows: 

(a) through the payment due January 1, 2004, and so long as no

uncured Event of Default exists, interest, at the election of the Company and

subject to shareholder approval as provided in this Note, may be paid by the

issuance of an additional senior secured convertible promissory note identical

in all respects to this Note except that it shall have a principal amount equal

to such interest payment, or if not so paid shall be payable in lawful money of

the United States of America and (b) thereafter shall be payable in lawful

money of the United States of America.

 

This Note, along with the

Senior Secured Convertible Promissory Note dated June 13, 2003, between Company

and L.F. Global Holdings, LLC (“LF”) (the “LF Note”),

 

 

shall amend and restate the note issued pursuant to the Note and

Warrant Purchase Agreement (the ”Purchase Agreement”) dated as of

May 22, 2002 by and between the Company and Perseus 2000, L.L.C.  This Note is amended and restated pursuant

to the Consent to Assignment and Amendment dated as of June 13, 2003, by and between

Company, Lender and LF (the “Consent Agreement”).

 

The following is a

statement of the rights of the Holder and the conditions to which this Note is

subject, and to which the Holder hereof, by the acceptance of this Note,

agrees:

 

1.                                       Definitions.  Capitalized terms defined in the Purchase

Agreement and used herein without definition have the same meaning herein as in

the Purchase Agreement.  In addition, as

used in this Note, the following capitalized terms have the following meanings:

 

(a)                                  “Business

Day” means any day other than a Saturday, Sunday or other day on which the

national or state banks located in the State of New York, State of California

or the District of Columbia are authorized to be closed.

 

(b)                                 “Common

Stock” means the common stock, par value $0.01 per share, of the Company.

 

(c)                                  “Company

Notes” means any of this Note, the LF Note or any note issued in payment of

Closing Fees (as defined in the Consent Agreement) or interest on any Company

Note.

 

(d)                                 

“Obligations” means the principal, interest and other amounts payable under

this Note.

 

(e)                                  “Transaction

Documents” shall mean each of the Company Notes, the Purchase Agreement, the

Registration Rights Agreement, the Pledge and Security Agreements securing the

Company Notes, as amended, the Company’s Officer’s Certificate dated June 13,

2003, the Purchaser’s Warrants (as defined in the Consent Agreement) and  the Consent Agreement.

 

2.                                       Events

of Default.  The occurrence of any

of the following shall constitute an “Event of Default” under this Note:

 

(a)                                  Failure

to Pay.  The Company shall fail to

pay when due any principal payment on this Note or any interest or other

payment required under the terms of this Note or any other Transaction Document

if such nonpayment is not cured by the Company within five (5) days immediately

after the date on which such payment became due and payable; or

 

(b)                                 Breaches

of Representations and Warranties. 

Any representation or warranty made by the Company herein or in any of

the other Transaction Documents shall prove false or misleading in any material

respect when made or deemed made; or

 

2

 

(c)                                  Breaches

of Other Covenants.  The Company

shall fail to observe or to perform any other material covenant, obligation,

condition or agreement contained in this Note or the other Transaction

Documents, other than those specified in Section 2(a) hereof, and such

failure shall continue for thirty (30) days after written notice thereof is

delivered to the Company; or

 

(d)                                 Cross-Default.  The Company or any of its subsidiaries shall

default under (i) any Company Note or (ii) any other bond, debenture,

note or other evidence of indebtedness for money borrowed, under any guarantee

or under any mortgage, or indenture pursuant to which there shall be issued or

by which there shall be secured or evidenced any indebtedness for money

borrowed by the Company or any of its subsidiaries, whether such indebtedness

now exists or shall hereafter be created, which default (other than a default

under a Company Note) shall have resulted in indebtedness of at least $100,000

being due and payable prior to the date on which it would otherwise become due

and payable and shall not have been cured by the Company or waived by the

lender; or

 

(e)                                  Undischarged

Judgment.  One or more judgments for

the payment of money in an amount in excess of $100,000 in the aggregate,

outstanding at any one time, shall be rendered against the Company or any of

its subsidiaries (or any combination thereof) and shall remain undischarged for

a period of thirty (30) consecutive days during which execution shall not be

effectively stayed, or any action is legally taken by a judgment creditor to

levy upon any such judgment; or

 

(f)                                    Voluntary

Bankruptcy or Insolvency Proceedings. 

The Company (and any subsidiary thereof) 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 in full or in part, (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

 

(g)                                 Involuntary

Bankruptcy or Insolvency Proceedings. 

Proceedings for the appointment of a receiver, trustee, liquidator or

custodian of the Company (and any subsidiary thereof) 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

the Company (and any subsidiary thereof) 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 case or proceeding shall not

be dismissed, discharged or stayed within ninety (90) days of commencement.

 

3

 

3.                                       Rights

of Holder Upon Default.

 

(a)                                  Upon

the occurrence or existence of any Event of Default (other than an Event of

Default referred to in Sections 2(f) or 2(g) hereof) and at any time thereafter

during the continuance of such Event of Default, the Holder may declare all

outstanding Obligations payable by the 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, anything contained herein or in

the other Transaction Documents to the contrary notwithstanding. Upon the

occurrence or existence of any Event of Default described in Sections 2(f) or

2(g) hereof, immediately and without notice, all outstanding Obligations

payable by the 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, anything contained herein or in the

other Transaction Documents to the contrary notwithstanding.  In addition to the foregoing remedies, upon

the occurrence or existence of any Event of Default, the Holder may exercise any

other right, power or remedy granted to it by the Transaction Documents or

otherwise permitted to it by law, either by suit in equity or by action at law,

or both.

 

(b)                                 In

addition to the rights of the Holder specified in subsection (a) of this

Section 3, on the date an Event of Default under this Note occurs, the

interest rate on this Note shall increase, from that date forward, to the

lesser of 15% and the maximum legally permissible interest rate, with such

interest payable solely in lawful money of the United States.

 

4.                                       Seniority;

Collateral.  To secure the Company’s

payment and performance of the Obligations and to secure the Company’s prompt,

full and faithful performance and observance of all of the provisions under

this Note and the other Transaction Documents, the Company hereby grants the

Holder the rights set forth in the Pledge and Security Agreement.  The security interest granted by the Company

under the Pledge and Security Agreement securing the indebtedness evidenced by

this Note, including all Obligations, is senior to all other liens, security

interests or encumbrances securing any other indebtedness of the Company,

subject only to Permitted Liens (as defined in the Pledge and Security

Agreement) to the extent such Permitted Liens by their express terms or

applicable law have priority equal or superior to such security interest.

 

5.                                       Prepayment

and Effect on Conversion Rights. 

This Note may be prepaid as a whole or in part at any time prior to the

Maturity Date at the election of the Company upon at least thirty (30) days

prior written notice to the Holder (the “Prepayment Notice Period”); provided

that any such prepayment shall include a prepayment premium equal to a

percentage of the amount of principal so prepaid, as determined by the date of

such prepayment, as follows:

 

4

 

	

  Prepayment Date

  	

   

  	

  Prepayment Premium %

  	

   

  
	

  May

  22, 2003 – August 22, 2003

  	

   

  	

  5%

  	

   

  
	

  August

  22, 2003 – November 22, 2003

  	

   

  	

  4%

  	

   

  
	

  November

  22, 2003 – February 22, 2004

  	

   

  	

  3%

  	

   

  
	

  February

  22, 2004 – May 22, 2004

  	

   

  	

  2%

  	

   

  
	

  May

  22, 2004 – August 22, 2004

  	

   

  	

  1%

  	

   

  
	

  August

  22, 2004 or later

  	

   

  	

  0%

  	

   

  

 

Any such

prepayment shall be applied first to the payment of expenses due under this

Note, second to any prepayment premium, third to interest accrued on the

portion of this Note so prepaid and fourth, if the amount of prepayment exceeds

the amount of all such expenses, prepayment penalties and accrued interest, to

the payment of principal of this Note. 

Notwithstanding the foregoing or anything to the contrary herein, any

such election to prepay the Note shall not extinguish or otherwise effect the

conversion rights set forth in Section 6 hereof with respect to the amount of

principal so elected to prepaid until after the expiration of the Prepayment

Notice Period.

 

6.                                       Conversion.

 

(a)                                  Conversion

by Holder.  At any time, and from

time to time, the Holder may, at its sole and exclusive option, convert all or

any part of the principal and accrued interest outstanding under this Note into

shares of Common Stock at a conversion price per share of Common Stock equal to

$2.11 (“Conversion Shares”), subject to adjustment as provided in Section 7

hereof (the “Conversion Price”). 

The Lender shall not be entitled to convert that amount of the Laurus

Note which would result in beneficial ownership by the Lender of more than

4.99% of the outstanding shares of Common Stock of the Company.  For the purposes of the immediately

preceding sentence, beneficial ownership shall be determined in accordance with

Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder.  A subsequent Holder of this Note shall not

be limited to the foregoing aggregate limit on conversions to only 4.99%,

unless such Holder elects in writing delivered to the Company to remain subject

to such limitation.  Any Holder may void

the conversion limitation described in this Section 6(a) upon 75 days prior

notice to the Company. Upon an Event of Default which has occurred and is

continuing under this Note, the conversion limitation in this Section 6(a)

shall automatically become null and void.

 

(b)                                 Transfer

of Shares.  The Company shall cause

the transfer agent to transmit the certificates representing the Conversion

Shares to the Holder by crediting the account of the Holder’s designated broker

with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal

Agent Commission (“DWAC”) system

within three (3) business days after receipt by the Company of the Notice of

Conversion (as defined below) (the “Delivery Date”), unless in the reasonable

opinion of Company’s counsel such Conversion Shares must bear a restrictive

legend to be issued in compliance with the Securities Act of 1933, as amended,

in which case, certificates shall be delivered to Holder on or before the

Delivery Date.

 

5

 

(c)                                  Conversion

by Company.  At any time following

the date hereof, the Company may, at its sole and exclusive option, convert all

of the principal and accrued interest outstanding under this Note into shares

of Common Stock at a conversion price per share of Common Stock equal to the

Conversion Price, provided that each of the following two conditions is

satisfied:  (i) the volume weighted

average price of the Company’s Common Stock, as reported by Bloomberg Financial

LP (or, in the event that such price is not available from Bloomberg Financial

LP, a comparable nationally recognized financial reporting service), using the

VAP function for the fifteen trading days immediately prior to the date on

which the Company provides the Conversion Notice (as defined below), is equal

to or greater than $12.93 and (ii) the Company’s aggregate EBITDA for the

two full calendar quarters immediately preceding the date on which the Company

provides the Conversion Notice, as set forth in the Company’s Forms 10-QSB or

10-Q and/or 10-KSB or 10-K filed with the United States Securities and Exchange

Commission for such calendar quarters, is equal to or greater than

$3,750,000.  If the Company elects to

exercise its conversion right pursuant to this Section 6(b), it shall provide

the Holder with written notice of such election at least five (5) but no more

than ten (10) Business Days prior to the date of such conversion (the

“Conversion Notice”) together with evidence reasonably establishing that all

conditions precedent to such conversion have been satisfied.

 

(d)                                 Mechanics

and Effect of Conversion.  No

fractional shares of Common Stock shall be issued upon conversion of this

Note.  Upon the conversion of all of the

principal outstanding under this Note, in lieu of the Company issuing any

fractional shares to the Holder, the Company shall pay to the Holder the amount

of outstanding principal that is not so converted in cash.  On partial conversion of this Note, the

Company shall issue to the Holder (i) the shares of Common Stock into which a

portion of this Note is converted and (ii) a new senior secured convertible

promissory note having identical terms to this Note, except that the principal

amount thereof shall equal the difference between (A) the principal amount of

this Note immediately prior to such conversion minus (B) the portion of such

principal amount converted into Common Stock. 

Upon conversion of this Note pursuant to this Section 6, the Holder

shall surrender this Note, duly endorsed, at the principal office of the

Company.  At its expense, the Company

shall, as soon as practicable thereafter, issue and deliver to such Holder at

such principal office a certificate or certificates for the number of shares of

Common Stock, to which the Holder shall be entitled upon such conversion

(bearing such legends as are required by the Purchase Agreement and applicable

state and federal securities laws in the opinion of counsel to the Company),

together with any other securities and property to which the Holder is entitled

upon such conversion under the terms of this Note.  Upon full conversion of this Note, the Company shall be forever

released from all its obligations and liabilities under this Note.

 

(e)                                  Reservation

of Stock Issuable Upon Conversion. 

The Company shall at all times reserve and keep available out of its

authorized but unissued shares of capital stock, solely for the purpose of

effecting the conversion of this Note, such number of its shares of capital

stock of the Company as shall from time to time be sufficient to effect the

conversion of this Note; and if at any time the number of authorized but

unissued shares of capital stock of the Company shall not be sufficient to

effect the

 

6

 

conversion of this

Note, the Company hereby covenants and agrees to take such corporate action as

may, in the opinion of its counsel, be necessary to increase its authorized but

unissued shares of capital stock to such number of shares as shall be sufficient

for such purpose.

 

(f)                                    Payment

of Expenses and Taxes on Conversion. 

The Company shall pay all expenses, taxes and other charges payable in

connection with the preparation, execution, issuance and delivery of stock

certificates and new promissory notes pursuant to this Section 6 hereof,

except that, in the event such stock certificates or new promissory notes shall

be registered in a name or names other than the name of the holder of this

Note, funds sufficient to pay all stock transfer fees, which shall be payable

upon the execution and delivery of such stock certificate or certificates or

new promissory notes, shall be paid by the holder hereof to the Company at the

time of delivering this Note to the Company upon conversion.

 

7.                                       Conversion

Price Adjustments.

 

(a)                                  Adjustment

for Stock Splits and Combinations. 

If the Company shall at any time or from time to time after June 13,

2003 effect a stock split or subdivision of the outstanding Common Stock, the

Conversion Price in effect immediately before that subdivision shall be

proportionately decreased, and, conversely, if the Company shall at any time or

from time to time after the June 13, 2003 combine the outstanding shares of

Common Stock into a smaller number of shares, the Conversion Price in effect

immediately before the combination shall be proportionately increased.  Any adjustment under this Section 7(a)

shall become effective at the close of business on the date the stock split,

subdivision or combination becomes effective.

 

(b)                                 Adjustment

for Common Stock Dividends and Distributions.  If the Company at any time or from time to time after June 13,

2003 issues, or fixes a record date for the determination of holders of Common

Stock entitled to receive, a dividend or other distribution payable solely in

additional shares of Common Stock, the Conversion Price that is then in effect

shall be decreased as of the time of such issuance or, in the event such record

date is fixed, as of the close of business on such record date, by multiplying

the Conversion Price by a fraction (i) the numerator of which is the total

number of shares of Common Stock issued and outstanding immediately prior to

the time of such issuance or the close of business on such record date, and

(ii) the denominator of which is the sum of the total number of shares of

Common Stock issued and outstanding immediately prior to the time of such

issuance or the close of business on such record date plus the number of shares

of Common Stock issuable in payment of such dividend or distribution; provided,

however, that if such record date is fixed and such dividend is not fully paid

or if such distribution is not fully made on the date fixed therefor, the

Conversion Price shall be recomputed accordingly as of the close of business on

such record date and thereafter the Conversion Price shall be adjusted pursuant

to this Section 7(b) to reflect the actual payment of such dividend or

distribution.

 

(c)                                  Adjustments

for Other Dividends and Distributions. 

If the Company at any time or from time to time after June 13, 2003

issues, or fixes a record

 

7

 

date for the

determination of holders of Common Stock entitled to receive, a dividend or

other distribution payable in securities of the Company other than shares of

Common Stock or in other property, in each such event provision shall be made

so that the Holder of this Note shall receive upon conversion hereof, in

addition to the number of shares of Common Stock receivable hereupon, the

amount of securities of the Company or other property which such Holder would

have received had this Note been converted into Common Stock on the date of

such event and had it thereafter, during the period from the date of such event

to and including the conversion date, retained such securities or other

property receivable by it as aforesaid during such period, subject to all other

adjustments called for during such period under this Section 7 with

respect to the rights of the Holders of this Note or with respect to such other

securities or other property by their terms. 

As used herein, the term “other property” does not include cash.

 

(d)                                 Adjustment

for Reclassification, Exchange and Substitution.  If at any time or from time to time after June 13, 2003, the

Common Stock issuable upon the conversion of this Note is changed into the same

or a different number of shares of any class or series of stock, whether by

recapitalization, reclassification or otherwise (other than a subdivision or

combination of shares or stock dividend or a reorganization, merger,

consolidation or sale of assets provided for elsewhere in this Section 7),

then in any such event the Holder shall have the right thereafter to convert

this Note into the kind and amount of stock and other securities and property

receivable upon such recapitalization, reclassification or other change by

holders of the number of shares of Common Stock into which this Note could have

been converted immediately prior to such recapitalization, reclassification or

change, all subject to further adjustment as provided herein or with respect to

such other securities or property by the terms thereof.

 

(e)                                  Sale

of Shares Below Conversion Price. 

Subject to obtaining shareholder approval, if required, pursuant to

subsection (iv) below:

 

(i)                                     If

at any time or from time to time after June 13, 2003, the Company issues or

sells, or is deemed by the provisions of clause (iii) of this Section 7(e)

to have issued or sold, Additional Shares of Common Stock (as hereinafter

defined), other than a subdivision or combination of shares of Common Stock or

as a dividend or other distribution of Common Stock as provided for elsewhere

in this Section 7, for an Effective Price (as hereinafter defined) less

than the then effective Conversion Price, then and in each such case the then

existing Conversion Price shall be reduced as of the close of business on the

date of such issue or sale to a price equal to the lowest such Effective Price.

 

(ii)                                  For

the purpose of making any adjustment required under this Section 7(e):

 

(A)                              “Additional

Shares of Common Stock” means all shares of Common Stock issued by the

Company, whether or not subsequently reacquired or retired by the Company, or

capital stock of the Company issued upon the exercise or conversion of Convertible

Securities outstanding on June 13, 2003, other than shares of Common Stock

issued or issuable:

 

8

 

(1)                                  to

employees, officers or directors of the Company, pursuant to stock purchase or

stock option plans or other arrangements that are approved by the Company’s

Board of Directors;

 

(2)                                  pursuant

to any rights, agreements, options or warrants outstanding as of the date

hereof and disclosed in writing to the Holder; and stock issued pursuant to any

such rights or agreements granted after the date hereof;

 

(3)                                  in

connection with any stock split, stock dividend or recapitalization by the

Company;

 

(4)                                  upon

conversion of any Company Notes or the Company’s Series B Preferred Stock or

upon exercise or conversion of the Purchaser’s Warrants or the Warrants issued

pursuant to the Purchase Agreement;

 

(5)                                  for

consideration other than cash pursuant to a merger, consolidation, strategic

alliance, acquisition or similar business combination approved by the Board of

Directors;

 

(6)                                  pursuant

to any equipment leasing, real property leasing or loan arrangement, or debt

financing from a bank or similar financial or lending institution approved by

the Company’s Board of Directors, the principal purpose of which is not to raise

equity capital; or

 

(7)                                  by

the Company in connection with joint ventures, manufacturing, marketing or

distribution arrangements or technology transfer or development arrangements; provided

that such strategic transactions and the issuance of shares in connection

therewith have been approved by the Company’s Board of Directors and the

principal purpose thereof is not to raise equity capital.

 

(B)                                “Aggregate

Consideration Received” by the Company for any issue or sale of securities

shall (1) to the extent it consists of cash, be computed at the gross amount of

cash received by the Company before deduction of any underwriting or similar

commissions, compensation or concessions paid or allowed by the Company in

connection with such issue or sale and without deduction of any expenses

payable by the Company, (2) to the extent it consists of property other than

cash, be computed at the fair value of that property as determined in good

faith by the Board of Directors of the Company, and (3) if Additional Shares of

Common Stock or Convertible Securities are issued or sold together with other

stock or securities or other assets of the Company for a consideration which

covers both, be computed as the portion of the consideration so received that

may be reasonably determined in good faith by the Board of Directors of the

Company to be allocable to such Additional Shares of Common Stock or

Convertible Securities.

 

9

 

(C)                                “Convertible

Securities” means stock or other securities (including options, warrants

and other rights) of the Company ultimately convertible into shares of Common

Stock.

 

(D)                               “Effective

Price” of Additional Shares of Common Stock means the quotient determined

by dividing the total number of Additional Shares of Common Stock issued or

sold, or deemed to have been issued or sold by the Company under this

Section 7(e), into the Aggregate Consideration Received, or deemed to have

been received by the Company for such issue under this Section 7(e), for

such Additional Shares of Common Stock.

 

(iii)                               For the purpose of

making any adjustment to the Conversion Price required under this

Section 7(e), if the Company issues or sells any Convertible Securities

and if the Effective Price of the shares of Common Stock issuable upon

conversion of the Convertible Securities is less than the Conversion Price then

in effect, the Company shall be deemed to have issued at the time of the

issuance of such Convertible Securities that number of Additional Shares of

Common Stock equal to the maximum number of shares of Common Stock issuable

upon conversion thereof and to have received as consideration for the issuance

of such shares an amount equal to the total amount of the consideration, if

any, received by the Company for the issuance of such Convertible Securities,

plus the minimum amounts of consideration, if any, payable to the Company

(other than by cancellation of liabilities or obligations evidenced by such

Convertible Securities) upon the conversion thereof; provided that:

 

(A)                              if

the minimum amounts of such consideration cannot be ascertained, but are a

function of antidilution or similar protective clauses, the Company shall be

deemed to have received the minimum amounts of consideration without reference

to such clauses;

 

(B)                                if

the minimum amount of consideration payable to the Company upon the conversion

of Convertible Securities is reduced over time or on the occurrence or

non-occurrence of specified events other than by reason of antidilution

adjustments, the Effective Price shall be recalculated using the figure to

which such minimum amount of consideration is reduced;

 

(C)                                if

the minimum amount of consideration payable to the Company upon the conversion

of Convertible Securities is subsequently increased, the Effective Price shall

be again recalculated using the increased minimum amount of consideration

payable to the Company upon the conversion of Convertible Securities; and

 

(D)                               no

further adjustment of the Conversion Price, adjusted or subject to adjustment

upon the issuance of such Convertible Securities, shall be made as a result of

the actual issuance of shares of Common Stock on the conversion of any such

Convertible Securities.  If the

conversion privilege represented by any such Convertible Securities shall expire

without having been exercised, the Conversion Price adjusted upon the issuance

of such Convertible Securities shall be readjusted to the Conversion Price

which would have been in effect had an adjustment been made on the

 

10

 

basis that the

only shares of Common Stock so issued were the shares of Common Stock, if any,

actually issued or sold on the exercise of such rights of conversion of such

Convertible Securities, and such shares of Common Stock, if any, were issued or

sold for the consideration received for issuing or selling the Convertible

Securities actually converted, plus the 

consideration, if any, actually received by the Company (other than by

cancellation of liabilities or obligations evidenced by such Convertible

Securities) on the conversion of such Convertible Securities, provided that

such readjustment shall not apply to prior conversions of this Note.

 

(iv)                              Notwithstanding

anything to the contrary in this Note, unless and until the Company obtains

shareholder approval, interest shall not be paid in kind and no adjustment will

be made under Subsection 7(e)(i) of this Note if such adjustment would cause

the maximum number of shares of Common Stock issuable pursuant to this Note,

any other Company Note, the Purchaser Warrants and the warrants issued pursuant

to the Purchase Agreement (collectively the “Convertible Securities”), to

exceed the maximum number of shares of Common Stock that the Company is

permitted to issue, without such shareholder approval, pursuant to and in

compliance with the American Stock Exchange Listing Standards, Policies and

Requirements, or any successor provisions so long as the Common Stock is listed

on such Exchange or a successor exchange.

 

(f)                                    Certificate

of Adjustment.  In each case of an

adjustment or readjustment of the Conversion Price for the number of shares of

Common Stock or other securities issuable upon conversion of this Note, the

Company, at its own expense, shall cause its Treasurer to compute such adjustment

or readjustment in accordance with the provisions hereof and prepare a

certificate showing such adjustment or readjustment, and shall mail such

certificate, by first class mail, postage prepaid, to the Holder at the

Holder’s address as shown in the Company’s books.  The certificate shall set forth such adjustment or readjustment,

showing in detail the facts upon which such adjustment or readjustment is

based.  No adjustment in the Conversion

Price shall be required to be made unless it would result in an increase or

decrease of at least one cent, but any adjustments not made because of this

sentence shall be carried forward and taken into account in any subsequent

adjustment otherwise required hereunder.

 

(g)                                 Notices

of Record Date.  Upon (i) the

establishment by the Company of a record of the holders of any class of

securities for the purpose of determining the holders thereof who are entitled

to receive any dividend or other distribution, or (ii) any capital

reorganization of the Company, any reclassification or recapitalization of the

capital stock of the Company, any merger or consolidation of the Company with

or into any other Company, or any transfer of all or substantially all the

assets of the Company to any other person or any voluntary or involuntary

dissolution, liquidation or winding up of the Company, the Company shall mail

to the Holder at least 20 days prior to the record date specified therein a

notice specifying (A) the date on which any such record is to be taken for the

purpose of such dividend or distribution and a description of such dividend or

distribution, (B) the date on which any such reorganization, reclassification,

transfer, consolidation, merger, dissolution, liquidation or winding up is

expected to become effective, and (C) the date, if any, that is to be fixed as

to when the holders of record of Common Stock (or other securities), shall be

entitled to

 

11

 

exchange their

shares of Common Stock (or other securities), for securities or other property

deliverable upon such reorganization, reclassification transfer, consolidation,

merger, dissolution, liquidation or winding up.

 

(h)                                 No

Impairment.  The Company shall not

amend its Articles of Incorporation or participate in any reorganization,

transfer of assets, consolidation, merger, dissolution, issue or sale of

securities or any other voluntary action for the purpose of avoiding or seeking

to avoid the observance or performance of any of the terms to be observed or

performed hereunder by the Company, but shall at all times in good faith assist

in carrying out all such action as may be reasonably necessary or appropriate

in order to protect the conversion rights of the Holders of this Note against

dilution or other impairment as provided herein.

 

8.                                       Successors

and Assigns.  Subject to the

restrictions on transfer described in Sections 10 and 11 hereof, the rights and

obligations of the Company and the Holder of this Note shall be binding upon

and benefit the successors, assigns, heirs, administrators and transferees of

the parties.

 

9.                                       Waiver

and Amendment.  Any provision of

this Note may be amended, waived or modified upon the written consent of the

Company and the Holder.

 

10.                                 Transfer

of this Note or Securities Issuable on Conversion Hereof.  This Note may not be transferred in

violation of any restrictive legend set forth hereon.  Each new Note issued upon transfer of this Note or securities

issuable on conversion of this Note shall bear a legend as to the applicable

restrictions on transferability in order to ensure compliance with the

Securities Act, unless in the opinion of counsel for the Company such legend is

not required in order to ensure compliance with the Securities Act.  The Company may issue stop transfer

instructions to its transfer agent in connection with such restrictions.  Subject to the foregoing, transfers of this

Note shall be registered upon registration books maintained for such purpose by

or on behalf of the Company.  Prior to

presentation of this Note for registration of transfer, the Company shall treat

the registered holder 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 the

Company shall not be affected by notice to the contrary.

 

11.                                 Assignment

by the 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 the Company, without the

prior written consent of the Holder.

 

12.                                 Treatment

of Note.  To the extent permitted by

generally accepted accounting principles, the Company will treat, account and

report the Note as debt and not equity for accounting purposes and with respect

to any returns filed with federal, state or local tax authorities.

 

13.                                 Notices.  Any notice, request or other communication

required or permitted hereunder shall be in writing and shall be deemed to have

been duly given if

 

12

 

personally

delivered or mailed by registered or certified mail, postage prepaid, or by

recognized overnight courier, personal delivery or facsimile transmission at

the respective addresses or facsimile number of the parties as set forth in or

otherwise designated by either party pursuant to the Purchase Agreement or on

the register maintained by the Company. 

Any party hereto may by notice so given change its address or facsimile

number for future notice hereunder.  Notice shall conclusively be deemed to have been given when

received.

 

14.                                 Expenses;

Waivers.  If action is instituted to

collect this Note, the Company promises to pay all costs and expenses,

including, without limitation, reasonable attorneys’ fees and costs, incurred

in connection with such action.  The

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.

 

15.                                 Governing

Law; Exclusive Jurisdiction; Jury Waiver. 

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

New York.  IN THE EVENT OF ANY DISPUTE

AMONG OR BETWEEN ANY OF THE PARTIES TO THIS NOTE ARISING OUT OF THE TERMS OF

THIS NOTE, THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE

COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, OR THE UNITED

STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR RESOLUTION OF

SUCH DISPUTE, AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION OR SEEK TO

TRANSFER ANY ACTION RELATING TO SUCH DISPUTE TO ANY OTHER JURISDICTION. THE

COMPANY AND THE HOLDER AGREE TO ACCEPT SERVICE OF PROCESS PURSUANT TO THE PROCEDURES

SET FORTH IN SECTION 13.  THE

PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO

ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE.

 

[signature appears on following page]

 

13

 

IN WITNESS

WHEREOF, the Company has caused this Note to be amended and

restated as of the date first written above.

 

	

   

  	

  IMAGEWARE SYSTEMS, INC.

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ S. James

  Miller, Jr.

  	

   

  
	

   

  	

   

  	

  Name: S.

  James Miller, Jr.

  	

   

  
	

   

  	

   

  	

  Title:   Chairman,

  CEO and President

  
					

 

14

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00053-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00053-of-00352.parquet"}]]