Document:

Exhibit

10.4

 

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.

 

	

  $106,000.00

  	

   

  	

  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 One Hundred Six Thousand Dollars ($106,000.00), 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 relates to the Senior Secured Convertible

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

Fund, Ltd. (“Laurus”) (the

 

 

“Laurus Note”), and the Senior Secured Convertible Promissory Note

dated June 13, 2003, by and between Company and L.F. Global Holdings, LLC

(“LF”) (the “LF Note”), and is 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., as 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 LF Note, the Laurus Note or any note issued

in payment of 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’s

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

10.5

 

THE SECURITIES EVIDENCED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN

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

AND MAY NOT BE SOLD, TRANSFERRED, OR ASSIGNED UNLESS THERE IS AN EFFECTIVE

REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS

MADE IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT, OR THE COMPANY

RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY

SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR

HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY

REQUIREMENTS OF SUCH ACT.

 

No.:  2003-2

 

WARRANT

TO PURCHASE COMMON STOCK

OF

IMAGEWARE SYSTEMS, INC.

 

(void after June 13,

2009)

 

1.                                  Issuance of Warrant. 

FOR VALUE RECEIVED, on and after the date of issuance of this Warrant,

and subject to the terms and conditions herein set forth, the Holder (as

defined below) is entitled to purchase from ImageWare Systems, Inc., a

California corporation (the “Company”), at any time before 5:00 p.m. New York

time on June 13, 2009 (the “Termination Date”), at a price per share equal to

the Warrant Price (as defined below and subject to adjustment as described

below), the Warrant Stock (as defined below and subject to adjustment as

described below) upon exercise of this warrant (this “Warrant”) pursuant to

Section 6 hereof.

 

2.               Definitions.  As used in

this Warrant, the following terms have the definitions ascribed to them below:

 

(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 or the 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)                                  “Holder” means L.F. Global Holdings, LLC,

or its assigns.

 

(d)                                 “Purchase Agreement” means the Note and

Warrant Purchase Agreement dated as of May 22, 2002 by and between the

Company and Perseus 2000,L.L.C., as amended.

 

(e)                                  “Company Notes” means all Notes issued to

L.F. Global Holdings, LLC (“LF”), and Laurus Master Fund, Ltd. (“Laurus”),

pursuant to the Consent to Assignment and

 

 

Amendment Agreement by and among LF, Laurus and the Company dated June

13, 2003 (the “Consent Agreement”).

 

(f)                                    “Warrant Price” means $2.11 per share,

subject to adjustment as described in Section 3 below.

 

(g)                                 “Warrant Stock” means the shares of

Common Stock (or other securities) purchasable upon exercise of this Warrant or

issuable upon conversion of this Warrant. 

The total number of shares to be issued upon the exercise of this

Warrant shall be 1,021,687, subject to adjustment as described in

Section 3 below.

 

3.                                  Adjustments and Notices. 

The Warrant Price and the number of shares of Warrant Stock shall be subject

to adjustment from time to time in accordance with this Section 3.

 

(a)                                  Subdivision, Stock Dividends or

Combinations.  In case the Company shall at any time

subdivide the outstanding shares of Common Stock or shall issue a stock

dividend with respect to the Common Stock, the Warrant Price in effect

immediately prior to such subdivision or the issuance of such dividend shall be

proportionately decreased, and in case the Company shall at any time combine

the outstanding shares of the Common Stock, the Warrant Price in effect

immediately prior to such combination shall be proportionately increased, in

each case effective at the close of business on the date of such subdivision,

dividend or combination, as the case may be.

 

(b)                                 Reclassification, Exchange, Substitution,

In-Kind Distribution.  Upon any reclassifications, exchange,

substitution or other event that results in a change of the number and/or class

of the securities issuable upon exercise or conversion of this Warrant or upon

the payment of a dividend in securities or property other than shares of Common

Stock, the Holder shall be entitled to receive, upon exercise or conversion of

this Warrant, the number and kind of securities and property that the Holder

would have received if this Warrant had been exercised or converted immediately

before the record date for such reclassification, exchange, substitution, or

other event or immediately prior to the record date for such dividend.  The Company or its successor shall promptly

issue to the Holder a new warrant for such new securities or other

property.  The new warrant shall provide

for adjustments which shall be as nearly equivalent as may be practicable to

the adjustments provided for in this Section 3 including, without limitation,

adjustments to the Warrant Price and to the number of securities or property

issuable upon exercise or conversion of the new warrant.  The provisions of this Section 3(b) shall

similarly apply to successive reclassifications, exchanges, substitutions, or

other events and successive dividends. 

As used in this Section 3(b), the term “property” shall not include

cash.

 

(c)                                  Reorganization, Merger etc. 

In case of any (i) merger or consolidation of the Company into or with

another corporation where the Company is not the surviving corporation, (ii)

sale, transfer or lease (but not including a transfer or lease by pledge or

mortgage to a bona fide lender) of all or substantially all of the assets of

the Company or (iii) sale by the Company’s shareholders of 50% or more of

the Company’s outstanding securities in one or more related transactions, the

Company, or such successor or purchasing corporation, as the case may be,

shall, as a condition to closing any such reorganization, merger or sale, duly

execute and deliver to the Holder hereof a new warrant so that the Holder shall

have

 

2

 

the right to receive, at a total purchase price not to exceed that

payable upon the exercise or conversion of the unexercised or unconverted

portion of this Warrant, and in lieu of the shares of the Common Stock

theretofore issuable upon exercise or conversion of this Warrant, the kind and

amount of shares of stock, other securities, money and property receivable upon

such reorganization, merger or sale by the Holder of the number of shares of

Common Stock then purchasable under this Warrant.  Such new warrant shall provide for adjustments that shall be as

nearly equivalent as may be practicable to the adjustments provided for in this

Section 3.  The provisions of this

subparagraph (c) shall similarly apply to successive reorganizations, mergers

and sales.

 

(d)                                 Dilutive Issuances.    (i)                   Subject to obtaining shareholder approval, if

required, pursuant to subsection (vii) below, if the Company, at any time or

from time to time after the date hereof, shall issue any Additional Stock (as

defined below) without consideration or for an Effective Price less than the

Warrant Price in effect immediately prior to the issuance of such Additional

Stock, 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 Warrant, then and in each such case the then existing Warrant 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.  “Effective Price” of Additional Stock means the quotient

determined by dividing the total number of shares of Additional Stock issued or

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

into the aggregate consideration received, or deemed to have been received by

the Company for such issue under this Section, for such Additional Stock.

 

(ii)                                  In

the case of the issuance of Common Stock for cash, the consideration received

therefor shall be deemed to be the amount of cash paid therefor before

deducting any reasonable discounts, commissions or other expenses allowed, paid

or incurred by the company for any underwriting or otherwise in connection with

the issuance and sale thereof.

 

(iii)                               In the case of the

issuance of Common Stock for a consideration in whole or in part other than

cash, the consideration other than cash received therefor shall be deemed to be

the fair value thereof as reasonably determined by the Board of Directors of

the Company in its good faith judgment irrespective of any accounting

treatment.

 

(iv)                              In

the case of the issuance, whether before, on or after the date hereof, of

options to purchase or rights to subscribe for Common Stock, securities by

their terms convertible into or exchangeable for Common Stock or options to

purchase or rights to subscribe for such convertible or exchangeable securities

(which are not excluded from the definition of Additional Stock), the following

provisions shall apply:

 

(A)                              The

aggregate maximum number of shares of Common Stock deliverable upon exercise of

such options to purchase or rights to subscribe for Common Stock shall be

deemed to have been issued at the time such options or rights were issued and

for a consideration equal to the consideration (determined in the manner

provided in clauses (ii) or (iii)), if any, received by the Company upon the

issuance of such options or rights plus the minimum purchase price provided in

such options or rights (without taking into account potential anti-dilution

adjustments) for the Common Stock covered thereby.

 

3

 

(B)                                The

aggregate maximum number of shares of Common Stock deliverable upon conversion

of or in exchange for any such convertible or exchangeable securities or upon

the exercise of options to purchase or rights to subscribe for such convertible

or exchangeable securities and subsequent conversion or exchange thereof shall

be deemed to have been issued at the time such securities were issued or such

options or rights were issued and for a consideration equal to the

consideration, if any, received by the corporation for any such securities and

related options or rights (excluding any cash received on account of accrued

interest or accrued dividends), plus the additional consideration, if any, to

be received by the Company upon the conversion or exchange of such securities

or the exercise of any related options or rights (the consideration in each case

to be determined in the manner provided in clauses (ii) or (iii)).

 

(C)                                In

the event of any change in the number of shares of Common Stock deliverable or

any increase in the consideration payable to the Company upon exercise of such

options or rights or upon conversion of or in exchange for such convertible or

exchangeable securities, including, but not limited to, a change resulting from

the antidilution provisions thereof, the Warrant Price obtained with respect to

the adjustment that was made upon the issuance of such options, rights or

securities, and any subsequent adjustments based thereon, shall be recomputed

to reflect such change, but no further adjustment shall be made for the actual

issuance of Common Stock or any payment of such consideration upon the exercise

of any such options or rights or the conversion or exchange of such securities.

 

(D)                               Upon

the expiration of any such options or rights, the termination of any such

rights to convert or exchange or the expiration of any options or rights related

to such convertible or exchangeable securities, the Warrant Price obtained with

respect to the adjustment which was made upon the issuance of such options,

rights or securities or options or rights related to such securities, and any

subsequent adjustments based thereon, shall be recomputed to reflect the

issuance of only the number of shares of Common Stock actually issued upon the

exercise of such options or rights, upon the conversion or exchange of such

securities or upon the exercise of the options or rights related to such

securities.  Upon the expiration of any

such options or rights, the termination of any such rights to convert or

exchange or the expiration of any options or rights related to such convertible

or exchangeable securities, only the number of shares of Common Stock actually

issued upon the exercise of such options or rights, upon the conversion or

exchange of such securities or upon the exercise of the options or rights

related to such securities shall continue to be deemed to be issued.

 

(E)                                 The

number of shares of Common Stock deemed issued and the consideration deemed

paid therefor pursuant to clauses (iv)(A) and (iv)(B) of this Section 3(d)

shall be appropriately adjusted to reflect any change, termination or

expiration of the type described in either clause (iv)(C) or (iv)(D) of this

Section 3(d).

 

(v)                                 “Additional

Stock” shall mean any shares of Common Stock issued (or deemed to have been

issued pursuant to clause (iv) of this Section 3(d)) by the Company after the

date hereof other than shares of Common Stock issued or issuable:

 

4

 

(A)                              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;

 

(B)                                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;

 

(C)                                in

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

Company;

 

(D)                               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  theWarrants issued pursuant to the Purchase

Agreement;

 

(E)                                 shares

of Common Stock (and/or options, warrants or other Common Stock purchase rights

issued pursuant to such options, warrants or other rights) issued for

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

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

Directors;

 

(F)                                 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

 

(G)                                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.

 

(vi)                              “Common

Stock Equivalent Share” means with respect to any security that is ultimately

convertible into shares of Common Stock or ultimately exercisable for shares of

Common Stock, the total number of shares of Common Stock that may be acquired

upon full exercise of all such rights.

 

(vii)                           Notwithstanding anything to

the contrary in this Warrant, unless and until the Company obtains shareholder

approval, no adjustment will be made under Subsection (d)(i) above if such

adjustment would cause the maximum number of shares of Common Stock issuable

pursuant to the Company Notes, Purchaser’s Warrants (as defined in Consent

Agreement) 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.

 

5

 

(e)                                  Certificate of Adjustment. 

In each case of an adjustment or readjustment of the Warrant Price, the

Company, at its own expense, shall cause its Chief Financial Officer 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.  The certificate shall set forth such

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

adjustment or readjustment is based.  No

adjustment of the Warrant 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.

 

(f)                                    Adjustment to Number of Shares of Warrant

Stock.  In the event the Warrant Price is adjusted

under any provision of this Section 3, the number of shares of Warrant Stock

shall be simultaneously adjusted by multiplying the number of shares of Warrant

Stock by a fraction, the numerator of which is the Warrant Price in effect

immediately prior to such adjustment and the denominator of which is the

Warrant Price in effect immediately after such adjustment.

 

(g)                                 No Impairment. 

The Company shall not, by amendment of its Articles of Incorporation or

through a reorganization, transfer of assets, consolidation, merger,

dissolution, issue, or sale of securities or any other voluntary action, avoid

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

observed or performed under this Warrant by the Company, but shall at all times

in good faith assist in carrying out all of the provisions of this Section 3

and in taking all such action as may be necessary or appropriate to protect the

Holder’s rights under this Section 3 against impairment.  If the Company takes any action affecting

the Common Stock or any other event occurs as to which the provisions of this

Section 3 are not strictly applicable or if strictly applicable would not

fairly protect the Holder’s rights under this Warrant, then the Board of Directors

of the Company shall make an adjustment in the number and/or class of shares

available under this Warrant, the Warrant Price, or the application of such

provisions, so as to protect the Holder’s rights under this Warrant as

aforesaid.  The adjustment will be such

as will give the Holder upon exercise for the same aggregate Warrant Price the

same number, class and kind of securities the Holder would have owned had the

Warrant been exercised prior to the occurrence of event requiring adjustment and

had the Holder continued to hold such securities until after the occurrence of

such event.

 

(h)                                 Fractional Shares. 

No fractional shares shall be issuable upon exercise or conversion of

the Warrant and the number of shares to be issued shall be rounded down to the

nearest whole share.  If a fractional

share interest arises upon any exercise or conversion of the Warrant, the

Company shall eliminate such fractional share interest by paying the Holder an

amount computed by multiplying the fractional interest by the fair market value

of a full share.

 

4.                                       No Shareholder Rights. 

This Warrant, by itself, as distinguished from any shares purchased

hereunder, shall not entitle its Holder to any of the rights of a shareholder

of the Company.

 

6

 

5.                                       Reservation of Stock. 

On and after the date hereof, the Company will reserve from its

authorized and unissued Common Stock a sufficient number of shares to provide

for the issuance of Warrant Stock upon the exercise or conversion of this

Warrant.  Issuance of this Warrant shall

constitute full authority to the Company’s officers who are charged with the

duty of executing stock certificates to execute and issue the necessary

certificates for shares of Warrant Stock issuable upon the exercise or

conversion of this Warrant.

 

6.                                  Exercise of Warrant. 

This Warrant may be exercised as a whole or part by the Holder, at any

time after the date hereof prior to the termination of this Warrant, by the

surrender of this Warrant, together with the Notice of Exercise and Investment

Representation Statement in the forms attached hereto as Attachments 1

and 2, respectively, duly completed and executed at the principal office

of the Company, specifying the portion of the Warrant to be exercised and

accompanied by payment in full of the Warrant Price in cash or by check with

respect to the shares of Warrant Stock being purchased.  This Warrant shall be deemed to have been

exercised immediately prior to the close of business on the date of its surrender

for exercise as provided above, and the person entitled to receive the shares

of Warrant Stock issuable upon such exercise shall be treated for all purposes

as the holder of such shares of record as of the close of business on such

date.  As promptly as practicable after

such date, the Company shall issue and deliver to the person or persons

entitled to receive the same a certificate or certificates for the number of

full shares of Warrant Stock issuable upon such exercise.  If this Warrant shall be exercised for less

than the total number of shares of Warrant Stock then issuable upon exercise,

promptly after surrender of this Warrant upon such exercise, the Company will

execute and deliver a new warrant, dated the date hereof, evidencing the right of

the Holder to the balance of this Warrant Stock purchasable hereunder upon the

same terms and conditions set forth herein.

 

7.                                  Conversion.  In lieu of

exercising this Warrant or any portion hereof, at any time the Holder hereof

shall have the right to convert this Warrant or any portion hereof into Warrant

Stock by executing and delivering to the Company at its principal office the

written Notice of Conversion and Investment Representation Statement in the

forms attached hereto as Attachments 2 and 3, specifying the

portion of the Warrant to be converted, and accompanied by this Warrant.  The number of shares of Warrant Stock to be

issued to Holder upon such conversion shall be computed using the following

formula:

 

X=(P)(Y)(A-B)/A

 

where

X =                             the

number of shares of Common Stock to be issued to the Holder for the portion of

the Warrant being converted.

 

P =                               the

portion of the Warrant being converted expressed as a decimal fraction.

 

Y =                              the

total number of shares of Common Stock issuable upon exercise of the Warrant in

full.

 

A =                            the

fair market value of one share of Warrant Stock which  means (i) the fair market value of the Warrant Stock as of the

last Business Day immediately prior to the date the notice of

 

7

 

conversion is

received by the Company, as reported in the principal market for such

securities or, if no such market exists, as determined in good faith by the

Company’s Board of Directors, or (ii) if this Warrant is being converted in

conjunction with a public offering of stock the price to the public per share

pursuant to the offering.

 

B =                              the

Warrant Price on the date of conversion.

 

Any portion of this Warrant that is converted shall be immediately

canceled.  This Warrant or any portion

hereof shall be deemed to have been converted immediately prior to the close of

business on the date of its surrender for conversion as provided above, and the

person entitled to receive the shares of Warrant Stock issuable upon such

conversion shall be treated for all purposes as the holder of such shares of

record as of the close of business on such date.  As promptly as practicable after such date, the Company shall

issue and deliver to the person or persons entitled to receive the same a

certificate or certificates for the number of full shares of Warrant Stock

issuable upon such conversion.  If the

Warrant shall be converted for less than the total number of shares of Warrant

Stock then issuable upon conversion, promptly after surrender of the Warrant

upon such conversion, the Company will execute and deliver a new warrant, dated

the date hereof, evidencing the right of the Holder to the balance of the

Warrant Stock purchasable hereunder upon the same terms and conditions set

forth herein.  If this Warrant is converted,

as a whole or in part, after the occurrence of an event as to which Section

3(c) is applicable, the Holder shall receive the consideration contemplated by

Section 3(c) in lieu of Common Stock of the Company.

 

8.                                  Transfer of Warrant. 

This Warrant may be transferred or assigned by the Holder hereof in

whole or in part, provided that the transferor provides, at the Company’s

request, an opinion of counsel satisfactory to the Company that such transfer

does not require registration under the Securities Act and the securities laws

applicable with respect to any other applicable jurisdiction.

 

9.                                  Termination. 

This Warrant shall terminate on 5:00 p.m. New York time on the

Termination Date.

 

10.                         Miscellaneous. 

This Warrant shall be governed by the laws of the State of New York, as

such laws are applied to contracts to be entered into and performed entirely in

New York by New York residents. In the event of any dispute among the Holder

and the Company arising out of the terms of this Warrant, the parties hereby

consent to the exclusive jurisdiction of the federal and state courts located

in the State 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 headings in this Warrant are for purposes of convenience and

reference only, and shall not be deemed to constitute a part hereof.  Neither this Warrant nor any term hereof may

be changed or waived orally, but only by an instrument in writing signed by the

Company and the Holder of this Warrant. 

All notices and other communications from the Company to the Holder of

this Warrant shall be delivered personally or by facsimile transmission or

mailed by first class mail, postage prepaid, to the address or facsimile number

furnished to the

 

8

 

Company in writing

by the last Holder of this Warrant who shall have furnished an address or

facsimile number to the Company in writing, and if mailed shall be deemed given

three days after deposit in the United States mail.

 

ISSUED:              June

13, 2003

 

 

	

   

  	

  IMAGEWARE

  SYSTEMS, INC.

  
	

   

  	

   

  
	

   

  	

  By:

  	

  /s/ S. James Miller,

  Jr.

  
	

   

  	

   

  	

   

  
	

   

  	

  Name:

  	

  S. James Miller, Jr.

  
	

   

  	

   

  	

   

  
	

   

  	

  Title:

  	

  Chairman, CEO and President

  
				

 

9

 

Attachment 1

 

NOTICE OF EXERCISE

 

TO:                                                                  

 

1.                                       The

undersigned hereby elects to purchase

                               

shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of

the attached Warrant, and tenders herewith payment of the purchase price in

full, together with all applicable transfer taxes, if any.

 

2.                                       Please

issue a certificate or certificates representing said shares of Warrant Stock

in the name of the undersigned or in such other name as is specified below:

 

 

	

   

  	

   

  	

   

  
	

   

  	

  (Name)

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

  (Address)

  	

   

  

 

 

	

   

  	

   

  	

   

  
	

  (Date)

  	

   

  	

  (Name of Warrant Holder)

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

  By:

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

  Title:

  	

   

  
					

 

 

Attachment 2

 

INVESTMENT

REPRESENTATION STATEMENT

 

Shares of the

Common Stock

(as defined in the

attached Warrant) of

ImageWare Systems,

Inc.

 

In connection with the purchase of the above-listed

securities, the undersigned hereby represents to ImageWare Systems, Inc. (the

“Company”) as follows:

 

(a)                                  The

securities to be received upon the exercise of the Warrant (the “Securities”)

will be acquired for investment for its own account, not as a nominee or agent,

and not with a view to the sale or distribution of any part thereof, and the

undersigned has no present intention of selling, granting participation in or

otherwise distributing the same, but subject, nevertheless, to any requirement

of law that the disposition of its property shall at all times be within its

control.  By executing this statement,

the undersigned further represents that it does not have any contract,

undertaking, agreement or arrangement with any person to sell, transfer, or

grant participations to such person or to any third person, with respect to any

Securities issuable upon exercise of the Warrant.

 

(b)                                 The

undersigned understands that the Securities issuable upon exercise of the

Warrant at the time of issuance may not be registered under the Securities Act

of 1933, as amended (the “Securities Act”), and applicable state securities

laws, on the ground that the issuance of such securities is exempt pursuant to

Section 4(2) of the Securities Act and state law exemptions relating to offers

and sales not by means of a public offering, and that the Company’s reliance on

such exemptions is predicated on the undersigned’s representations set forth

herein.

 

(c)                                  The

undersigned agrees that in no event will it make a disposition of any

Securities acquired upon the exercise of the Warrant unless and until (i) it

shall have notified the Company of the proposed disposition and shall have

furnished the Company with a statement of the circumstances surrounding the

proposed disposition, and (ii) it shall have furnished the Company with an

opinion of counsel satisfactory to the Company and Company’s counsel to the

effect that (A) appropriate action necessary for compliance with the Securities

Act and any applicable state securities laws has been taken or an exemption

from the registration requirements of the Securities Act and such laws is

available, and (B) the proposed transfer will not violate any of said laws.

 

(d)                                 The

undersigned acknowledges that an investment in the Company is highly

speculative and represents that it is able to fend for itself in the

transactions contemplated by this statement, has such knowledge and experience

in financial and business matters as to be capable of evaluating the merits and

risks of its investments, and has the ability to bear the economic risks

(including the risk of a total loss) of its investment.  The undersigned represents that it has had

the opportunity to ask questions of the Company concerning the Company’s

business and assets and to obtain any additional information which it

considered necessary to verify the accuracy of or to amplify the Company’s

disclosures, and has had all questions which have been

 

 

asked by it satisfactorily answered by the Company.  The undersigned represents that it is an

“accredited investor” within the meaning of Regulation D of the Securities Act.

 

(e)                                  The

undersigned acknowledges that the Securities issuable upon exercise or

conversion of the Warrant must be held indefinitely unless subsequently

registered under the Securities Act or an exemption from such registration is

available.  The undersigned is aware of

the provisions of Rule 144 promulgated under the Securities Act which permit

limited resale of shares purchased in a private placement subject to the

satisfaction of certain conditions, including, among other things, the

existence of a public market for the shares, the availability of certain

current public information about the Company, the resale occurring not less

than one year after a party has purchased and paid for the security to be sold

from the Company or any affiliate of the Company, the sale being through a

“broker’s transaction” or in transactions directly with a “market maker” (as

provided by Rule 144(f)) and the number of shares being sold during any three

month period not exceeding specified limitations.

 

 

	

   

  	

  Dated:

  	

   

  	

   

  	

   

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  (Typed or Printed Name)

  
	

   

  	

   

  
	

   

  	

  By:

  	

   

  
	

   

  	

   

  	

  (Signature)

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  (Title)

  

 

2

 

Attachment 3

 

NOTICE OF CONVERSION

 

TO:                                                                   

 

1.                                       The

undersigned hereby elects to acquire

                            

shares of the Warrant Stock of ImageWare Systems, Inc. pursuant to the terms of

the attached Warrant, by conversion of

                

percent (            %)

of the Warrant.

 

2.                                       Please

issue a certificate or certificates representing said shares of Warrant Stock

in the name of the undersigned or in such other name as is specified below:

 

 

	

   

  	

   

  	

   

  
	

   

  	

  (Name)

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

  (Address)

  	

   

  

 

 

	

   

  	

   

  	

   

  	

   

  
	

  (Date)

  	

   

  	

  (Name of Warrant Holder)

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

  By:

  	

   

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

   

  	

  Title:

  	

   

  	

   

  
	

   

  	

   

  	

  (Title and

  signature of authorized person)

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