-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/F4PzUPyR7KXXtjb21TrxwYkRq7823ewrUpW4f+5or7wo8Dd9wo/jQjlyPF5RZ9 0bKIY/0VMIlk38g46e5I+A== 0000950134-01-001826.txt : 20010307 0000950134-01-001826.hdr.sgml : 20010307 ACCESSION NUMBER: 0000950134-01-001826 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20010228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 001-11900 FILM NUMBER: 1557890 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 STREET 2: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10KSB/A 1 d84523a2e10ksba.txt AMENDMENT NO. 2 TO FORM 10-K - FISCAL END 6/30/00 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------- FORM 10-KSB/A ---------- [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-11900 ---------- INTEGRATED SECURITY SYSTEMS, INC. ---------------------------------------------- (Name of Small Business Issuer in its Charter) Delaware 75-2422983 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TX 75063 (972) 444-8280 (Address including zip code, area code and telephone number of Registrant's principal executive offices.) ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ---------------------------- Common stock, $.01 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $6,561,359 As of September 30, 2000, 10,572,545 shares of the Registrant's common stock and 1,340,505 warrants, entitling holders to purchase 3,552,338 shares of common stock, were outstanding. On September 30, 2000, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $5,150,521. This amount was calculated by reducing the total number of shares of the registrant's common stock outstanding on September 30, 2000 by the total number of shares of common stock held by officers and directors, and stockholders owning in excess of 5% of the registrant's common stock, and multiplying the remainder by the close price of the registrant's common stock on September 30, 2000, as reported on the over-the-counter market. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Documents Incorporated by Reference: None. - -------------------------------------------------------------------------------- Page 1 of 47 2 TABLE OF CONTENTS
Item No. Page - -------- ---- PART I 1. Description of Business......................................................................................3 2. Description of Property......................................................................................7 3. Legal Proceedings............................................................................................8 4. Submission of Matters to a Vote of Security Holders..........................................................8 PART II 5. Market for Common Equity and Related Stockholder Matters.....................................................9 6. Management's Discussion and Analysis or Plan of Operation...................................................10 7. Financial Statements........................................................................................15 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................33 PART III 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act......................................................................34 10. Executive Compensation......................................................................................34 11. Security Ownership of Certain Beneficial Owners and Management..............................................34 12. Certain Relationships and Related Transactions..............................................................34 13. Exhibits and Reports on Form 8-K............................................................................34
- -------------------------------------------------------------------------------- Page 2 of 47 3 PART I FORWARD LOOKING STATEMENTS This annual report on Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as "may," "believe," "expect," "intend," "plan," "seek," "anticipate," "estimate," or "continue" or the negative of those words or other variations or comparable terminology. All statements other than statements of historical fact included in this annual report on Form 10-KSB, including the statements under "Item 1. Description of Business" and "Item 6. Management's Discussion and Analysis or Plan of Operation" and located elsewhere in this annual report on Form 10-KSB regarding the financial position and liquidity of the Company are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company's expectations, are disclosed in this annual report on Form 10-KSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-QSB. Important factors that could cause actual results to differ materially from those in the forward-looking statements in this annual report on Form 10-KSB include changes from anticipated levels of operations, customer acceptance of existing and new products, anticipated development schedules of new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, casualty to or other disruption of the Company's production facility and equipment, delays and disruptions in the shipment of the Company's products, government regulations and the ability of the Company to meet its stated business goals. ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Company designs, develops, manufactures, distributes and services security and traffic control products used in the commercial, industrial and government sectors through two wholly owned subsidiaries, B&B Electromatic, Inc. and Intelli-Site, Inc. B&B's products are used in thousands of locations across the country. The Company has experienced unanticipated delays in the completion of its Intelli-Site(R) software product and has not met the anticipated sales levels for this product. In addition, the audit report of Grant Thornton LLP, the Company's independent auditors, states that the Company has suffered recurring losses from operations, has an excess of liabilities over assets, and is in default of certain debt covenants. The audit report further states that these matters raise substantial doubt about the Company's ability to continue as a going concern. INTELLI-SITE, INC. Computer software that allows automated integration enables a customer to decouple the selection of software from hardware, so that a customer can mix and match different hardware, from various manufacturers, into a single, integrated security system. Within the security industry, it is generally accepted that automated integration of products improves productivity, response time and accuracy. Automated integration of products also reduces loss, which in turn reduces insurance premiums. Intelli-Site, Inc. develops software that provides automated integration for the security industry. This software, named Intelli-Site(R), allows automatic integration that can break the stranglehold that proprietary system providers have on customers. Intelli-Site(R) can integrate products, such as hardware and devices, from different vendors, to provide a tailored solution to unique customer requirements. - -------------------------------------------------------------------------------- Page 3 of 47 4 More specifically, Intelli-Site(R) allows customers to integrate a wide variety of devices from various manufacturers, such as access control, closed circuit television, badge systems, fire alarm systems, lighting control and heating, ventilation and air conditioning systems. In addition to providing centralized control, Intelli-Site(R) users can tailor the interface for ease of operation based on their unique functional requirements. Since Intelli-Site(R) is device non-specific, customers can integrate currently installed equipment, even if purchased from different manufacturers. For example, an access control system and a closed circuit television system from different hardware manufacturers may already exist within a facility, but due to the proprietary nature of both systems, they cannot communicate with each other. Unless the two systems can communicate, a "forced door" alarm on the access control system cannot initiate a video recording of the event. A proprietary integrated system would require replacement of one or both of the existing systems with equipment compatible to that of the proprietary system. However, assuming device drivers are available, Intelli-Site(R) can integrate existing systems to avoid expensive equipment retrofits, time delays and single vendor dependencies. The software can also be tailored to a manufacturer's proprietary specifications to be marketed as an added feature to their existing product line. No two companies, facilities or workgroups are identical, so each has different security requirements. Intelli-Site(R), while a standard product, allows users to define the following aspects of a security system: o its configuration--what is to be integrated; o its graphical user interface--how the operator controls the system; o its functionality--what the system does; and o its databases--what and how data is stored. In the past, only a custom-designed system could provide this level of user-specific features. Other standard software products either cannot be tailored or attempt to provide limited "customization" through a fixed set of user options. With Intelli-Site(R), user-defined restrictions are limited to the capabilities of the integrated devices. B&B ELECTROMATIC, INC. B&B Electromatic, Inc., the Company's manufacturing subsidiary, designs, manufactures and distributes warning gates, crash barriers, such as railroad, anti-terrorist and traffic control barriers, lane changers, airport and navigational lighting, and perimeter security gates and operators. B&B has been in operation since 1925, and enjoys a long-term reputation of high quality designs with its broad customer network of engineering and architectural firms. Core Business B&B's core products are gates and barriers, perimeter security and navigational lighting. These products compete primarily in the road and bridge construction, refurbishment and perimeter security markets. These products are used for: o gating and barricading movable bridges; o locking down sections of roads under construction; o gates for reversible lane changer systems; o gates to secure railroad crossings; - -------------------------------------------------------------------------------- Page 4 of 47 5 o operators and gates used in perimeter security; and o navigational lights used primarily with waterways. B&B typically sells its products through electrical sub-contractors or through distributors. B&B's XL automatic gate operator product line, called the XL Series, includes hydraulic sliding gate operators with two pair of infrared beams and an audible alarm. This gate operator is called a "hydraulic" sliding gate operator because it is operated by the resistance when a small quantity of liquid is forced through a small opening. In addition, the XL Series incorporates a new solid-state controller, called the PK2K, which monitors and controls the correct installation and functioning of safety devices. The PK2K will not allow the operator to function if there is incorrect wiring or a malfunction that could cause injury or property damage. The XL Series has been successfully tested and is in compliance with the Underwriters Laboratories Inc. new safety standard that is named UL325. The XL Series is also now listed by a Nationally Recognized Testing Laboratory. Meeting the new UL325 safety standard, like all of the Underwriters Laboratories standards, is voluntary. However, many governmental and private sector corporations will only purchase products that meet Underwriters Laboratories standards and that are listed by a Nationally Recognized Testing Laboratory. B&B's XL Series of gate operators are the first operators of its kind to meet the new Underwriters Laboratories 325 safety standards. The XL Series is listed by Intertek Testing Services with the Electronic Testing Laboratory trademark. The XL Series of gate operators meets the primary and secondary entrapment protection requirements of Underwriters Laboratories 325 with two pair of infrared beams and an audible alarm. Fewer movable bridges are being constructed. As a result, B&B is seeking broader applications of its movable gates and barriers. Highway lane changers, road construction gates and barriers, seismic gates and perimeter security gates are all growing market opportunities for B&B. New Business B&B has developed a railroad safety barrier gate that is targeted for highway railroad crossings with high accident incident rates, blind curves, high frequency of hazardous rail transport, whistle-ban zones, multiple track crossings and high-speed rail corridors. In November 1998, after two years of development and testing, the Federal Highway Administration accepted B&B's patented safety barrier gate. B&B has an eighteen-year patent on this safety barrier gate, expiring in September 2018. This patent is significant because B&B's railroad safety barrier gate is the only product of its kind presently on the market. In August 2000, the Federal Railroad Administration determined that the safety barrier gate is in compliance with their fail-safe requirement. The Federal Highway Administration only accepts safety barrier gates designed to improve safety at highway railroad crossings without the necessity of grade separations, such as bridges or underpasses. Federal funding of approximately $160 million per year is available for upgrading the safety of the more than 262,000 existing highway railroad crossings. Additional federal and state funding is available for highway railroad crossings on high-speed rail corridors which have mandated upgrade requirements. B&B anticipates that the available market for its railroad safety barrier gate will increase by tenfold. Penetration into this market, however, may require a relatively long sales cycle due to federal funding approvals. WARRANTIES The Company has one-year, two-year and five-year warranties on products it manufactures, depending on whether the product is an existing product or a new product. If the product is new, then the term of the warranty is based on competition and industry trends. If the product is already in existence, then the term of the warranty is based on that particular type of product. The Company provides for replacement of components and products that contain manufacturing defects. When the Company uses other manufacturers' components, the warranties - -------------------------------------------------------------------------------- Page 5 of 47 6 of the other manufacturers are passed to the dealers and end users. To date, the servicing and replacement of defective software components and products have not been material. BACKLOG The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At September 30, 2000, the Company's backlog was approximately $1.6 million. The Company expects that it will fill the majority of this backlog by December 31, 2001. PRODUCT DESIGN AND DEVELOPMENT As of September 30, 2000, the Company has six employees dedicated to research, development and product engineering. During fiscal year 1999, the Company spent approximately $378,365 on research and development, primarily related to the development and enhancement of Intelli-Site(R). During fiscal year 2000, the Company spent approximately $386,899 on research and development, also primarily related to the development and enhancement of Intelli-Site(R). COMPETITION Intelli-Site, Inc. Many companies across the industry use the term "integrated security system" to describe their products and services. In fact, an integrated security system can range very limited fixed function systems "integrating" as few as two sub-systems to feature-rich, real-time sophisticated software systems, including custom coded integrated solutions. Differences in functionality, performance, and price among integrated security systems vary greatly. Intelli-Site NT has the capability to compete across the entire spectrum of integrated security systems. Consequently, Intelli-Site NT has a diverse set of competitors, depending on the complexity of the integration effort. Intelli-Site NT's competitors generally fall into one of three categories: (a) access control manufacturers, (b) "pure" integrated systems platforms and (c) custom software developers. Access Control Manufacturers Access control integration is the integration of access control systems with other security devices and sub-systems. Access control manufacturers produce integrated security systems that range in capability from the control of panel inputs and outputs to the integration of access control systems with other security devices and sub-systems, most commonly closed circuit television. Access Control and Security Systems Integration magazine, in its annual buyers guide, lists approximately 200 companies that provide software for access control integration representing approximately 81% of the market. Access control manufacturers provide closed, proprietary systems for integration of their hardware. Only a few manufacturers offer complete integrated systems. Vendor-proprietary systems tend to be expensive and lock the customer into one supplier. With vendor-proprietary systems, the end user can only add new features or integrate new technologies if the access control manufacturer supplies them. Access control manufactures' integrated product solutions prevent systems integrators and end users from integrating the products and/or technologies that best meet the end-user requirements. "Pure" Integrated Systems Platforms "Pure" integrated system providers, such as Intelli-Site, offer integration platforms that are non-proprietary and able to integrate across any device or sub-system. Integrated system providers can integrate products, such as hardware or devices, across the industry from different vendors. The Company has identified three third-party providers that supply software that competes with Intelli-Site NT. These competitors are LARES Technology, Inc., Lenel Systems International, Inc., and Integral Technologies, Inc. It is estimated that in 1998, "pure" integrated systems platform products accounted for less than 2% of the $170 million software systems - -------------------------------------------------------------------------------- Page 6 of 47 7 integration market. Software system integration is the integration of various types of systems utilizing software technology. The software systems integration market includes access control manufacturers, "pure" integrated system platforms and custom software developers. The software systems integration market is a segment of the $3.4 billion systems integration market. The systems integration market encompasses all industries that integrate any type of system by utilizing various means and processes. None of the identified competitors has established itself as a clear market leader. Custom Software Developers Custom software solutions for integrated security typically target large systems with complex user integration requirements between multiple sub-systems. A number of system developers and large systems integrators provide custom software solutions. An estimated 17%, and declining, of end users use custom-developed solutions. However, the Company believes many of these end users would consider using a non-proprietary, tailored, user-definable standard platform if one were available. Today, of the estimated 1,000 system integrators in the market, only a small fraction is capable of developing custom software applications. Open, user-definable systems such as Intelli-Site NT would allow many of these integrators to bid competitively on large, integrated security system jobs that have traditionally required custom-developed software solutions. The Company faces intense competition in the security industry. Some of the Company's competitors are large, well-financed and established companies that have greater name recognition and resources for research and development, manufacturing and marketing than that of the Company. These competitors may be better able to compete for market share. B&B Electromatic, Inc. The competitors of B&B Electromatic, Inc.'s road and bridge products are relatively the same size as B&B. The customers of these competitors are concentrated in only certain geographical regions. In contrast, B&B's customers are located throughout the United States. B&B has a far more extensive design specification network than its competitors, mostly because B&B has been in existence in this market niche since 1925. Only one other manufacturer of horizontal sliding gates powered by a hydraulic operator mechanism competes with B&B's high-end perimeter security products. B&B does not compete in the lower end perimeter security products market. The competition for the railroad safety barrier market appears to be non-existent, because B&B is the only company that manufactures this type of railroad safety barrier product at the present time. B&B has two competitors in the general market of warning gates, crash barriers, such as railroad, anti-terrorist and traffic control barriers, lane changers, and seismic gates. B&B has two competitors in the airport and navigational lighting market. EMPLOYEES As of June 30, 2000, the Company employed 65 people, all in full-time positions. None of the Company's employees are subject to collective bargaining agreements. The Company believes that relations with its employees are good. ITEM 2. DESCRIPTION OF PROPERTY B&B Electromatic, Inc. own its manufacturing and office facility in Norwood, Louisiana. This facility consists of approximately 26,000 square feet of manufacturing and office space on five acres of land. The Company has a mortgage on this property. The Company refinanced the mortgage in 1999 for a cash contribution of approximately $100,000. These funds were used for operations and capital improvements at B&B. At September 30, 2000, the principal amount of the mortgage was $734,894. The interest rate is 10% and the amortization provisions are standard. There are no prepayment provisions and the mortgage matures on September 14, 2001. The balance due on the maturity date is $673,296. - -------------------------------------------------------------------------------- Page 7 of 47 8 The Company occupies 13,038 square feet of office and warehouse space in Irving, Texas. The lease for the Irving facility expires on December 31, 2001. The monthly rent of this lease is $14,815, plus the costs of utilities, property taxes, insurance, repair and maintenance expenses and common area utilities. The Company believes that the properties, equipment, fixtures and other assets of the Company located within the Company's facilities are adequately insured against loss, that suitable alternative facilities are readily available if the lease agreements described above are not renewed, and that its existing facilities are adequate to meet current requirements. ITEM 3. LEGAL PROCEEDINGS The Company is subject to certain legal actions and claims arising in the ordinary course of the Company's business. Although management recognizes the uncertainties of litigation, based upon the dollar amount involved, the nature and management's understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - -------------------------------------------------------------------------------- Page 8 of 47 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's preferred stock is not publicly traded. The Company's Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol "IZZI." The Company's Common Stock was quoted on the Nasdaq Small Cap Market under the symbol "IZZI" until March 23, 1999. On March 24, 1999, Nasdaq delisted the Company's Common Stock for failing to meet the minimum net tangible asset base of $2.0 million and for failing to meet the minimum trading price threshold of $1.0 per share. The following table sets forth, for the periods indicated, the high and low bid quotations for the Common Stock on the Nasdaq Small Cap Market and the Nasdaq Over-the-Counter Bulletin Board Market. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The trading market in the Company's securities may at times be moderately illiquid due to low volume.
Common Stock ------------------------------------------- $ High $ Low ----------------- ---------------- Fiscal 2000 First Quarter 11/16 19/32 Second Quarter 3/4 7/16 Third Quarter 9/16 15/32 Fourth Quarter 23/32 13/32 Fiscal 1999 First Quarter 1 9/32 21/32 Second Quarter 1 17/32 Third Quarter 1 1/2 15/32 Fourth Quarter 1 5/32 9/16
On September 15, 2000, the last reported sales prices for the Common Stock as reported on the Over-the-Counter Bulletin Board was $0.53. HOLDERS As of September 30, 2000, there were 10,572,545 shares of Common Stock outstanding and 1,340,505 warrants outstanding entitling holders to purchase 3,552,338 shares of Common Stock. The shares of Common Stock are held of record by approximately 139 holders and the warrants are held of record by approximately 21 holders, including those brokerage firms and/or clearing houses holding the Company's Common Stock for their clientele, with each such brokerage house and/or clearing house being considered as one holder. DIVIDEND POLICY The Company has never declared or paid any dividends on the Company's Common Stock. The Company currently intends to retain future earnings, if any, for the operation and development of the Company's business and to repay outstanding debt. The Company does not intend to pay any dividends on the Common Stock in the foreseeable future. - -------------------------------------------------------------------------------- Page 9 of 47 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL The Company's executive offices are located at 8200 Springwood Drive, Suite 230, Irving, Texas 75063. The Company's telephone number is (972) 444-8280. The Company is a Delaware corporation. The following is a brief summary of the recent history of the Company and its subsidiaries. This summary identifies why the Company is in its current financial position and what led to the changes in the Company's financial position. The summary also includes information about why the Company has experienced unanticipated delays in the completion of its Intelli-Site(R) software product and why the Company has not met the anticipated sales levels for this product. During the spring of 1999, the Company's operating cash deficit was increasing as a result of lower revenues and higher than budgeted development costs. Management made a decision to refocus the Company on two of its subsidiaries, B&B Electromatic, Inc. and Intelli-Site, Inc., and to sell its other subsidiaries, Golston Company, Inc. and Tri-Coastal Systems, Inc. Intelli-Site, Inc. manufactures the Intelli-Site(R) software product and B&B Electromatic, Inc. manufactures traffic control and safety systems as well as safety barriers for highway railroad crossings. In May 1999, the Company sold Golston for $3.2 million in cash and a $100,000 promissory note. In August 1999, the Company sold Tri-Coastal Systems to Notification Systems, Inc. for a $66,000 promissory note. These two dispositions were consistent with the Company's previously announced respositioning strategy to focus on Intelli-Site, Inc. and B&B Electromatic, Inc. When the Company decided in the spring of 1999 to shift its focus, management assumed that the development of its Intelli-Site(R) software product was complete. However, due to unanticipated delays in the completion of the product, the Company did not meet the anticipated sales levels for the product and the Company once again experienced operating cash shortfalls. In the fall of 1999, the Company successfully raised $1.8 million through a private placement. In late 1999, the anticipation by customers of a new requirement scheduled to become effective in the spring of 2000 concerning the UL325 listing for gate operators caused B&B Electromatic to experience a significant downturn in perimeter security sales. B&B received compliance listing in July 2000. B&B also experienced a much lower sales volume than anticipated for the new railroad barrier product. The audit report of Grant Thornton LLP, the Company's independent auditors, states that the Company has suffered recurring losses from operations, has an excess of liabilities over assets, and is in default of certain debt covenants. The audit report further states that these matters raise substantial doubt about the Company's ability to continue as a going concern. The Company cannot predict any material trends, events or uncertainties that may affect the Company, its subsidiaries, their businesses and financial condition. RESULTS OF OPERATIONS Year Ended June 30, 2000 Compared to Year Ended June 30, 1999 Sales. The Company's total sales increased by $0.7 million, or 12.6%, during the fiscal year ended June 30, 2000, from $5.8 million in fiscal 1999. This increase is the result of increased Intelli-Site(R) software sales of approximately $0.3 million and increased end-user system installations of approximately $0.6 million by the Company's Intelli-Site, Inc. subsidiary. Intelli-Site, Inc.'s sales increase was offset by a slight decrease of $0.2 million in overall sales at the Company's B&B Electromatic Inc. subsidiary. For the twelve months ended June 30, 2000, approximately 82% of the Company's revenues were generated from the sale of products manufactured by the Company compared to 95% for the twelve months ended June 30, 1999. - -------------------------------------------------------------------------------- Page 10 of 47 11 Cost of Sales. Cost of sales as a percentage of sales remained comparable at 67% for the fiscal year ended June 30, 2000 and at 66% for the fiscal year ended June 30, 1999. For the twelve months ended June 30, 2000, approximately 73% of the Company's cost of sales were related to the products manufactured by the Company, compared to 91% for the twelve months ended June 30, 1999. This decrease in the percentage of cost of sales related to manufactured products is due to a decrease in sales at B&B Electronic, Inc., a manufacturing subsidiary of the Company, coupled with an increase in sales at Intelli-Site, Inc., a software development subsidiary of the Company that is not a manufacturer Gross Margin. Gross margin as a percent of sales remained comparable at 33% for the fiscal year ended June 30, 2000 and at 34% for the fiscal year ended June 30, 1999. Selling, General and Administrative. Selling, general and administrative expenses decreased by 24% or by $1.4 million during the fiscal 2000 period. Approximately $0.5 million of the decrease during the current year is due to decreases in recruiting and relocation expenses at the Intelli-Site, Inc. subsidiary. The additional decrease is attributable to a one-time charge in fiscal 1999 of $0.9 million for the dissolution of the partnership that was originally formed to fund marketing and sales of the Intelli-Site(R) software product. Research and Development. Research and product development expenses remained comparable for the fiscal years ended June 30, 2000 and 1999. Interest Expense. During fiscal 2000, interest expense decreased by approximately $60,000. This decrease is primarily due to securing additional financing during the fiscal 1999 period. LIQUIDITY AND CAPITAL RESOURCES Cash Position The Company's cash position decreased $151,477 during the fiscal year 2000. At June 30, 2000, the Company had $99,636 in cash and cash equivalents and $408,166 outstanding under its accounts receivable factoring facility. This accounts receivable factoring facility is explained in greater detail below in this section. Continuing Operating Activities For the fiscal year ended June 30, 2000, the Company's continuing operating activities used $2,546,753 of cash compared to $3,505,922 of cash used during the fiscal year ended June 30, 1999, a difference of $959,169. This $959,169 decrease in cash used in continuing operating activities in fiscal 2000 is primarily due to the Company's reduced losses of $2,515,414 in fiscal 2000. However, this $2,515,414 amount of reduced losses in fiscal 2000 is offset in part by the payment in fiscal 1999 of expenses with the issuance of shares of the Company's Common Stock and warrants. The market value of these shares of Common Stock and of the warrants was approximately $1,469,922. Default under Convertible Debentures In the fall of 1998, the Company required additional funding as a result of continuing operating losses. Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC loaned the Company $600,000 in exchange for promissory notes at 9% interest due and payable in February 1999. These notes were refinanced as demand notes on February 22, 1999 with all other terms and conditions remaining the same as the original notes. In December 1996, the Company entered into a convertible debenture financing with each of Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC to finance the purchase of Golston Company, Inc. The Company issued a $2.3 million convertible debenture to each of the two Renaissance entities, for an aggregate of $4.6 million of convertible debentures. The Renaissance convertible debentures have an annual interest rate of 9% of outstanding principal balance. The debentures, plus interest, are due on December 1, 2003. The debentures are secured by equity, assets and futures contracts. The debentures are convertible into shares of the Company's Common Stock at an initial conversion price of $1.05 per share. On March 26, 1998, as a result of the Company's failure to achieve required financial milestones for the quarter ended December 31, 1997, the conversion rate on the Renaissance convertible debentures was reduced to $0.549, the average closing price of the Company's Common Stock for the 20-day period beginning on the date of the public announcement of its financial results for the quarter ended December 31, 1997. Monthly principal installments were to commence in December 1999 through maturity. These principal payments have not yet begun. The Company is in default of the covenants for the $4.6 million of convertible debentures issued to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. At September 30, 2000, the principal amount of these convertible debentures in default was $4.6 million, of which $398,555 is currently outstanding. The Company has not received notice of default and is currently in negotiations to restructure this debt, but no agreement has yet been reached. The Company currently has no other source of repayment and - -------------------------------------------------------------------------------- Page 11 of 47 12 there can be no assurance that these renegotiations will be successful. Accordingly, the debentures are classified as short-term debt on the financial statements. Accounts Receivable Factoring Facility On March 3, 2000, the Company replaced its existing accounts receivable factoring facility with an Account Transfer Agreement with Evergreen Funding Corporation to factor accounts receivable with recourse. Under the terms of this factoring facility, the Company sells its accounts receivable to Evergreen Funding Corporation, a factoring company. Evergreen Funding Corporation then acts as the principal in collecting those accounts receivable. The Company sells the receivables with recourse, which means that Evergreen Funding Corporation can turn to the Company if the accounts receivable prove to be not collectable. The Company's factoring facility also allows the Company to borrow money from Evergreen Funding Corporation in anticipation of the Company's expected sales. Borrowing money from the factoring company allows the Company to build up its inventory before a peak selling period. This accounts receivable factoring facility expires September 3, 2001, and can be extended at the discretion of the Company. The Company may sell its eligible accounts receivable at an advance rate of 80%, less an adjustable factoring fee, or service charge, of 1.5% to 2.0% of the amount of accounts receivable sold. The factor has recourse to the 20% residual of aggregate accounts receivable purchased and outstanding. The factor may require the Company to repurchase all or any portion of the accounts receivable unpaid following 90 days after its due date. The interest rate charged is equal to the prime rate charged by Chase Bank of Texas, N.A. plus 2% per annum. The monthly minimum borrowing amount is $200,000 and the maximum monthly borrowing amount is $800,000, subject to availability under the Company's borrowing base. This facility is secured by the accounts receivable and inventory of the Company's B&B Electromatic, Inc. subsidiary and is guaranteed by the Company and Intelli-Site, Inc. The Company believes borrowing under this accounts receivable factoring facility, combined with results from operations, will be sufficient to finance future cash requirements at B&B Electromatic, Inc. for the fiscal year ended June 30, 2001. The cash that the Company receives from the accounts receivable factoring facility is also used to support Company-wide operations. Additional Debt Service Obligations During the twelve months ended June 30, 2000, the Company financed its operations with cash flows from long-term borrowings of $1,538,806 and received $1,688,021 in cash from the sale of preferred stock. The Company made payments of $613,786 on debt and other liabilities. In October and November 1999, the Company raised $1.855 million through a private placement of 92,750 shares of preferred stock. In consideration for the 1.855 million, the Company received $1,688,021 in cash, converted $87,402 of other liabilities into preferred stock and paid $79,577 in fees associated with the preferred stock placement. The preferred stock provides for dividends of 9% per annum and is convertible into common stock at a rate of 25 common shares for each preferred share. Each investor in the private placement also received a warrant to purchase 16 2/3 shares of common stock for each share of preferred stock purchased. The warrant exercise price is $1.00 per share and the warrants expire in October 2004. As of December 31, 1996, pursuant to the terms of a convertible loan agreement, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC loaned the Company $4.6 million in convertible debentures at an interest rate of 9% per year. The monthly interest payments are $4,438. The debentures are convertible into shares of Common Stock at a rate of $0.549 per share. Since February 22, 1999, each of Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC has made six loans to the Company evidenced by promissory notes. Each of the twelve promissory notes accrues interest at a rate of 9% per year. The monthly interest payments are $3,975. On April 12, 2000, C. A. Rundell, Jr., currently Chairman of the board of directors and Chief Executive Officer of the Company, loaned the Company $200,000 as evidenced by a promissory note. In addition, on June 28, - -------------------------------------------------------------------------------- Page 12 of 47 13 2000, The Rundell Foundation, a non-profit corporation, loaned the Company $100,000 as evidenced by a promissory note. Both of these promissory notes accrue interest at a rate of 9% a year and are due and payable on demand. The monthly interest payments are $2,250. Mr. Rundell is President, a director and trustee of The Rundell Foundation. As discussed in "Item 2. Description of Property" above, the Company has a mortgage on B&B Electromatic, Inc.'s facility. At September 30, 2000, the principal amount of the mortgage was $734,894. The interest rate is 10% and the amortization provisions are standard. There are no prepayment provisions and the mortgage matures on September 14, 2001. The balance due on the maturity date is $673,296. The Company does not have any material commitments to purchase property and equipment in fiscal 2000. The Company does not have any material funding requirements for software and other products under development. Summary of Material Terms of Convertible Debentures In December 1996, the Company entered into a convertible debenture financing with each of Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC to finance the purchase of Golston Company, Inc. The Company issued a $2.3 million convertible debenture to each of the two Renaissance entities, for an aggregate of $4.6 million of convertible debentures. The Renaissance convertible debentures have an annual interest rate of 9% of outstanding principal balance. The debentures, plus interest, are due on December 1, 2003. The debentures are secured by equity, assets and future contracts. The debentures are convertible at the option of the holders at any time into shares of the Company's Common Stock at an initial conversion price of $1.05 per share. Pursuant to the debenture, if the Company did not meet specified financial milestones in 1997, the conversion price would be decreased one time to an amount equal to 75% of the average closing price of the Company's Common Stock for the 20-day period beginning on the date of the public announcement of its financial results for the quarter ended December 31, 1997. On March 26, 1998, as a result of the Company's failure to achieve the required financial milestones for the quarter ended December 31, 1997, the conversion rate on the Renaissance convertible debentures was reduced to $0.549. The conversion price will be adjusted again: o If the Company issues any shares of Common Stock for a consideration per share that is less than the current conversion price,then in each such case,the conversion price will be reduced to a new conversion price equal to the consideration per share received by the Company for the additional shares of Common Stock and the number of shares issuable to the Renaissance entities will be proportionately increased. o If the Company issues shares of Common Stock for consideration, part or all of which is cash, then the amount of the cash consideration will be deemed to be the amount of the cash received by the Company for those shares, after subtracting certain fees and expenses incurred in connection with the sale. o If the Company's securities are reclassified into shares of Common Stock, then the shares of Common Stock issued in such reclassification will be deemed to have been issued for a consideration other than cash. o If issued and outstanding shares of Common Stock are subdivided or split up into a greater number of shares of Common Stock, then the conversion price will be proportionately decreased. If issued and outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, then the conversion price will be proportionately increased. The conversion price will not be affected by: o The issuance of Common Stock upon the conversion of any of the debentures; o The issuance of Common Stock upon the exercise of any warrants or stock purchase options issued and outstanding as of the date of the debentures; - -------------------------------------------------------------------------------- Page 13 of 47 14 o The issuance of Common Stock pursuant to the exercise of authorized or outstanding options under any currently existing incentive stock option plan; o The issuance of Common Stock pursuant to the conversion of preferred stock currently outstanding at its current conversion price; and o The issuance of the first 700,000 shares of Common Stock sold or issued for less than the conversion price. Mandatory Principal Installments. If the debentures are not sooner redeemed or converted, then the Company is required to pay to the Renaissance entities, commencing on December 11, 1999, and the first day of each successive month before maturity, mandatory principal redemption installments in the amount of $10.00 for each $1,000,000 of the then remaining principal amount of the debentures. The Company has not made any of these payments and as a result is technically in default of the debentures. At maturity, the Company is required to make a final installment of all of the remaining unpaid principal amount plus all unpaid interest and other charges due. Mandatory Redemption in the Event of Certain Changes. If the Common Stock is not listed for exchange on the NASDAQ National Market, the New York Stock Exchange, the American Stock Exchange, or quoted on the NASDAQ Small Cap System, or any person acquires more than 50% of the Common Stock, then the debentures will, at the option of the Renaissance entities after 30 days notice to the Company, be redeemed at the greater of (a) the market value of the debentures or (b) at a certain percentage of par, depending on the date. Since March 24, 1999, the Common Stock has not been listed on any referenced exchange. As of September 30, 2000, the Company has not received notice from the holder of an election to cause mandatory redemption. Redemption at the option of the Company. On any interest payment date, and after prior irrevocable notice, the outstanding principal amount of the debentures is redeemable, in whole, at 120% of par if: o The closing bid price for the Common Stock averages at least $4.00 per share for the 21 consecutive trading days; o The $4.00 bid price is supported by a minimum of 30 times fully diluted net earnings per share of Common Stock in the aggregate for the last four consecutive fiscal quarters preceding the date of irrevocable notice; o The average, over 20 days, of the daily trading volume shall be no less than 10,000 shares; and o The Company shall have filed a registration statement covering the shares of Common Stock issuable upon conversion of the debentures. Adjustment for Mergers. If (a) the Company distributes to all Common Stock holders indebtedness of the Company or assets, excluding cash dividends or distributions from retained earnings, or other rights to purchase securities or assets, or (b) there is a capital reorganization or reclassification of the Company's Common Stock, then the debentures will be converted into the kind and amount of securities, cash and other property which the Renaissance entities would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the debentures immediately before the occurrence of the event. Events of Default. "Event of Default" includes: o the failure to pay, not later than 10 days after the due date, any interest or principal of the debenture; o any representation or warranty under the loan agreement or loan documents is untrue in any material respect as of the date made; o default in the performance of any covenant under the loan agreement, security agreement, pledge agreement or other loan documents, after the expiration of a 30 day cure period; o default in the payment of any Material Indebtedness (as defined in the debenture); o any of the loan documents cease to be enforceable or become inoperative; o bankruptcy events; o any final judgment for the payment of money in excess of $250,000 is rendered against the Company and not satisfied or discharged at least 10 days before assets could be sold to pay the judgment; o the failure of the Company to deliver shares of Common Stock upon conversion of the debenture; or o the failure to submit Renaissance's nominee, if any, for election to the Company's board for any reason other than good cause. Remedies upon Default. Upon the occurrence of an Event of Default, the holder may: o declare all principal and interest due and payable; o reduce any claim to judgment; or o pursue and enforce the holder's rights and remedies. In addition, the Company must pay all costs and expenses reasonably incurred by the holder in connection with preserving its rights. Rights under Convertible Loan Agreement. The convertible debentures were issued pursuant to the Convertible Loan Agreement dated as of December 31, 1996 among the Company, its subsidiaries and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. This loan agreement includes representations, warranties and covenants of the Company customary for a loan agreement. The loan agreement includes the same events of default as are specified in the convertible debentures. Pursuant to the loan agreement, the Renaissance parties may designate a nominee to the Company's board of directors, subject to the Company's written approval, which may not be unreasonably withheld. If the Renaissance parties do not request a board designee, then the Renaissance parties may have a representative attend board meetings. Registration Rights. The holders of convertible debentures have registration rights under the loan agreement. The holders have registration rights under the Convertible Loan Agreement dated December 31, 1996 with the Renaissance parties. The holders of at least 50% of the registrable securities then outstanding may demand that the Company file a registration statement and use its best efforts to register the securities within 150 days of the registration request. The holders also have piggyback registration rights. The registration rights terminate on the earlier to occur of June 30, 2006 or after the holders have demanded two registrations. Summary of Material Terms of Promissory Notes From February 22, 1999 to June 30, 2000, each of Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC has made three loans to the Company evidenced by promissory notes. Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC - -------------------------------------------------------------------------------- Page 14 of 47 15 made their loans to the Company on the same day, from February 22, 1999 through May 5, 2000. These dates and amounts of these six promissory notes are outlined in the table below. In addition, on April 20, 2000, the Company issued a $200,000 promissory note to C. A. Rundell, Jr. The two promissory notes issued on February 22, 1999, and the Company's five other promissory notes are not convertible and were not renewed or extended. The promissory notes accrue interest at a rate of 9% per year.
AMOUNT OF PROMISSORY NOTES AMOUNT OF PROMISSORY ISSUED TO RENAISSANCE CAPITAL NOTES ISSUED TO RENAISSANCE US DATE GROWTH & INCOME FUND III, INC.($) GROWTH & INCOME TRUST PLC($) - ---- --------------------------------- ------------------------------ February 22, 1999 $ 375,000(1) $ 225,000(1) August 12, 1999 115,000(2) 115,000(2) May 5, 2000 150,000 150,000
- ---------- (1) This is a convertible promissory note, with an initial conversion price of $0.549 per share. This promissory note was amended on May 5, 2000. (2) This promissory note was renewed and extended on May 5, 2000. The following is a summary of the material terms of the promissory notes. Interest. Interest will accrue interest on the unpaid principal balance due under the notes at an annual rate equal to 9%. Interest accrues from the date of the note until it is paid in full. For the convertible promissory notes only, interest is due and payable monthly on the first date of each month. Limitation of Interest. All agreements of the Company and the payee are expressly limited so that in no contingency or event will the amount contracted for, charged, received, paid or agreed to be paid to the holder of the note exceed the maximum amount permissible under applicable usury laws. Payment of Notes. The principal balance of and all accrued unpaid interest will be due and payable on demand. The notes may be prepaid in whole or in part at any time, at the option of the maker, without premium or penalty. Two of the seven issued promissory notes are silent regarding prepayment of the note: (a) the $375,000 convertible promissory note dated February 22, 1999, issuable to Renaissance Capital Growth & Income Fund III, Inc. and (b) the $200,000 note dated April 12, 2000, issuable to Mr. Rundell. Upon the default in payment of the notes, the payee may pursue any and all remedies to which payee may be entitled. Security of Agreements. The $200,000 note dated April 12, 2000, issuable to Mr. Rundell is secured by the accounts receivable of Intelli-Site, Inc. The other six promissory notes issued by the Company through June 30, 2000 are secured by (a) the Security Agreement, dated as of October 2, 1998, among the Company, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC, and (b) the Stock Pledge Agreement, dated as of December 31, 1996, as amended, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. Conversion. Of the seven promissory notes issued between February 22, 1999 and May 5, 2000, only the two promissory notes issued on February 22, 1999 are convertible into shares of Common Stock. The conversion rate is $0.549 per share. The convertible notes may be converted at the option of the payee in its sole and absolute discretion, in whole or in part, and at any time or from time to time, into fully paid and nonassessable shares of Common Stock. If the Company issues Common Stock for consideration per share less than the conversion rate, then the conversion rate will be reduced to that lower price. This does not apply to Common Stock issued upon (a) the conversion of a promissory note, (b) the exercise of any outstanding warrants, options or convertible debt instruments, or (c) the exercise of outstanding employee stock options. Adjustment for Mergers, Sales and Consolidations. For the Company's convertible promissory notes - -------------------------------------------------------------------------------- Page 15 of 47 16 only, if there is a consolidation or merger of the Company with or into, or the sale of substantially all of the properties and assets of the Company, to any person and, in connection with such transaction, consideration is payable to holders of Common Stock in cash, securities or other property, then the payee will have the right to purchase the kind of receivable in connection with the transaction by a holder of the same number of shares of Common Stock as were exercisable by the payee immediately prior to the transaction. In addition, if there is such a transaction, or in the event of the dissolution, liquidation or winding up of the Company, then the payee will be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if the note had been converted immediately prior to such event, less the conversion price. Registration Rights. For the Company's convertible promissory notes only, the shares of Common Stock issued upon conversion of the notes will be restricted from transfer by the payee, unless the shares are duly registered for sale pursuant to the Securities Act of 1933 or the transfer is exempt from registration. Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC have rights regarding the registration of shares of Common Stock issued upon the conversion of the notes under the terms of the Registration Rights Agreement between the Company and the two Renaissance entities, dated February 22, 1999. Dividends. For the Company's convertible promissory notes only, shares of Common Stock issued as a dividend or other distribution on any class of capital stock of the Company will be deemed to have been issued without consideration. Stock Splits/Subdivisions. For the Company's convertible promissory notes only, if there is a stock split or subdivision of shares of Common Stock into a greater number of shares, the conversion price will be proportionately decreased. If there is a combination of shares of Common Stock into a smaller number of shares, the conversion price will be proportionately increased. Any increase or decrease will be effective at the record date. Property and Equipment The Company used $110,298 for the purchase of property and equipment during fiscal 2000 compared to $266,192 for the previous fiscal 1999 period. The purchases in fiscal 1999 of a new computer system for approximately $30,000 at B&B Electromatic, Inc. and a trade show booth for approximately $90,000 at Intelli-Site, Inc. accounted for the majority of this variance. Additional Sources of Financing The Company's liabilities are currently in excess of its assets and the Company has experienced significant losses during fiscal 1999 and 2000. Management expects losses to continue through the majority of fiscal 2001. In order to meet working capital needs, the Company will need to receive additional financing either through the sale of assets of the Company or its subsidiaries, equity placement and/or additional debt. Failure to receive financing could jeopardize the Company's ability to continue to operate. The Company is seeking stockholder approval of a proposed financial restructuring of the Company's debt. Under the terms of this financial restructuring, the Company will obtain approximately $1.0 million in cash from Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC in exchange for the issuance of promissory notes and new series of preferred stock of the Company. The Company anticipates that it will receive a portion of this $1.0 million in funding before the 2001 Annual Meeting of Stockholders. The Company will receive the full amount of this $1.0 million in funding before June 30, 2001. The cash that the Company receives from the accounts receivable factoring facility is utilized to support Company-wide operations. As discussed in more detail in the Company's proxy statement for the 2001 Annual Meeting of Stockholders, the Company's board of directors determined that the proposed financial restructuring is the best alternative to attempt to preserve stockholder value and to obtain additional funding. If the Company's stockholders do not approve the proposed financial restructuring or if the financial restructuring is not completed, then at the present time and the foreseeable future, it seems unlikely that the Company will be able to obtain additional financing either through the sale of assets of the Company or its subsidiaries, equity placement and/or additional debt. - -------------------------------------------------------------------------------- Page 16 of 47 17 BACKLOG The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At September 30, 2000, the Company's backlog was approximately $1.6 million. The Company expects that it will fill the majority of this backlog by December 31, 2001. CAPITAL EXPENDITURES During the year ended June 30, 1999, the Company acquired $110,298 of property and equipment with both short-term and long-term borrowings. The Company does not anticipate any significant capital expenditures during fiscal 2001. EFFECTS OF INFLATION The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company's sales or operating results. SEASONALITY Historically the Company has experienced seasonality in its business due to fluctuations in the weather. The Company typically experiences a decline in sales and operating results during the quarter ended March 31 due to winter weather conditions. ENVIRONMENTAL MATTERS The Company believes that it is currently in compliance with all applicable environmental regulations. Compliance with these regulations has not had, and is not anticipated to have, any material impact upon the Company's capital expenditures, earnings or competitive position. - -------------------------------------------------------------------------------- Page 17 of 47 18 INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 7. FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants..................................................................................16 Consolidated Balance Sheets as of June 30, 2000 and 1999...........................................................17 Consolidated Statements of Operations for the years ended June 30, 2000 and 1999...................................18 Consolidated Statements of Stockholders' Equity for the years ended June 30, 2000 and 1999.........................19 Consolidated Statements of Cash Flows for the years ended June 30, 2000 and 1999...................................20 Notes to Consolidated Financial Statements......................................................................21-33
- -------------------------------------------------------------------------------- Page 18 of 47 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Integrated Security Systems, Inc. We have audited the accompanying consolidated balance sheets of Integrated Security Systems, Inc. as of June 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Security Systems, Inc. as of June 30, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations, has an excess of liabilities over assets, and is in default of certain debt covenants. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ GRANT THORNTON LLP Dallas, Texas August 4, 2000 - -------------------------------------------------------------------------------- Page 19 of 47 20 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
June 30, ---------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ........................................................ $ 99,636 $ 251,113 Accounts receivable, net of allowance for doubtful accounts of $58,847 and $54,383, respectively ......................... 1,201,491 1,381,879 Inventories ...................................................................... 585,486 529,198 Notes receivable, net of $60,000 discount in 1999 ................................ 28,546 340,000 Unbilled revenue ................................................................. 252,567 -- Other current assets ............................................................. 112,718 156,165 Assets of discontinued operations ................................................ -- 626,220 ------------ ------------ Total current assets ........................................................... 2,280,444 3,284,575 Property and equipment, net ...................................................... 921,695 1,019,993 Capitalized software development costs, net ...................................... 113,713 332,802 Deferred income taxes ............................................................ -- 205,384 Other assets ..................................................................... 16,898 74,653 ------------ ------------ Total assets ................................................................... $ 3,332,750 $ 4,917,407 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable - trade ......................................................... $ 582,717 $ 625,964 Accrued liabilities .............................................................. 440,072 1,004,253 Current portion of long-term debt ................................................ 6,135,260 1,330,566 Liabilities of discontinued operations ........................................... -- 249,654 ------------ ------------ Total current liabilities ...................................................... 7,158,049 3,210,437 Long-term debt ...................................................................... 728,331 4,608,003 Stockholders' deficit: Convertible preferred stock, $.01 par value, 750,000 shares authorized; 102,250 and 10,250, shares respectively issued and outstanding (liquidation value of $2,045,000 and $205,000, respectively) ................................ 1,023 102 Common stock, $.01 par value, 35,000,000 shares authorized; 10,564,145 and 10,513,993 shares, respectively, issued; and 10,514,145 and 10,463,993 shares, respectively, outstanding ...................................................... 105,641 105,140 Additional paid in capital ....................................................... 14,502,963 12,704,653 Accumulated deficit .............................................................. (19,044,507) (15,592,178) Treasury stock, at cost - 50,000 shares .......................................... (118,750) (118,750) ------------ ------------ Total stockholders' deficit ...................................................... (4,553,630) (2,901,033) ------------ ------------ Total liabilities and stockholders' deficit .................................... $ 3,332,750 $ 4,917,407 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. - -------------------------------------------------------------------------------- Page 20 of 47 21 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, ---------------------------- 2000 1999 ------------ ------------ Sales ...................................................... $ 6,561,359 $ 5,828,247 Cost of sales .............................................. 4,369,262 3,836,319 ------------ ------------ Gross margin ............................................... 2,192,097 1,991,928 Operating expenses: Selling, general and administrative ..................... 4,589,922 6,038,120 Research and product development ........................ 386,899 378,365 ------------ ------------ 4,976,821 6,416,485 ------------ ------------ Loss from operations ....................................... (2,784,724) (4,424,557) Other income (expense): Interest income ......................................... 33,690 45,448 Interest expense ........................................ (645,684) (705,352) Other ................................................... -- (59,482) ------------ ------------ Loss from continuing operations before income taxes ........ (3,396,718) (5,143,943) Deferred income tax benefit ................................ 51,856 -- ------------ ------------ Net loss from continuing operations after income taxes ..... (3,344,862) (5,143,943) Discontinued operations: Gain from operations .................................... -- 21,837 Loss on disposal ........................................ -- (738,170) ------------ ------------ Loss from discontinued operations .......................... -- (716,333) ------------ ------------ Net loss ................................................... (3,344,862) (5,860,276) Preferred dividends ........................................ (107,467) -- ------------ ------------ Net loss allocable to common stockholders .................. $ (3,452,329) $ (5,860,276) ============ ============ Weighted average common shares outstanding ................. 10,508,510 9,168,124 Basic and diluted loss per share: Continuing operations ................................... $ (0.33) $ (0.56) Discontinued operations ................................. $ -- $ (0.08) ------------ ------------ Total ...................................................... $ (0.33) $ (0.64) ============ ============
The accompanying notes are an integral part of the consolidated financial statements. - -------------------------------------------------------------------------------- Page 21 of 47 22 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Stock Common Stock Additional -------------------------- -------------------------- Paid In Accumulated Treasury Shares Amount Shares Amount Capital Deficit Stock ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at July 1, 1998 ...... 10,250 $ 102 8,525,808 $ 85,258 $ 10,822,802 $ (9,731,902) $ (118,750) Common stock issuance ........ 1,200,000 12,000 768,000 Warrant issuance ............. 689,929 Warrant exercise ............. 1,668 17 Debenture conversion ......... 786,517 7,865 423,933 Net loss ..................... (5,860,276) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1999 ..... 10,250 102 10,513,993 105,140 12,704,653 (15,592,178) (118,750) Preferred stock issuance ..... 92,750 928 1,774,638 Preferred stock conversion ... (750) (7) 15,000 150 (143) Preferred dividends paid ..... (107,467) Common stock issuance ........ 35,152 352 23,815 Net loss ..................... (3,344,862) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 2000 ..... 102,250 $ 1,023 10,564,145 $ 105,641 $ 14,502,963 $(19,044,507) $ (118,750) ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. - -------------------------------------------------------------------------------- Page 22 of 47 23 INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended June 30, ---------------------------- 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss ................................................ $ (3,344,862) $ (5,860,276) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations ..................... -- 716,333 Depreciation .......................................... 208,596 202,872 Amortization .......................................... 219,089 227,638 Provision for bad debt ................................ 36,946 20,060 Provision for warranty reserve ........................ 55,000 113,352 Provision for inventory reserve ....................... 1,359 -- Unbilled revenue ...................................... (189,976) (70,091) Expenses paid with common stock and warrants .......... 111,712 1,469,922 Changes in operating assets and liabilities: Accounts receivable ................................. 171,988 (108,558) Inventories ......................................... (57,647) (81,831) Notes receivable .................................... 311,454 (338,544) Deferred income taxes ............................... 205,384 -- Other assets ........................................ 38,612 51,990 Accounts payable .................................... (43,247) 180,835 Accrued liabilities ................................. (271,161) (29,624) ------------ ------------ Cash used in continuing operations ................ (2,546,753) (3,505,922) Cash provided by discontinued operations .......... -- 3,445,964 ------------ ------------ Net cash used in operating activities ........... (2,546,753) (59,958) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment ...................... (110,298) (266,192) Purchase of software technology ......................... -- (200,090) ------------ ------------ Net cash used in investing activities ........... (110,298) (466,282) ------------ ------------ Cash flows from financing activities: Issuance of preferred stock ............................. 1,688,021 -- Dividends on preferred stock ............................ (107,467) -- Issuance of common stock ................................ -- 17 Payments of long-term debt and other liabilities ........ (613,786) (1,833,671) Proceeds from notes payable and long-term debt .......... 1,538,806 2,561,260 ------------ ------------ Net cash provided by financing activities ....... 2,505,574 727,606 ------------ ------------ Increase (decrease) in cash and cash equivalents ........... (151,477) 201,366 Cash and cash equivalents at beginning of period ........... 251,113 49,747 ------------ ------------ Cash and cash equivalents at end of period ................. $ 99,636 $ 251,113 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. - -------------------------------------------------------------------------------- Page 23 of 47 24 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Integrated Security Systems, Inc. was formed in December 1991. The Company consists of two wholly-owned subsidiaries: Intelli-Site, Inc., a developer and retail seller of PC-based control systems which integrate discrete security devices; and B&B Electromatic, Inc., a gate and barrier engineering and manufacturing facility. Golston Company, Inc. and Tri-Coastal Systems, Inc. are reflected as discontinued operations in the financial statements as a result of the sale of Golston in May 1999 and the sale of Tri-Coastal Systems in August 1999. 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the Company and its subsidiaries: B&B Electromatic, Inc. and Intelli-Site, Inc.. All significant intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS Cash is comprised of highly liquid instruments with original maturities of three months or less. INVENTORIES Inventories are carried at the lower of cost or market using the first-in, first-out method. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Leased property and equipment under capital leases are amortized on the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Estimated useful lives range from 3 to 31 years. INCOME TAXES The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the liability method, deferred taxes are provided for tax effects of differences in the basis of assets and liabilities arising from differing treatments for financial reporting and income tax purposes using currently enacted tax rates. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized prior to the expiration of the carryforward periods. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE The Company recognizes revenue from sales at either the time of shipment or by percentage of completion for installations of security systems. The Company's accounts receivable are generated from a large number of customers in the traffic and security products markets. No single customer accounted for 10% or more of revenues during the years ended June 30, 2000 or 1999. UNBILLED REVENUE The Company recognizes revenue on system installation contracts as services are performed, which results in unbilled or unearned revenues based on billing provisions in the contract. This variance due to timing is accounted for as unbilled revenue. - -------------------------------------------------------------------------------- Page 24 of 47 25 SOFTWARE DEVELOPMENT COSTS The Company accounts for software development costs pursuant to SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalized costs are amortized over the greater of the revenue method or the straight-line method over five years. Amortization expense for the years ended June 30, 2000 and 1999 was $219,089 and $227,638, respectively. Accumulated amortization at June 30, 2000 was $723,283 and at June 30, 1999 was $504,194. The Company expenses all other research and product development costs as they are incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of the Company's accounts receivable, notes receivable, accounts payable, long-term debt and other liabilities approximate the fair values of such financial instruments. NET LOSS PER SHARE The Company computes basic loss per common share using the weighted average number of common shares. Dilutive net loss per common share is not presented as all common equivalent shares would have been antidilutive. At June 30, 2000 and 1999, there were 12,503,022 and 9,664,010 potentially dilutive common shares, which were not included in weighted average shares outstanding because their effect is antidilutive. ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual amounts could differ from these estimates. STATEMENTS OF CASH FLOWS Supplemental cash flow information for the years ended June 30, 1999 and 1998:
2000 1999 -------- -------- Interest paid $411,421 $284,805 Income tax refunds received $257,240 $ --
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company follows the practice of filing statutory liens on construction projects where collection problems are anticipated. The liens serve as collateral for trade receivables. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company will adopt SAB 101 in the fiscal year ending June 30, 2001. SAB 101 is not expected to have a significant effect on the Company's consolidated results of operations or financial position. - -------------------------------------------------------------------------------- Page 25 of 47 26 STOCK-BASED COMPENSATION The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, compensation cost for stock options to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. 3. LIQUIDITY The Company is in default of the covenants for the convertible debentures issued to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. The Company has not received notice of default and is currently in negotiations to restructure this debt, but no agreement has yet been reached. The Company currently has no other source of repayment and there can be no assurance that these renegotiations will be successful. Accordingly, the debentures are classified as short-term debt on the financial statements. The Company's liabilities are currently in excess of its assets and the Company has experienced significant losses during fiscal 1999 and 2000. Management expects losses to continue through the majority of fiscal 2001. In order to meet working capital needs, the Company will need to receive additional financing either through the sale of assets, equity placement and/or additional debt. Failure to receive such financing could jeopardize the Company's ability to continue to operate. The Company is seeking stockholder approval of a proposed financial restructuring of the Company's debt. Under the terms of this financial restructuring, the Company will obtain approximately $1.0 million in cash from Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC in exchange for the issuance of promissory notes and new series of preferred stock of the Company. The Company anticipates that it will receive a portion of this $1.0 million in funding before the 2001 Annual Meeting of Stockholders. The Company will receive the full amount of this $1.0 million in funding before June 30, 2001. The cash that the Company receives from the accounts receivable factoring facility is utilized to support Company-wide operations. As discussed in more detail in the Company's proxy statement for the 2001 Annual Meeting of Stockholders, the Company's board of directors determined that the proposed financial restructuring is the best alternative to attempt to preserve stockholder value and to obtain additional funding. If the Company's stockholders do not approve the proposed financial restructuring or if the financial restructuring is not completed, then at the present time and the foreseeable future, it seems unlikely that the Company will be able to obtain additional financing either through the sale of assets of the Company or its subsidiaries, equity placement and/or additional debt. 4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS The composition of certain balance sheet accounts is as follows:
June 30, ---------------------------- 2000 1999 ------------ ------------ Inventories: Raw materials $ 383,092 $ 422,770 Work-in-process 188,391 105,763 Finished goods 14,003 665 ------------ ------------ $ 585,486 $ 529,198 ============ ============ Property and equipment: Land $ 40,164 $ 40,164 Building 586,449 586,449 Leasehold improvements 48,769 48,769 Office furniture and equipment 1,070,258 990,088 Manufacturing equipment 626,122 595,994 Vehicles 63,875 63,875 Construction 153,425 153,425 ------------ ------------ 2,589,062 2,478,764 Less: accumulated depreciation (1,667,367) (1,458,771) ------------ ------------ $ 921,695 $ 1,019,993 ============ ============
- -------------------------------------------------------------------------------- Page 26 of 47 27 5. DEBT Debt:
June 30, ---------------------------------------- 2000 1999 ----------------- ----------------- Convertible debentures to venture capital funds; interest at 9% of outstanding principal balance due in monthly installments through December 2003; monthly principal installments of $10 per $1,000 of the then remaining principal amount of the debenture beginning in December 1999 through maturity; secured by equity, assets and future contracts. The outstanding balance of the note can be converted into the Company's common stock at $0.549 per share. At June 30, 1999 and 2000, the Company was not in compliance with the Current Ratio, Minimum Tangible Net Worth, Debt to Equity and Debt Service Coverage financial standards under this agreement. ............................................... $ 4,168,202 $ 4,168,202 Term note payable to a bank; due in monthly principal and interest installments of $12,000 through November 2000; interest at the lender's prime rate less 1% (10% at June 30, 1999 and 2000); this note was refinanced in September 1999; secured by first mortgage on real estate and equipment; personally guaranteed by a former officer............................................................ 752,084 704,258 Convertible notes payable to venture capital funds; interest at 9% due in monthly installments of $4,438; principal and accrued unpaid interest due upon demand. The outstanding balance of the note can be converted into the Company's common stock at $0.549 per share............................................... 600,000 600,000 Accounts receivable factoring facility with a finance company to factor accounts receivable with recourse. This accounts receivable factoring facility has an adjustable factoring fee of 1.5%-2.0%, a minimum and maximum borrowing of $200,000 and $800,000, respectively, per month; interest at the prime rate of Chase Bank of Texas, N. A. plus 2% and expires on September 3, 2001............ 408,166 -- Notes payable to venture capital funds; interest at 9% due in monthly installments of $3,975; principal and accrued unpaid interest due upon demand.. 530,000 -- Notes payable to individual and foundation; interest at 9% due in monthly installments of $2,250; secured by accounts receivable; principal and accrued unpaid interest due upon demand................................................ 300,000 -- Cash accelerator agreement with a bank; interest at prime plus 3%; paid in full in fiscal 2000............................................................ -- 325,460 Other term notes payable to unrelated third parties............................ 105,139 140,649 ----------------- ----------------- 6,863,591 5,938,569 Less current portion........................................................... (6,135,260) (1,330,566) ----------------- ----------------- $ 728,331 $ 4,608,003 ================= =================
- -------------------------------------------------------------------------------- Page 27 of 47 28 Due to financial covenant defaults, the entire balance of the convertible debentures has been included in current maturities. Payments required under long-term debt and other liabilities outstanding at June 30, 2000 are as follows: 2001 $6,135,260 2002 724,805 2003 3,526 2004 -- 2005 -- Thereafter -- ---------- $6,863,591 ==========
6. INCOME TAXES A reconciliation of the income tax provision and the amount computed by applying the federal statutory benefit rate to loss before income taxes are as follows:
For the Years Ended ------------------------------ June 30, 2000 June 30, 1999 ------------- ------------- Federal statutory benefit rate (34.0)% (34.0)% Tax gain on sale of Golston Company, Inc. --% 22.6% Net operating carryforwards lost on sale of Golston --% 5.3% Increase in valuation allowance 38.6% 4.5% Other (2.6)% 1.6% ------------ ------------ 2.0% --% ============ ============
Deferred tax assets (liabilities) are comprised of the following at:
June 30, 2000 June 30, 1999 ------------- ------------- Deferred tax assets Amortization -- 69,000 Warranty reserve 25,000 29,000 Accounts receivable 20,000 17,000 Net operating loss carryforward 4,640,000 3,489,000 ------------- ------------- Gross deferred tax asset 4,685,000 3,604,000 Deferred tax liabilities Property and equipment (96,000) (122,000) ------------- ------------- Net deferred tax asset 4,589,000 3,482,000 Valuation allowance (4,589,000) (3,276,616) ------------- ------------- Net deferred tax asset $ -- $ 205,384 ============= =============
The tax benefit of net operating loss carryforwards at June 30, 1999 has been reduced by $1,441,000 from the amount previously reported, upon final determination of the tax effect of the sale of Golston Company, Inc. in fiscal 1999. The Company has unused net operating loss carryforwards of approximately $13.6 million at June 30, 2000. These carryforwards expire beginning in 2007 through 2020. The Company has recorded a valuation allowance each year to the extent it is more likely than not that a tax benefit will not be realized prior to expiration of the carryforward periods. - -------------------------------------------------------------------------------- Page 28 of 47 29 7. COMMITMENTS AND CONTINGENCIES The Company leases facilities and equipment under leases accounted for as operating leases. Future minimum payments for fiscal years subsequent to June 30, 2000 under these leases, which expire in 2001, are approximately $96,073. Rent expense for operating leases was $163,959 and $146,269 for the years ended June 30, 2000 and 1999, respectively. CONTINGENCIES The Company is subject to certain legal actions and claims arising in the ordinary course of business. Management recognizes the uncertainties of litigation; however, based upon the nature and management's understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company's financial position, results of operations or cash flows. 8. BENEFIT PLANS The Company has established a 401(k) savings and profit sharing plan. Participants include all employees who have completed six months of service and are at least 21 years of age. Employees can contribute up to 15% of compensation and the Company may at its option make discretionary contributions. Vesting on the Company's contribution occurs over a five-year period. The Company made no contributions during the years ended June 30, 2000 and 1999. 9. STOCK OPTIONS AND WARRANTS The Company's 1993 Stock Option Plan provides for grants of options for up to 500,000 shares of common stock. Under the plan, options must be granted with an exercise price not less than the fair market value on the date of grant. The Company's 1997 Omnibus Stock Plan provides for the granting of incentive stock options, non-statutory stock options, stock appreciation rights, awards of stock and stock purchase opportunities to its directors, employees and consultants. Under the plan, incentive stock options may only be granted to employees or directors of the Company. Option exercise prices are equal to the market price at date of grant. Shares under grant generally become exercisable over three years and expire after ten years. If the Company recognized compensation expense as permitted under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), based on the fair value at the grant dates, the Company's pro forma net loss and net loss per share would have been as follows (net loss amounts in thousands):
For the Year Ended For the Year Ended June 30, 2000 June 30, 1999 -------------------------------------- -------------------------------------- As reported Pro forma As reported Pro forma ----------------- ----------------- ----------------- ----------------- Net Loss $ (3,345) $ (3,521) $ (5,860) $ (5,979) Loss per Common Share $ (.33) $ (.35) $ (.64) $ (.65)
- -------------------------------------------------------------------------------- Page 29 of 47 30 The fair value of these options was estimated at the date of grant using the Black-Sholes option pricing model with the following weighted average assumptions: For the period ending June 30, 2000, expected volatility of 100-110%; risk-free interest rates of approximately 6.2-6.9%; no dividend yield; and expected lives of five years. For the period ending June 30, 1999, expected volatility of 37-45%; risk-free interest rates of 4.5-5.4%; no dividend yield; and expected lives of five years. The pro forma net loss and net loss per share may not be indicative of future amounts because the disclosures do not reflect compensation expense for options granted prior to fiscal 1995. Additional information with respect to options outstanding at June 30, 2000 and changes for the two years then ended is as follows (share amounts in thousands):
For the Year Ended For the Year Ended June 30, 2000 June 30, 1999 ------------------------------------ ------------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ---------------- ---------------- ---------------- ---------------- Outstanding at beginning of period 2,162 $ 1.40 1,336 $ 1.78 Granted 452 .58 933 .86 Forfeited (397) 1.12 (107) 1.42 ---------------- ---------------- ---------------- ---------------- Outstanding at end of period 2,217 $ 1.29 2,162 $ 1.40 ================ ================ ================ ================ Exercisable at end of period 1,499 $ 1.54 1,242 $ 1.71 ================ ================ ================ ================ Weighted-average fair value of options granted during the period $ .51 $ .54
Information about stock options outstanding at June 30, 2000 is summarized as follows:
Options Outstanding Options Exercisable ------------------------------------------------------ -------------------------------- Range of Shares Weighted Average Weighted Shares Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price -------- ------------- ---------------- -------------- ----------- -------------- $0.01-1.00 1,194 8.4 Years $ .73 564 $ .80 $1.1875-2.00 573 6.3 Years 1.55 485 1.58 $2.0938-2.50 450 2.9 Years 2.43 450 2.43 ----- ------ ----- ----- 2,217 $ 1.29 1,499 $1.54
- -------------------------------------------------------------------------------- Page 30 of 47 31 WARRANTS During fiscal 1999, the Company issued warrants to purchase 100,000 shares of its common stock at $0.01 per share. These warrants were issued as compensation for certain investor relations representation and expire in 2003. Also in fiscal 1999, in conjunction with financing transactions, the Company issued warrants to purchase 437,500 shares of its common stock for $0.80 per share and warrants to purchase 1,274,715 shares of its common stock for $0.549 per share, both of which expire in 2004, and, in association with the acquisition of the royalty arrangements, warrants to purchase 480,000 shares of its common stock for $2.00 per share which expire in 2009. During fiscal 2000, the company issued warrants to purchase 1,545,833 shares of its common stock at $1.00 per share. These warrants were issued in connection with the Company's Series D Convertible Preferred Stock placement completed in October and November 1999. Additional information with respect to warrants outstanding at June 30, 2000 and changes for the two years then ended are as follows (share amounts in thousands):
For the Year Ended For the Year Ended June 30, 2000 June 30, 1999 ------------------------------------ ------------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ---------------- ---------------- ---------------- ---------------- Outstanding at beginning of period 6,977 $ 1.84 4,793 $ 3.30 Granted 1,546 1.00 2,292 .86 Exercised -- -- (2) .01 Forfeited (18) 2.40 (106) 1.00 ---------------- ---------------- ---------------- ---------------- Outstanding at end of period 8,505 $ 1.69 6,977 $ 1.84 ================ ================ ================ ================ Exercisable at end of period 8,505 $ 1.69 6,977 $ 1.84 ================ ================ ================ ================ Weighted-average fair value of warrants granted during the period $ .28 $ .36
- -------------------------------------------------------------------------------- Page 31 of 47 32 Information about warrants outstanding at June 30, 2000 is summarized as follows:
Warrants Outstanding Warrants Exercisable ------------------------------------------------------ ------------------------------- Shares Weighted Average Weighted Shares Weighted Range Outstanding Remaining Average Exercisable Average of Exercise Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price ------------------ ----------- ---------------- -------------- ----------- -------------- $.01-1.00 3,965 4.4 Years $ .80 3,965 $ .80 $1.06-2.00 610 7.7 Years 1.96 610 1.96 $2.40-2.55 3,930 .8 Years 2.55 3,930 2.55 ----- ------- ----- ------- 8,505 $ 1.69 8,505 $ 1.69
10. CONVERTIBLE PREFERRED STOCK The Company's outstanding preferred stock consists of 750,000 authorized shares of $.01 par value convertible preferred stock. Series A $20 Convertible Preferred Stock. At June 30, 2000, the Company had 9,500 shares of its Series A $20 Convertible Preferred Stock (the "Series A Preferred") outstanding. Holders of the Series A Preferred are not entitled to receive any dividends, and have no voting rights, unless otherwise required pursuant to Delaware law. Each share of the Series A Preferred may, at the option of the Company, be converted into 20 shares of Common Stock at any time after (i) the closing bid price of the Common Stock is at least $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the shares of Common Stock to be received on conversion have been registered or otherwise qualified for sale under applicable securities laws. The holders of the Series A Preferred have the right to convert each share into 20 shares of Common Stock at any time. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series A Preferred are entitled to receive $20 per share before the holders of Common Stock are entitled to receive any distribution. Series D $20 Convertible Preferred Stock. At June 30, 2000 the Company had 92,750 shares of its Series D $20 Convertible Preferred Stock (the "Series D Preferred") outstanding. Holders of the Series D Preferred are entitled to receive dividends at the annual rate of 9% per share paid quarterly in cash, and have voting rights of one vote for each share of Common Stock into which the Preferred Stock is convertible. Beginning on November 15, 2004 the Company may redeem the Series D Preferred upon not less than 30 days' notice, in whole or in part, plus all accrued but unpaid dividends. After notice and prior to the expiration of the 30-day notice period, holders of the Series E Preferred will have the option to convert the Series D Preferred into Common Stock prior to the redemption. Each share of the Series D Preferred may, at the option of the Company beginning on November 15, 2000, be converted into 25 shares of Common Stock at any time after (i) the closing bid price of the Common Stock exceeds $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the Company has sustained positive earnings per share of Common Stock for the two previous quarters. The holders of the Series D Preferred have the right to convert each share into 25 shares of Common Stock at any time. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series D Preferred are entitled to receive $20 per share before the holders of Common Stock are entitled to receive any distribution. Each holder also received a stock purchase warrant to purchase 16.67 shares of common stock at $1.00 per share for each share of Series D Preferred purchased. These warrants expire on October 10, 2004. - -------------------------------------------------------------------------------- Page 32 of 47 33 11. SEGMENT REPORTING The Company has two business segments: B&B Electromatic, Inc. and Intelli-Site, Inc. These segments are differentiated by the products they produce and the customers they service as follows: B&B Electromatic, Inc. This segment consists of road and bridge perimeter security and railroad physical security products such as warning gates, crash barriers, lane changers, navigational lighting, airport lighting and hydraulic gates and operators, and aluminum gate panels. Intelli-Site, Inc. This segment consists of the development and marketing of programmable security systems that integrate multiple security devices and subsystems for governmental, commercial and industrial facilities utilizing the Intelli-Site(R) software product through systems integrators and original equipment manufacturers to end users. The Company's underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance based on earnings from operations before income tax and other income and expense. The corporate column includes corporate overhead-related items. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 2). The following table provides financial data by segment for the fiscal years ended June 30, 2000 and 1999.
B&B Intelli-Site, Electromatic, Inc Inc. Corporate Total ------------------ ------------------ ------------------ ------------------ 2000 - ---- Sales $ 5,363,239 $ 1,198,120 -- $ 6,561,359 Income/(loss) from operations 510,083 (1,900,298) (1,394,509) (2,784,724) Total assets 2,356,082 748,892 227,776 3,332,750 Depreciation and amortization expense 140,176 280,445 7,064 427,685 Capital additions 51,332 57,656 1,310 110,298 1999 - ---- Sales $ 5,538,930 $ 289,318 $ -- $ 5,828,247 Loss from operations (71,385) (2,799,885) (1,553,287) (4,424,557) Total assets 2,720,489 727,227 1,469,691 4,917,407 Depreciation and amortization expense 143,503 236,269 50,738 430,510 Capital additions 108,690 144,039 13,463 266,192
- -------------------------------------------------------------------------------- Page 33 of 47 34 12. DISCONTINUED OPERATIONS Effective October 1, 1998, the Company disposed of a portion of its Golston Company, Inc. subsidiary. In May 1999, the Company sold the remainder of Golston, which designs, manufactures and markets pneumatic tube carriers for use in financial institutions and hospitals through its plastic injection molding operations. Summarized financial information for Golston Company, Inc. is as follows:
For the Year Ended June 30, 1999 ------------------ Revenues $ 3,794,575 Income from discontinued operations 344,747 Loss on disposal (313,170)
In June 1999, the Company discontinued operations of its Tri-Coastal Systems, Inc. subsidiary, which designs, sells, installs and services electronic security systems. The Company sold Tri-Coastal Systems, Inc. on August 13, 1999. Summarized financial information for Tri-Coastal Systems, Inc. is as follows:
For the Year Ended June 30, 1999 ------------------ Revenues $ 1,423,095 Loss from discontinued operations (332,910) Loss on disposal (425,000)
The net assets of discontinued operations of Tri-Coastal Systems, Inc. at June 30, 1999 of $626,220 consist of $29,495 of cash, $159,741 of accounts receivable, $51,949 of inventories, $179,669 of other current assets, $10,601 of equipment, and $194,768 of goodwill, net of accumulated amortization. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes or disagreements required to be reported under this Item 8. - -------------------------------------------------------------------------------- Page 34 of 47 35 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT C. A. RUNDELL, 67, Director and Chairman of the board of directors, has been a director of the Company since March 1999. Mr. Rundell was appointed Chief Executive Officer of the Company upon Gerald K. Beckmann's resignation as President, Chief Executive Officer and director on August 31, 2000. Mr. Rundell is also a director and Chairman of the board of NCI Building Systems, since 1988. Also since 1989, Mr. Rundell has owned and operated Rundell Enterprises, a sole proprietorship engaged in providing acquisitions and financial consulting services to various business enterprises. Mr. Rundell is a director and member of the executive committee of Tyler Technologies, Inc., a provider of information management systems and services for county governments and other enterprises. Mr. Rundell was the President and Chief Executive Officer of Tyler Technologies, Inc. from 1997 to 1998, Chairman of the board from 1996 to 1997, and temporary Chief Executive Officer from 1996 to 1997. Mr. Rundell is also a director of Renaissance US Growth & Income Trust, PLC, a director of Dain Rauscher Corporation, a holding company for a full-service regional brokerage and investment banking company and Tandy Brands Accessories, Inc., a manufacturer of accessories for men, women and boys. Mr. Rundell earned an M.B.A. with Distinction from Harvard University and a B.S. in Chemical Engineering from The University of Texas at Austin. ALAN M. ARSHT, 57, Director has been a director of the Company since 1999. Mr. Arsht has been President of Arsht & Company, Inc., a New York based investment banking firm established in 1986. From 1977 to 1986, Mr. Arsht was Senior Vice President and Managing Director of Thomson McKinnon Securities, Inc. He also served as Vice President, Corporate Finance at Wertheim & Company, Inc. and was Special Assistant to the Deputy Secretary of the U.S. Treasury Department. Mr. Arsht also held positions at the U.S. Securities and Exchange Commission. Mr. Arsht earned an M.B.A. in Finance from American University and a B.A. in History from East Texas State University. HOLLY J. BURLAGE, 37, Executive Vice President, Chief Financial Officer, Secretary and Treasurer, joined the Company in February 1994 as Accounting Manager, became Controller in 1995, became Vice President, Secretary and Treasurer in May 1997, and became Chief Financial Officer in July 1999. Prior to joining the Company, Ms. Burlage was Controller of Signature Home Care Group, Inc., a home health care company, from 1993 to 1994, and Controller and Chief Accounting Officer of National Heritage, Inc., a publicly-traded long-term care company, from 1989 to 1993. Ms. Burlage holds a B.B.A. from Baylor University. JACK G. CALDWELL, 63, President, B&B Electromatic, Inc., joined the Company in January 1998. Prior to joining the Company, Mr. Caldwell was a Results Manager for Thomas Group, Inc. from 1992 to 1998. From 1986 to 1992, Mr. Caldwell served as the European Operations Manager for E-Systems and was Director of Sales and Marketing from 1978 to 1986 for the Cooper Industries. Mr. Caldwell earned an M.B.A. and B.S. degrees from East Texas State University. ROBERT M. GALECKE, 59, Director, has been a director of the Company since May 1996. Mr. Galecke is currently Vice President of Finance and Administration for the University of Dallas. Prior to that he was a principal in the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to May 1996. He also served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of Southmark Corporation, a financial services insurance and real estate holding company, from 1986 to 1992. From 1989 to 1995, Mr. Galecke served as Chairman of the board, President and Chief Executive Officer of National Heritage, Inc. Mr. Galecke received a graduate degree from the School of Banking at the University of Wisconsin, Madison, and a B.S. in Economics from the University of Wisconsin at Stevens Point. JAMES E. JACK, 60, Director, has been a director of the Company since May 1997. Mr. Jack is currently Executive Vice President and Chief Financial Officer of Coachmen Industries, Inc. From 1996 to 1999, Mr. Jack was Director, Global Financial Services Product for TowersPerrin. From 1991 to 1996 Mr. Jack - -------------------------------------------------------------------------------- Page 35 of 47 36 was Senior Executive Vice President and Chief Financial Officer of Associates First Capital Corporation, a publicly-traded consumer and commercial finance organization. Prior to that, Mr. Jack was Director, Executive Vice President and Chief Financial Officer from 1981 to 1993 of the same company. Mr. Jack received a graduate degree from the Southern Methodist University School of Business and a B.B.A. from the University of Notre Dame. JOHN P. JENKINS, 50, Director, has been a director of the Company since September 2000. Mr. Jenkins served as Chairman, Chief Executive Officer and President of TAVA Technologies, Inc., a systems integrator providing sophisticated IT solutions to manufacturing and process industries from 16 locations across the U.S. In July 1999, Real Software, a Belgian IT service and software provider, acquired TAVA. Mr. Jenkins continued as CEO and President of the U.S. operations, Real Enterprise Solutions, until June 2000. Prior to TAVA Technologies, Inc., Mr. Jenkins was President of Morgan Technical Ceramics, Inc., and Vice President and General Manager of the Structural Ceramic Division of Coors Ceramic Company, a subsidiary of Adolph Coors Company. Mr. Jenkins holds a Juris Doctor degree from the University of Denver and a B.S. degree in Mechanical Engineering from the University of Washington. FRANK R. MARLOW, 62, Director, has been a director of the Company since May 1995. Mr. Marlow served as Vice President, Sales and Marketing for the Company from October 1993 to February 1995. Mr. Marlow is currently Vice President of Sales for Conformity, formerly Money Star, a technology company based in Austin, Texas. From 1995 until 1998, Mr. Marlow was Vice President of Hogan Systems, a publicly-traded company subsequently purchased by Computer Sciences Corp. Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL Corporation and Syntelligence Corporation in executive sales and training positions. Robert C. Pearson, 65, has been affiliated with the Company in a non-voting capacity since January 1997 and was a director from April 1999 to August 2000. Mr. Pearson is currently Senior Vice President of Renaissance Capital Group, Inc. From 1994 to 1997, Mr. Pearson was an independent financial management consultant. From 1990 to 1994, Mr. Pearson served as Chief Financial Officer and Executive Vice President of Thomas Group, Inc., a management consulting firm, where he was instrumental in moving the company from a small privately held company to a public company with over $40 million in revenue. Prior to 1990, Mr. Pearson was responsible for all administrative activities for the Superconducting Super Collider Laboratory. In addition, from 1960 to 1985, Mr. Pearson served in a variety of positions at Texas Instruments in financial planning and analysis. Mr. Pearson earned an M.B.A. from the University of Michigan and a B.S. in Business from the University of Maryland, where he was a W. A. Paton Scholar. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto provided to the Company pursuant to Rule 16a-3(e), Messrs. Rundell, Arsht, Caldwell, Galecke, Jack, Beckmann and Marlow and Ms. Burlage had late filings during the fiscal year ending June 30, 2000. - -------------------------------------------------------------------------------- Page 36 of 47 37 ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows the compensation of the Chief Executive Officer and the two executive officers of the Company whose compensation exceeded $100,000 for the fiscal years ended June 30, 2000, 1999 and 1998.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ---------------------------------- -------------------------------------------- OTHER ANNUAL RESTRICTED OPTION/ NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS --------------------------- ---- ----------- -------- ------------ ------------ ---------- Gerald K. Beckmann 2000 $ 277,078 -- -- -- 100,000 Chief Executive Officer 1999 296,393 -- -- -- -- and President(1) 1998 289,425 -- -- -- 200,000 Holly J. Burlage 2000 $ 125,650 -- -- -- 40,000 Executive Vice President 1999 105,011 -- -- -- 60,000 and Chief Financial Officer 1998 90,368 $ 15,000 -- -- 17,500 Jack G. Caldwell 2000 $ 149,213 President 1999 140,510 -- -- -- 100,000 B&B Electromatic, Inc. 1998 58,333 -- -- -- 61,790
- ---------- (1) Resigned as of August 31, 2000. No other executive officer's salary and bonus exceeded $100,000 annually and no executive had any form of long-term incentive plan compensation arrangement with the Company during the fiscal years ended June 30, 2000, 1999 and 1998. STOCK OPTION GRANTS The following table provides information concerning the grant of stock options during the twelve months ended June 30, 2000 to the named executive officers:
NUMBER OF % OF TOTAL OPTIONS FOR THE TWELVE SECURITIES UNDERLYING GRANTED TO EMPLOYEES EXERCISE MONTHS ENDED 6/30/00 OPTIONS GRANTED(1) IN FISCAL YEAR(%) PRICE($) EXPIRATION DATE - -------------------- --------------------- -------------------- -------- --------------- Gerald K. Beckmann(2) 50,000 11.1% $0.563 08/23/09 Gerald K. Beckmann(2) 50,000 11.1 0.625 06/26/10 Holly J. Burlage 20,000 4.4 0.563 08/23/09 Holly J. Burlage 20,000 4.4 0.625 06/26/10 Jack G. Caldwell 10,000 2.2 0.563 08/23/09 Jack G. Caldwell 20,000 4.4 0.625 06/26/10
- ---------- (1) The options for all listed vest with respect to 25% of the shares issuable thereunder six months after the date of grant and with respect to cumulative increments of 25% of the shares issuable thereunder on each anniversary of the date of grant. (2) Resigned as of August 31, 2000. - -------------------------------------------------------------------------------- Page 37 of 47 38 OPTION EXERCISES AND HOLDINGS The following table provides information related to the number of shares received upon exercise of options, the aggregate dollar value realized upon exercise, and the number and value of options held by the named executive officers of the Company at June 30, 2000.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS FISCAL YEAR END AT FISCAL YEAR END($) ---------------------------- ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- FOR THE TWELVE MONTHS ENDED 6/30/00 - ----------------------------------- Gerald K. Beckmann 346,973 137,500 $ 7,031 $ 21,094 Holly J. Burlage 90,625 69,375 2,813 8,437 Jack G. Caldwell 98,843 92,947 1,406 4,219
DIRECTOR COMPENSATION Currently, directors are compensated by incentive stock options in an amount equivalent to $7,500 annually for serving on the board in addition to $1,250 for each committee on which they serve. All directors are reimbursed for their out-of-pocket expenses incurred in connection with their attendance at board meetings. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number and percentage of outstanding shares of Common Stock beneficially owned as of September 30, 2000, by (a) each director and named executive officer of the Company, (b) all officers and directors of the Company as a group, and (c) all persons who are known by the Company to be beneficial owners of 5% or more of the Company's outstanding Common Stock. Unless otherwise noted, each of the persons listed below has sole voting and investment power with respect to the shares indicated as beneficially owned by such person. - -------------------------------------------------------------------------------- Page 38 of 47 39
NUMBER OF SHARES BENEFICIALLY NAME OF BENEFICIAL OWNER OWNED(1) PERCENT(1) - ------------------------------------------------------------------ ----------------- ---------- Renaissance Capital Growth & Income Fund III, Inc.(4) 5,874,295 36.7% Renaissance US Growth & Income Trust PLC(5) 5,595,388 35.8% C. A. Rundell, Jr.(2)(3)(6) 1,764,190 15.0% Phillip R. Thomas(7) 1,490,942 14.0% Gerald K. Beckmann(8) 1,063,166 9.6% Alan M. Arsht(2)(3)(9) 316,955 2.9% Frank R. Marlow(2)(3)(10) 188,911 1.8% Holly J. Burlage(2)(3)(11) 168,619 1.6% Jack Caldwell(2)(3)(12) 101,343 0.9% James E. Jack(2)(3)(13) 93,575 0.9% Robert M. Galecke(2)(3)(14) 46,081 0.4% John P. Jenkins(2)(3) -- --% All current directors and executive officers as a group (8 person) 1,500,484 14.0%
- ---------- (1) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. (2) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX 75063. (3) Mr. Rundell is a Director, Chairman of the Board and Chief Executive Officer of the Company. Mr. Arsht, Mr. Marlow, Mr. Jack, Mr. Galecke, and Mr. Jenkins are Directors of the Company. Mr. Caldwell is President of a subsidiary of the Company. Ms. Burlage is Vice President, Chief Financial Officer and Secretary of the Company. (4) Based on a 13(g) filing dated November 10, 1999, Renaissance Capital Growth & Income Fund III, Inc. is deemed the beneficial owner of 5,874,295 shares of Common Stock. The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (5) Based on a 13(g) filing dated November 12, 1999, Renaissance US Growth & Income Trust PLC is deemed the beneficial owner of 5,595,388 shares of Common Stock. The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (6) Includes 164,126 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 705,971 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 331,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (7) Includes 108,418 shares of Common Stock issuable upon the exercise of warrants within 60 days. The address for Mr. Thomas is 3510 Turtle Creek Boulevard, Ph-A, Dallas, TX 75219-5542. (8) Includes 409,473 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; and 128,021 shares of Common Stock issuable upon the exercise of warrants within 60 days. The address for Mr. Beckmann is 1017 Diamond Boulevard, Southlake, TX 76092. (9) Includes 4,455 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 125,000 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 187,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (10) Includes 79,879 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 35,167 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 31,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. - -------------------------------------------------------------------------------- Page 39 of 47 40 (11) Includes 95,625 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 26,240 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 37,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (12) Includes 101,343 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days. (13) Includes 21,492 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 20,833 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 31,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (14) Includes 25,248 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 8,333 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 12,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 12, 2000, Mr. Rundell, Chairman of the board of directors, Chief Executive Officer and a stockholder of the Company, loaned the Company approximately $200,000, at 9% annual interest. On June 28, 2000, The Rundell Foundation, an affiliate of Mr. Rundell, loaned the Company approximately $100,000, at 9% annual interest. To date, both of the loans remain outstanding. On December 31, 1996, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC together loaned the Company $4.6 million at a 9% annual interest rate. Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC currently are stockholders of the Company. In addition, during calendar year 1999 and through June 30, 2000, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC loaned the Company approximately $1.13 million at a 9% annual interest rate in exchange for promissory notes. Mr. Jenkins joined the board of directors in September 2000. In addition to his board duties, Mr. Jenkins currently serves as a consultant to the Company's subsidiary, Intelli-Site, Inc., on a part-time basis at an hourly rate of $120.00. Intelli-Site did not employ Mr. Jenkins as a consultant in fiscal year 2000. Mr. Beckmann was the Company's Chief Executive Officer and President until August 2000. He is currently a director and stockholder of the Company. Mr. Beckmann became a consultant to the Company in August 2000 on a part-time basis at an hourly rate of $120.00. The Company believes that the terms of the foregoing transactions were on terms no less favorable to the Company than could be obtained from unaffiliated third parties. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. *3.1 Amended and Restated Certificate of Incorporation of the Company. *3.2 Amended and Restated Bylaws of the Company. *3.11 Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.11 to the Company's Form 10-KSB for the year ended December 31, 1994). *4.1 Specimen certificate for common stock of the Company. *4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant. - -------------------------------------------------------------------------------- Page 40 of 47 41 **4.5 Certificate of Designation for Series A $20 Convertible Preferred Stock. *******4.6 Certificate of Designation for Series D $20 Convertible Preferred Stock. *******4.7 Convertible Debenture, dated December 31, 1996, in the amount of $2.3 million, with Renaissance Capital Growth & Income Fund III, Inc. *******4.8 Convertible Debenture, dated December 31, 1996, in the amount of $2.3 million, with Renaissance US Growth & Income Trust PLC. *******4.9 Amendment to Convertible Debenture, dated March 26, 1998, in the amount of $2.3 million, with Renaissance Capital Growth & Income Fund III, Inc., originally dated December 31, 1996. *******4.10 Amendment to Convertible Debenture, dated March 26, 1998, in the amount of $2.3 million, with Renaissance US Growth & Income Trust PLC, originally dated December 31, 1996, *******4.11 Form of Convertible Promissory Note. *******4.12 Form of Non-Convertible Promissory Note. *******4.13 Security Agreement, dated as of October 2, 1998, among the Company, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.14 Stock Pledge Agreement, dated as of December 31, 1996, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.15 First Amendment to Stock Pledge Agreement, dated May 5, 2000, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.16 Registration Rights Agreement, dated as of February 22, 1999, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.17 Registration Rights Agreement, dated as of October 20, 2000 among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.18 Promissory Note, dated April 12, 2000, issued to C. A. Rundell, Jr., in the amount of $200,000. *******4.19 Promissory Note, dated June 28, 2000, issued to The Rundell Foundation, in the amount of $100,000. *******4.20 Promissory Note, dated November 17, 2000, issued to C. A. Rundell, Jr., in the amount of $50,000. - -------------------------------------------------------------------------------- Page 41 of 47 42 **10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated September 7, 1993, as amended on December 30, 1994. *10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option Agreement. *10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock Option Agreement. *10.13 Form of Indemnification Agreement by and between the Company and the Company's officers and directors. *10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and among the Company, Trammell Crow Company No. 90 and Petula Associates Limited for property located in Dallas, Texas. *10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option Plan. ***10.58 Form of Subscription Agreement for Series A Convertible Preferred Stock executed on March 27, 1996. ***10.59 Subscription Agreement for Common Stock executed March 28, 1996. ***10.60 Form of Warrant Agreement for purchase of common stock executed March 29, 1996. **10.64 Subscription Agreement, dated December 31, 1996, between the Company and ProFutures Special Equity Fund, L.P. **10.65 Convertible Loan Agreement, dated December 31, 1996, between the Company (and its subsidiaries) and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. **10.71 Asset Purchase Agreement, dated October 1, 1998, between the Company and MPA Systems, Inc. ****10.73 Asset Purchase Agreement, dated May 29, 1999 between the Company and Day's Molding & Machinery, LLC *****10.74 Purchase Agreement dated May 21, 1999 between the Company and I.S.T. Partners, Ltd. *****10.75 Stock Purchase Agreement dated August 13, 1999 between the Company and Notification Systems of America, Inc. ******10.76 Form of Subscription Agreement for Series D Convertible Preferred Stock. ******10.77 Amended and Restated Certificate of Incorporation of the Company. *******21.1 Subsidiaries of the Company. - -------------------------------------------------------------------------------- Page 42 of 47 43 *******23.1 Consent of Grant Thornton LLP - ---------- * Filed as the similarly numbered exhibit to the Company's Registration Statement on Form SB-2 (No. 33-59870-FW) and incorporated herein by reference. ** Filed as the similarly numbered exhibit to the Company's Registration Statement on Form SB-2 (No. 333-5023) and incorporated herein by reference. *** Filed as the similarly numbered exhibit to the Company's Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by reference. **** Filed as the similarly numbered exhibit to the Company's Form 8-K filed June 14, 1999 and incorporated herein by reference. ***** Filed as the similarly numbered exhibit to the Company's Form 10-KSB for the fiscal year ended June 30, 1999 and incorporated herein by reference. ****** Filed as the similarly numbered exhibit to the Company's Form 10-QSB for the quarter ended December 31, 1999 and incorporated herein by reference. ******* Filed herewith. (b) Reports filed on Form 8-K. The Company filed a Form 8-K on August 25, 2000 to report the changes in the Company's management. - -------------------------------------------------------------------------------- Page 43 of 47 44 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Integrated Security Systems, Inc. ----------------------------------------- (Registrant) Date: February 28, 2001 /s/ C. A. RUNDELL, JR. ------------------ ----------------------------------------- C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Integrated Security Systems, Inc. ----------------------------------------- (Registrant) Date: February 28, 2001 /s/ C. A. RUNDELL, JR. ------------------ ----------------------------------------- C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer Date: February 28, 2001 /s/ HOLLY J. BURLAGE ------------------ ----------------------------------------- Holly J. Burlage Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) Date: February 28, 2001 /s/ ALAN M. ARSHT ------------------ ----------------------------------------- Alan M. Arsht Director Date: February 28, 2001 /s/ ROBERT M. GALECKE ------------------ ----------------------------------------- Robert M. Galecke Director Date: February 28, 2001 /s/ JAMES E. JACK ------------------ ----------------------------------------- James E. Jack Director Date: February 28, 2001 /s/ JOHN P. JENKINS ------------------ ----------------------------------------- John P. Jenkins Director Date: February 28, 2001 /s/ FRANK R. MARLOW ------------------ ----------------------------------------- Frank R. Marlowe Director - -------------------------------------------------------------------------------- Page 44 of 47 45 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 Amended and Restated Certificate of Incorporation of the Company. *3.2 Amended and Restated Bylaws of the Company. *3.11 Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.11 to the Company's Form 10-KSB for the year ended December 31, 1994). *4.1 Specimen certificate for common stock of the Company. *4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant. **4.5 Certificate of Designation for Series A $20 Convertible Preferred Stock. *******4.6 Certificate of Designation for Series D $20 Convertible Preferred Stock. *******4.7 Convertible Debenture, dated December 31, 1996, in the amount of $2.3 million, with Renaissance Capital Growth & Income Fund III, Inc. *******4.8 Convertible Debenture, dated December 31, 1996, in the amount of $2.3 million, with Renaissance US Growth & Income Trust PLC. *******4.9 Amendment to Convertible Debenture, dated March 26, 1998, in the amount of $2.3 million, with Renaissance Capital Growth & Income Fund III, Inc., originally dated December 31, 1996. *******4.10 Amendment to Convertible Debenture, dated March 26, 1998, in the amount of $2.3 million, with Renaissance US Growth & Income Trust PLC, originally dated December 31, 1996, *******4.11 Form of Convertible Promissory Note. *******4.12 Form of Non-Convertible Promissory Note. *******4.13 Security Agreement, dated as of October 2, 1998, among the Company, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.14 Stock Pledge Agreement, dated as of December 31, 1996, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.15 First Amendment to Stock Pledge Agreement, dated May 5, 2000, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.16 Registration Rights Agreement, dated as of February 22, 1999, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.17 Registration Rights Agreement, dated as of October 20, 2000 among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. *******4.18 Promissory Note, dated April 12, 2000, issued to C. A. Rundell, Jr., in the amount of $200,000. *******4.19 Promissory Note, dated June 28, 2000, issued to The Rundell Foundation, in the amount of $100,000. *******4.20 Promissory Note, dated November 17, 2000, issued to C. A. Rundell, Jr., in the amount of $50,000.
- -------------------------------------------------------------------------------- Page 45 of 47 46 **10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated September 7, 1993, as amended on December 30, 1994. *10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option Agreement. *10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock Option Agreement. *10.13 Form of Indemnification Agreement by and between the Company and the Company's officers and directors. *10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and among the Company, Trammell Crow Company No. 90 and Petula Associates Limited for property located in Dallas, Texas. *10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option Plan. ***10.58 Form of Subscription Agreement for Series A Convertible Preferred Stock executed on March 27, 1996. ***10.59 Subscription Agreement for Common Stock executed March 28, 1996. ***10.60 Form of Warrant Agreement for purchase of common stock executed March 29, 1996. **10.64 Subscription Agreement, dated December 31, 1996, between the Company and ProFutures Special Equity Fund, L.P. **10.65 Convertible Loan Agreement, dated December 31, 1996, between the Company (and its subsidiaries) and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC. **10.71 Asset Purchase Agreement, dated October 1, 1998, between the Company and MPA Systems, Inc. ****10.73 Asset Purchase Agreement, dated May 29, 1999 between the Company and Day's Molding & Machinery, LLC *****10.74 Purchase Agreement dated May 21, 1999 between the Company and I.S.T. Partners, Ltd. *****10.75 Stock Purchase Agreement dated August 13, 1999 between the Company and Notification Systems of America, Inc. ******10.76 Form of Subscription Agreement for Series D Convertible Preferred Stock. ******10.77 Amended and Restated Certificate of Incorporation of the Company. *******21.1 Subsidiaries of the Company. - -------------------------------------------------------------------------------- Page 46 of 47 47
*******23.1 Consent of Grant Thornton LLP
- ---------- * Filed as the similarly numbered exhibit to the Company's Registration Statement on Form SB-2 (No. 33-59870-FW) and incorporated herein by reference. ** Filed as the similarly numbered exhibit to the Company's Registration Statement on Form SB-2 (No. 333-5023) and incorporated herein by reference. *** Filed as the similarly numbered exhibit to the Company's Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by reference. **** Filed as the similarly numbered exhibit to the Company's Form 8-K filed June 14, 1999 and incorporated herein by reference. ***** Filed as the similarly numbered exhibit to the Company's Form 10-KSB for the fiscal year ended June 30, 1999 and incorporated herein by reference. ****** Filed as the similarly numbered exhibit to the Company's Form 10-QSB for the quarter ended December 31, 1999 and incorporated herein by reference. ******* Filed herewith. Page 47 of 47 EX-4.6 2 d84523a2ex4-6.txt CERTIFICATE OF DESIGNATION FEE 1 EXHIBIT 4.6 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES D $20 CONVERTIBLE PREFERRED STOCK of INTEGRATED SECURITY SYSTEMS, INC. PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE The undersigned, President of Integrated Security Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the said Board of Directors on August 13, 1999, adopted the following resolutions creating a series of shares of Preferred Stock, par value $.01 per share, designated as Series D $20 Convertible Preferred Stock: RESOLVED, that, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be, and it hereby is, created, and that the designations and amounts thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series D $20 Convertible Preferred Stock" and the number of shares constituting such series shall be 150,000. Section 2. Dividends. The holders of Series D $20 Convertible Preferred Stock shall be entitled to receive, out of the funds of the Corporation legally available therefor (and the Board of Directors shall declare such dividends to the extent funds are legally available therefor), a cash dividend at the rate of $1.80 per annum per share, and no more. Dividends on each share of Series D shall be cumulative from the date of original issue of such share. Such dividends shall be paid in four equal quarterly installments on each December 31, March 31, June 30 and September 30 (the "Dividend Payment Dates"), beginning with December 31, 1999. Dividends on account of arrears may be declared and paid at any time, without reference to any Dividend Payment Date. Each dividend shall be paid to the holders of record of 2 shares of Series D $20 Convertible Preferred Stock as they appear on the stock register of the Corporation on such record date, not exceeding 30 days preceding the payment date thereof, as may be fixed by the Board of Directors of the Corporation. So long as any share of Series D $20 Convertible Preferred Stock remains outstanding, no dividend whatever shall be paid or declared and no distribution shall be made on shares of the Common Stock or any junior stock (that is, stock ranking junior to the Series D $20 Convertible Preferred Stock either as to dividends or upon liquidation, dissolution or winding up), other than a dividend payable solely in junior stock, and no shares of junior stock shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of junior stock, or the exchange or conversion of one share of junior stock, in each case, for or into another share of junior stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of junior stock), unless all accrued dividends on all outstanding shares of Series D $20 Convertible Preferred Stock for all past quarterly dividend periods shall have been paid and the full dividend thereon for the then current quarterly dividend period shall have been paid or declared and set apart for payment. Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on any junior stock from time to time out of any funds legally available therefor, and the shares of Series D $20 Convertible Preferred Stock shall not be entitled to participate therein. Section 3. Voting. The holder of each share of Series D $20 Convertible Preferred Stock shall have the right to one vote for each share of Common Stock, par value $.01, of the Corporation ("Common Stock"), into which such share of Series D $20 Convertible Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any meeting of the holders of Common Stock, in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote, including without limitation, the election of directors by holders of the Common Stock. Fractional votes shall not be permitted and any fractional voting rights available to any holder of Series D $20 Convertible Preferred Stock on an as-converted basis (after aggregating all shares of Common Stock into which shares of Series D $20 Convertible Preferred Stock held by such holder could be converted) shall be rounded down to the nearest whole number. Section 4. Conversion. (1) Beginning on November 15, 2000, each share of Series D $20 Convertible Preferred Stock (and all or any portion of all such shares) may be converted at the option of the Board of Directors of the Corporation at any time, subject to the occurrence of both events described in paragraph (B) of this Section 4, into the number of shares of Common Stock as is determined by dividing the Liquidation Amount (defined below) by the Conversion Price (defined below). The initial Conversion Price shall be $.80, and shall be subject to adjustment 2 3 from time to time as provided in paragraph (D) of this Section 4. Upon the action by the Board of Directors authorizing the conversion of shares of Series D $20 Convertible Preferred Stock, the Corporation shall send notice of such conversion to each holder of Series D $20 Convertible Preferred Stock whose shares are to be so converted. (2) The Corporation shall not have the conversion right described in paragraph (A) of this Section 4 until such time as (i) the closing bid price for the Common Stock, as quoted on NASDAQ, for twenty (20) consecutive trading days exceeds 2.5 times the Conversion Price in effect on such trading days and (ii) the Corporation has had basic earnings per share of Common Stock of greater than $0 for each of the two complete fiscal quarters immediately preceding such conversion. (3) Each share of Series D $20 Convertible Preferred Stock shall be convertible, at the option of the holder thereof, as a whole or in part, at any time and from time to time, by written notice to the Corporation, into the number of shares of Common Stock as is determined by dividing the Liquidation Amount by the Conversion Price then in effect. Before any holder of Series D $20 Convertible Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation. (4) In the event the Corporation shall at any time after the date of issuance of the Series D $20 Convertible Preferred Stock (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Conversion Price in effect immediately prior to such event shall be adjusted by multiplying such Conversion Price by a fraction the numerator of which is the number of shares of Common Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. (5) In connection with the conversion of any shares of the Series D $20 Convertible Preferred Stock, no fractional shares of Common Stock shall be issued. Any fractional shares of Common Stock to which a holder of Series D $20 Convertible Preferred Stock would otherwise be entitled (after aggregating all shares of Common Stock which such holder would receive upon such conversion) shall be rounded down to the nearest whole number. Section 5. Reacquired Shares. Any shares of Series D $20 Convertible Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 3 4 Section 6. Redemption. At any time on or after November 15, 2004, the Corporation, at the option of the Board of Directors, may redeem shares of Series D $20 Convertible Preferred Stock, at any time and from time to time, in whole or in part, upon notice given as hereinafter specified, at the Liquidation Amount per share in effect on the redemption date. Notice of every redemption of shares of Series D $20 Convertible Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses as they shall appear on the books of the Corporation. Such mailing shall be at least 30 days and no more than 60 days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of shares of Series D $20 Convertible Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series D $20 Convertible Preferred Stock. The giving of such notice will not prohibit the conversion of the Series D $20 Convertible Preferred Stock by any holder in accordance with paragraph (C) of Section 4. In case of redemption of only a part of the shares of Series D $20 Convertible Preferred Stock at the time outstanding, the redemption may be either pro rata or by lot. The Board of Directors shall have full power and authority, subject to the provisions herein contained, to prescribe the terms and conditions upon which shares of Series D $20 Convertible Preferred Stock shall be redeemed from time to time. If notice of redemption shall have been duly given, and if on or before the redemption date specified therein all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, on and after such redemption date, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on redemption thereof, without interest. Any funds so set aside or deposited by the Corporation which shall not be required for such redemption because of the exercise of any right of conversion by the holder thereof pursuant to paragraph (C) of Section 4 subsequent to the date of such deposit shall be released or repaid to the Corporation forthwith. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of three years from such redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment thereof. 4 5 Section 7. Liquidation, Dissolution or Winding Up. (1) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D $20 Convertible Preferred Stock unless, prior thereto, the holders of shares of Series D $20 Convertible Preferred Stock shall have received the Liquidation Amount with respect to such shares. "Liquidation Amount" with respect to any share of Series D $20 Convertible Preferred Stock on any date shall mean the sum of (i) $20 and (ii) the amount of any accrued and unpaid dividends with respect to such share on such date. Following the payment of the full amount of the Liquidation Amount, no additional distributions shall be made to the holders of shares of Series D $20 Convertible Preferred Stock. (2) In the event that there are not sufficient assets available to permit payment in full of the Liquidation Amount and the liquidation preferences of all other series of preferred stock of the Corporation, if any, which rank on a parity with the Series D $20 Convertible Preferred Stock, then such remaining assets shall be distributed ratably to the holders of the Series D $20 Convertible Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. Section 8. Consolidation, Merger, etc. In the event the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or other securities, cash or any other property, then in any such event each share of Series D $20 Convertible Preferred Stock shall at the same time be similarly exchanged or changed into the aggregate amount of stock, securities, cash and/or any other property, as the case may be, as a holder of Series D $20 Convertible Preferred Stock would have received in such consolidation, merger, combination or other transaction in exchange for the shares of Common Stock issuable upon conversion of one share of Series D $20 Convertible Preferred Stock had the holder converted such share of Series D $20 Convertible Preferred Stock into shares of Common Stock immediately prior to such consolidation, merger, combination or other transaction, at the Conversion Price then in effect. The consolidation, merger, combination or other transaction of the Corporation with one or more other corporations shall not constitute a liquidation, dissolution or winding up of the Corporation within the meaning of paragraph (A) of Section 7. Section 9. Ranking. The Series D $20 Convertible Preferred Stock shall rank on a parity with the Corporation's Series A $20 Convertible Preferred Stock, and with all other series of the Corporation's preferred stock as to the distribution of assets, unless the terms of any such series shall provide otherwise. 5 6 IN WITNESS WHEREOF, I have executed and subscribed this Certificate and do affirm the foregoing as true as of October 8, 1999. /s/ GERALD K. BECKMANN --------------------------- Gerald K. Beckmann President 6 EX-4.7 3 d84523a2ex4-7.txt CONVERTIBLE DEBENTURE 1 EXHIBIT 4.7 INTEGRATED SECURITY SYSTEMS, INC. 9.00% Convertible Debenture $2,300,000 No. 1 Date of Issue: December 31, 1996 Integrated Security Systems, Inc. (a Delaware corporation hereinafter referred to as the "Company" or "Borrower") is indebted to and, for value received, herewith promises to pay to: River Oaks Trust Company, FBO Renaissance Capital Growth & Income Fund III, Inc. or to its order, (together with any assignee, jointly or severally, the "Holder" or "Lender") on or before December 1, 2003 (the "Due Date") (unless this Debenture shall have been sooner called for redemption or presented for conversion as herein provided), the sum of Two Million Three Hundred Thousand Dollars ($2,300,000) (the "Principal Amount") and to pay interest on the Principal Amount at the rate of nine percent (9.00%) per annum as provided herein. In furtherance thereof, and in consideration of the premises, the Borrower covenants, promises and agrees as follows: 1. Interest: Interest on the Principal Amount outstanding from time to time shall accrue at the rate of 9.00% per annum and be payable in monthly installments commencing February 1, 1997, and subsequent payments shall be made on the first day of each month thereafter until the Principal Amount and all accrued and unpaid interest shall have been paid in full. Overdue principal and interest on the Debenture shall, to the extent permitted by applicable law, bear interest at the rate of 9.00% per annum. All payments of both principal and interest shall be made at the address of the Holder hereof as it appears in the books and records of the Borrower, or at such other place as may be designated by the Holder hereof. 2. Maturity: If not sooner redeemed or converted, this Debenture shall mature on December 1, 2003 at which time all then remaining unpaid principal, interest and any other charges then due under the Loan Agreement shall be due and payable in full. 3. Mandatory Principal Installments: If this Debenture is not sooner redeemed or converted as provided hereunder, Borrower shall pay to Holder, commencing on December 1, - 1 - 2 1999, and the first day of each successive month thereafter prior to maturity, mandatory principal redemption installments, each of such installments to be in the amount of Ten Dollars ($10) per Thousand Dollars ($1,000) of the then remaining principal amount of the Debenture and further, at maturity, shall make a final installment of all of the remaining unpaid Principal Amount balance due plus the amount of any unpaid interest and other charges then due. Each of such installments shall be applied in partial redemption of the Debenture when received by Holder. 4. Mandatory Redemption in the Event of Certain Changes: If at any time after the date hereof (i) the Common Stock is not listed for exchange on the NASDAQ National Market ("National Market"), the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), or quoted on the NASDAQ Small Cap System ("Small Cap System"), or (ii) any Person acquires more than a majority of the Common Stock, the Debenture shall, at the option of the Holder upon thirty (30) days notice to the Borrower, be redeemed at the greater of (y) market value of the Debenture or (z) at 111% of par prior to November 1, 1997, thereafter at 123% of par until November 1, 1998, thereafter at 137% of par until November 1, 1999, thereafter at 152% of par until November 1, 2000 and thereafter at 167% of par. 5. Redemption: (a) On any interest payment date, and after prior irrevocable notice as provided for below, the outstanding principal amount of this Debenture is redeemable, in whole but not in part, at 120% of par if the following conditions are satisfied: (i) The closing bid price for the Common Stock averages at least $4.00 per share for the 21 consecutive trading days prior to the irrevocable notice and the Common stock is listed or quoted on the National Market, the Small Cap System, AMEX or NYSE; (ii) the $4.00 bid price is supported by a minimum of 30 times fully diluted net earnings per share of Common Stock in the aggregate for the last four consecutive fiscal quarters preceding the date of irrevocable notice, excluding any extraordinary gains of the Borrower; (iii) the average (20 days) daily trading volume shall be no less than 10,000 shares; and (iv) the Borrower shall have filed a registration statement covering the shares of Common Stock issuable upon conversion of the Debentures. The foregoing earnings per share and bid price tests shall be duly adjusted for share splits, stock dividends, mergers, consolidations, and other recapitalizations. (b) The Borrower may exercise this right to redeem prior to maturity by giving notice (the "Redemption Notice") thereof to the holder of this Debenture as such name appears on the books of the Borrower, which notice shall specify the terms of redemption (including the place at which the holder may obtain payment), the total principal amount to be redeemed (such principal amount plus the premium thereon herein called the "Redemption Amount") and the date for redemption (the "Redemption Date"), which date shall not be less than 90 days nor more than 120 days after the date of the notice. On the Redemption Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to and including the Redemption Date, and shall pay to the holder a dollar amount equal to the Redemption Amount. In the case of Debentures called for redemption, the conversion rights will expire at the close of business on the Redemption Date. - 2 - 3 6. Conversion Right: The holder of this Debenture shall have the right, at holder's option, at any time, to convert all, or, in multiples of $10,000, any part of this Debenture into such number of fully paid and nonassessable shares of common stock, $0.01 par value, of Integrated Security Systems, Inc. (the "Common Stock") as shall be provided herein. The holder of this Debenture may exercise the conversion right by giving written notice (the "Conversion Notice") to Borrower of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by the Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the face amount of the Debenture divided by the Conversion Price as defined below and in effect on the date the Conversion Notice is given; provided, however, that in the event that this Debenture shall have been partially redeemed, shares of Common Stock shall be issued pro rata, rounded to the nearest whole share. Conversion shall be deemed to have been effected on the date the Conversion Notice is received (the "Conversion Date"). Within 20 business days after receipt of the Conversion Notice, Borrower shall issue and deliver by hand against a signed receipt therefor or by United States registered mail, return receipt requested, to the address designated in the Conversion Notice, a stock certificate or stock certificates of Borrower representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid on the Debenture up to and including the Conversion Date. The conversion rights will be governed by the following provisions: (a) Conversion Price: On the issue date hereof and until such time as an adjustment shall occur, the Conversion price shall be $1.0 per share; provided, however, that the Conversion Price shall be subject to adjustment at the times, and in accordance with the following provisions: (i) Adjustment for Issuance of Shares at less than the Conversion Price: If and whenever any Additional Common Stock shares shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the consideration per share received by Borrower for the additional shares of Common Stock then issued and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of shares issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debenture into shares equal in amount to the same percentage interest in the Common Stock of Integrated Security Systems, Inc. as existed for the Holder immediately proceeding the Stock Issue Date. (ii) Sale of Shares: In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of the cash received by Borrower for such shares, after any compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers - 3 - 4 or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. (iii) Reclassification of Shares: In case of the reclassification of securities into shares of Common Stock, the shares of Common Stock issued in such reclassification shall be deemed to have been issued for a consideration other than cash. Shares of Additional Common Stock issued by way of dividend or other distribution on any class of stock of Borrower shall be deemed to have been issued without consideration. (iv) Split up or Combination of Shares: In case issued and outstanding shares of Common Stock shall be subdivided or split up into a greater number of shares of the Common Stock, the Conversion Price shall be proportionately decreased, and in case issued and outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the time of record of the split-up or combination, as the case may be. (v) Exceptions: The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Borrower (including Common Stock in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issued upon exercise of any warrants or stock purchase options issued and outstanding as of the date of this Debenture; (C) Common Stock issued pursuant to exercise of authorized or outstanding options under any currently existing incentive stock option plan for the officers, directors, and certain other key personnel as defined in said stock option plans of Borrower as currently established; (D) Common Stock issued pursuant to the conversion of Preferred Stock currently outstanding at its current conversion price; (E) Issuance of the first 700,000 shares of Common Stock sold or issued for less than the Conversion Price. (b) Adjustment for Mergers; Consolidations, Etc.: (i) In the event of distribution to all Common Stock holders of any stock, indebtedness of Borrower or assets (excluding cash dividends or distributions from retained earnings) or other rights to purchase securities or assets, then, after such event, the Debentures will be convertible into the kind and amount of securities, cash and other property which the holder of the Debentures would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debentures immediately prior to the occurrence of such event. (ii) In case of any capital reorganization, reclassification of the stock of Borrower (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of shares), this Debenture shall be convertible into the kind and number of shares of - 4 - 5 stock or other securities or property of Borrower to which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the immediately foregoing sentence shall similarly apply to successive reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. (iii) The term "Fair Market Value", as used herein, is the value ascribed to consideration other than cash as determined by the Board of Directors of Borrower in good faith, which determination shall be final, conclusive and binding. If the Board of Directors shall be unable to agree as to such fair market value, then the issue of fair market value shall be submitted to arbitration under and pursuant to the rules and regulations of the American Arbitration Association, and the decision of the arbitrators shall be final, conclusive and binding, and a final judgment may be entered thereon; provided, however, that such arbitration shall be limited to determination of the fair market value of assets tendered in consideration for the issue of Common Stock. (iv) Notice of Adjustment. (A) In the event Borrower shall propose to take any action which shall result in an adjustment in the Conversion Price, Borrower shall give notice to the Holder of this Debenture, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of 10 days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. (B) Following completion of an event wherein the Conversion Price shall be adjusted, Borrower shall furnish to the holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of the Borrower, of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect which statement shall constitute and amendment to this Debenture. 7. One Time Adjustment to Conversion Price. If (y) the Borrower has failed to achieve minimum projections as provided in the business plan, which minimum projections are the achievement of year end 1997 net sales of $16,500,000 and net income after tax of $2,000,000 and (z) the average closing bid price of the Common Stock for the 21 consecutive trading days following Borrower's public press release of the 1997 fiscal year end financial results (such average closing bid price herein referred to as the "1997 Conversion Price Adjustment Bid Price") is a price less than the then existing Conversion Price, then the Conversion Price shall be adjusted downward to an amount equal to seventy-five percent (75%) of the said 1997 Conversion Price Adjustment Bid Price. The adjustment shall only be utilized to adjust the Conversion Price to a lesser amount than the prior existing Conversion Price. If an adjustment is required pursuant to Section 7, then the Borrower shall furnish to the holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of Borrower, of - 5 - 6 the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect, which statement shall continue an amendment to The Debenture. 8. Reservation of Shares: Borrower warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock or treasury shares of common stock necessary to effect conversion of this Debenture. 9. Registration Rights. Shares issued upon conversion of this Debenture shall be restricted from transfer by the holder except if and unless the shares are duly registered for sale pursuant to the Securities Act of 1933, as amended, or the transfer is duly exempt from registration. The Holder has certain rights with respect to the registration of shares of Common Stock issued upon the conversion of this Debenture pursuant to the terms of the Loan Agreement. Borrower agrees that a copy of the Loan Agreement with all amendments, additions or substitutions therefor shall be available to the Holder at the offices of Borrower. 10. Taxes: The Borrower shall pay any documentary or other transactional taxes attributable to the issuance or delivery of this Debenture or the shares of Common Stock issued upon conversion by the Holder (excluding any federal, state or local income taxes and any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any political subdivision thereof, under which such Holder is organized or is qualified to do business.) 11. Default: (a) Event of Default: An "Event of Default" shall exist if any one or more of the following events (herein collectively called "Event of Default") shall occur and be continuing: (i) Borrower shall fail to pay (or shall state in writing an intention not to pay or its inability to pay), not later than 10 days after the due date, any installment of interest on or principal of, any installment of interest on or principal of, any Debenture of any fee, expense or other payment required hereunder; (ii) Any representation or warranty made under the Loan Agreement, or any of the other Loan Documents, or in any certificate or statement furnished or made to Lender pursuant hereto or in connection herewith or with the Loans hereunder, shall prove to be untrue or inaccurate in any material respect as of the date on which such representation or warranty is made; (iii) Default in the performance of any of the covenants or agreements of Borrower of its Subsidiaries, if any, contained under the Loan Agreement, Security Agreement, Pledge Agreement, or in any of the other Loan Documents, which default is not remedied within thirty - 6 - 7 (30) days after written notice thereof to Borrower from Lender, provided that such 30 day grace period shall not apply to default of any payment requirement or notice covenant made by Borrower; (iv) Default shall occur in the payment of any Material Indebtedness (other than the Obligation) of the Borrower or its Subsidiaries, if any, or default shall occur in respect of any note, loan agreement or credit agreement relating to any such Indebtedness, and such default shall continue for more than the period of grace, if any, specified therein and any such Indebtedness shall become due before its stated maturity by acceleration of the maturity thereof or shall become due by its terms and shall not be promptly paid or extended; (v) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the Borrower in accordance with the respective terms thereof or shall in any way be terminated or become or be declared ineffective or inoperative or shall in any way whatsoever cease to give or provide the respective rights, titles, interests, remedies, powers or privileges intended to be created thereby; (vi) Borrower or its Subsidiaries, if any, shall (A) apply for a consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of itself, or of all or substantially all of such Person's assets, (B) file a voluntary petition in bankruptcy, admit in writing that such Person is unable to pay such Person's debts as they become due or generally not pay such Person's debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against such Person in any bankruptcy, reorganization or insolvency proceeding, or (F) take corporate action for the purpose of effecting any of the foregoing; (vii) An involuntary petition or complaint shall be filed against Borrower or any of its Subsidiaries seeking bankruptcy or reorganization of such Person or the appointment of a receiver, custodian, trustee, intervenor or liquidator of such Person, or all or substantially all of such Person's assets, and such petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of Borrower or its Subsidiary, if any, or appointing a receiver, custodian, trustee, intervenor or liquidator of such Person, or of all or substantially all of such Person's assets; (viii) Any final judgment(s) for the payment of money in excess of the sum of $250,000 in the aggregate shall be rendered against Borrower or any Subsidiary and such judgment or judgments shall not be satisfied or discharged at least ten (10) days prior to the date on which any of its assets could be lawfully sold to satisfy such judgment; - 7 - 8 (ix) The failure of Borrower to issue and deliver shares of Common Stock as provided herein upon conversion of the Debenture; or (x) The failure to submit Lender's nominee, if any, for election to the Board of Directors of Borrower for any reason other than good cause. (b) Remedies Upon Event of Default: If an Event of Default shall have occurred and be continuing, then Lender may exercise any one or more of the following rights and remedies, and any other remedies provided in any of the Loan Documents, as Lender in its sole discretion, may deem necessary or appropriate: (i) declare the unpaid Principal Amount (after application of any payments or installments received by Lender) of, and all interest then accrued but unpaid on, the Debentures and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives; (ii) reduce any claim to judgment; and/or (iii) without notice of default or demand, pursue and enforce any of Lender's rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement, all of which rights may be specifically enforced. (c) Remedies Nonexclusive: Each right, power or remedy of the holder hereof upon the occurrence of any Event of Default as provided for in this Debenture or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Debenture or now or hereafter existing at law or in equity or by statute, and the exercise or beginning of the exercise by the holder or transferee hereof of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the holder of any or all such other rights, powers or remedies. (d) Expenses: Upon the occurrence of a Default or an Event of Default, which occurrence is not cured within the notice provisions, if any provided therefor, Borrower agrees to pay and shall pay all costs and expenses (including Lender's attorney's fees and expenses) reasonably incurred by Lender in connection with the preservation and enforcement of Lender's rights under the Loan Agreement, the Debentures, or any other Loan Document. 12. Failure to Act and Waiver. No failure or delay by the holder hereof to require the performance of any term or terms of this Debenture or not to exercise any right or any remedy shall constitute a waiver of any such term or of any right or of any default, nor shall such delay or failure preclude the holder hereof from exercising any such right, power or remedy at any later - 8 - 9 time or times. By accepting payment after the due date of any amount payable under this Debenture, the holder hereof shall not be deemed to waive the right either to require payment when due of all other amounts payable, or to later declare a default for failure to effect such payment of any such other amount. The failure of the holder of this Debenture to give notice of any failure or breach of the Borrower under this Debenture shall not constitute a waiver of any right or remedy in respect of such continuing failure or breach or any subsequent failure or breach. 13. Consent to Jurisdiction. The Borrower hereby agrees and consents that any action, suit or proceeding arising out of this Debenture may be brought in any appropriate court in the State of Texas including the United States District Court for the Northern District of Texas, or in any other court having jurisdiction over the subject matter, all at the sole election of the Holder hereof, and by the issuance and execution of this Debenture the Borrower irrevocably consents to the jurisdiction of each such court. The Borrower hereby irrevocably appoints CT Corporation, Dallas, Texas, as agent for the Borrower to accept service of process for and on behalf of the Borrower in any action, suit or proceeding arising out of this Debenture. Except for default in payment of interest or principal when and as they become due, and except as otherwise specifically set forth herein or otherwise agreed to in writing by the parties, any action dispute, claim or controversy (all such herein called "Dispute") between or among the parties as to the facts or the interpretation of the Debenture shall be resolved by arbitration as set forth in Section 12.05 of the Loan Agreement. 14. Holder's Right to Request Multiple Debentures. The Holder shall, upon written request and presentation of the Debenture, have the right, at any interest payment date, to request division of this Debenture into two or more units, each of such to be in such amounts as shall be requested; provided however that no Debentures shall be issued in denominations of face amount less than $10,000.00. 15. Transfer. This Debenture may be transferred on the books of the Borrower by the registered Holder hereof, or by Holder's attorney duly authorized in writing, only upon (i) delivery to the Borrower of a duly executed assignment of the Debenture, or part thereof, to the proposed new Holder, along with a current notation of the amount of payments received and net Principal Amount yet unfunded, and presentment of such Debenture to the Borrower for issue of a replacement Debenture, or Debentures, in the name of the new Holder, (ii) the designation by the new Holder of the Lender's agent for notice, such agent to be the sole party to whom Borrower shall be required to provide notice when notice to Lender is required hereunder and who shall be the sole party authorized to represent Lender in regard to modification or waivers under the Debenture, the Loan Agreement, or other Loan Documents; and any action, consent or waiver, (other than a compromise of principal and interest), when given or taken by Lender's agent for notice, shall be deemed to be the action of the holders of a majority in amount of the Principal Amount of the Debentures, as such holders are recorded on the books of the Borrower, and (iii) in compliance with the legend to read "The Securities represented by this Debenture have not been registered under the Securities Act of 1933, as amended ("Act"), or applicable - 9 - 10 state securities laws ("State Acts") and shall not be sold, hypothecated, donated or otherwise transferred unless the Company shall have received an opinion of Legal Counsel for the Company, or such other evidence as may be satisfactory to Legal Counsel for the Company, to the effect that such transfer shall not require registration under the Act and the State Acts. The Borrower shall be entitled to treat any holder of record of the Debentures as the Holder in fact thereof and of the Debenture and shall not be bound to recognize any equitable or other claim to or interest in this Debenture in the name of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Texas. 16. Notices. All notices and communications under this Debenture shall be in writing and shall be either delivered in person or by overnight service such as FedEx and accompanied by a signed receipt thereof, or mailed first-class United States certified mail, return receipt requested, postage prepaid, and addressed as follows: (i) if to the Borrower at its address for notice as stated in the Loan Agreement; and (ii) if to the Holder of this Debenture, to the address (a) of such Holder as it appears on the books of the Borrower, or (b) in the case of a partial assignment to one or more Holders, to the Lender's agent for notice, as the case may be. Any notice of communication shall be deemed given and received as of the date of such delivery if delivered; or if mailed, then three days after the date of mailing. 17. Maximum Interest Rate. Regardless of any provision contained in this Debenture, Lender shall never be entitled to receive, collect or apply as interest on the Debenture any amount in excess of interest calculated at the Maximum Rate, and, in the event that Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Debenture is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non principal payment as an expense, fee or premium rather than as interest; (ii) exclude voluntary prepayments and the effects thereof; and (iii) amortize, pro rate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Debenture; provided that, if the Debenture is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of excess against the principal amount of the Debenture and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. "Maximum Rate" shall mean, on any day, the highest nonusurious rate of interest (if any) permitted by applicable law on such day that at any time, or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness evidenced by the Debenture under the laws which are presently in effect of the United States of America and the State of Texas or - 10 - 11 by the laws of any other jurisdiction which are or may be applicable to the holders of the Debenture and such Indebtedness or, to the extent permitted by law, under such applicable laws of the United States of America and the State of Texas or by the laws of any other jurisdiction which are or may be applicable to the holder of the Debenture and which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. 18. Rights under Loan Agreement. This Debenture is issued pursuant to that certain Convertible Debenture Loan Agreement dated December 31,1996 by and between Integrated Security Systems, Inc. and certain guarantors and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC as Lenders, (the "Loan Agreement"), and the holders hereof are entitled to all the rights and benefits, and are subject to all the obligations of Lender under said agreement, including the maximum interest rates limitations as specified in Section 11.07 thereof. Both Borrower, Guarantor and Lenders have participated in the negotiation and preparation of the Loan Agreement and of this Debenture. Borrower agrees that a copy of the Loan Agreement with all amendments, additions and substitutions therefor shall be available to the Holders at the offices of Borrower. 19. Defined Terms. Capitalized Terms used but not defined herein shall have the meaning given them in the Loan Agreement. 20. Governing Law. This Debenture shall be governed by and construed and enforced in accordance with the laws of the State of Texas, or, where applicable, the laws of the United States. IN WITNESS WHEREOF, the undersigned Borrowers have caused this Debenture to be duly issued and executed on the Date above stated. BORROWER Integrated Security Systems, Inc. By: /s/ GERALD K. BECKMANN ------------------------------------------ Gerald K. Beckmann, President Attest by: /s/ HOLLY J. BURLAGE -------------------------------------- Holly J. Burlage, Assistant Secretary - 11 - EX-4.8 4 d84523a2ex4-8.txt CONVERTIBLE DEBENTURE 1 EXHIBIT 4.8 INTEGRATED SECURITY SYSTEMS, INC. 9.00% Convertible Debenture $2,300,000 No. 2 Date of Issue: December 31, 1996 Integrated Security Systems, Inc. (a Delaware corporation hereinafter referred to as the "Company" or "Borrower") is indebted to and, for value received, herewith promises to pay to: River Oaks Trust Company, FBO Renaissance US Growth & Income Trust PLC or to its order, (together with any assignee, jointly or severally, the "Holder" or "Lender") on or before December 1, 2003 (the "Due Date") (unless this Debenture shall have been sooner called for redemption or presented for conversion as herein provided), the sum of Two Million Three Hundred Thousand Dollars ($2,300,000) (the "Principal Amount") and to pay interest on the Principal Amount at the rate of nine percent (9.00%) per annum as provided herein. In furtherance thereof, and in consideration of the premises, the Borrower covenants, promises and agrees as follows: 1. Interest: Interest on the Principal Amount outstanding from time to time shall accrue at the rate of 9.00% per annum and be payable in monthly installments commencing February 1, 1997, and subsequent payments shall be made on the first day of each month thereafter until the Principal Amount and all accrued and unpaid interest shall have been paid in full. Overdue principal and interest on the Debenture shall, to the extent permitted by applicable law, bear interest at the rate of 9.00% per annum. All payments of both principal and interest shall be made at the address of the Holder hereof as it appears in the books and records of the Borrower, or at such other place as may be designated by the Holder hereof. 2. Maturity: If not sooner redeemed or converted, this Debenture shall mature on December 1, 2003 at which time all then remaining unpaid principal, interest and any other charges then due under the Loan Agreement shall be due and payable in full. 3. Mandatory Principal Installments: If this Debenture is not sooner redeemed or converted as provided hereunder, Borrower shall pay to Holder, commencing on December 1, - 1 - 2 1999, and the first day of each successive month thereafter prior to maturity, mandatory principal redemption installments, each of such installments to be in the amount of Ten Dollars ($10) per Thousand Dollars ($1,000) of the then remaining principal amount of the Debenture and further, at maturity, shall make a final installment of all of the remaining unpaid Principal Amount balance due plus the amount of any unpaid interest and other charges then due. Each of such installments shall be applied in partial redemption of the Debenture when received by Holder. 4. Mandatory Redemption in the Event of Certain Changes: If at any time after the date hereof (i) the Common Stock is not listed for exchange on the NASDAQ National Market ("National Market"), the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX"), or quoted on the NASDAQ Small Cap System ("Small Cap System"), or (ii) any Person acquires more than a majority of the Common Stock, the Debenture shall, at the option of the Holder upon thirty (30) days notice to the Borrower, be redeemed at the greater of (y) market value of the Debenture or (z) at 111% of par prior to November 1, 1997, thereafter at 123% of par until November 1, 1998, thereafter at 137% of par until November 1, 1999, thereafter at 152% of par until November 1, 2000 and thereafter at 167% of par. 5. Redemption: (a) On any interest payment date, and after prior irrevocable notice as provided for below, the outstanding principal amount of this Debenture is redeemable, in whole but not in part, at 120% of par if the following conditions are satisfied: (i) The closing bid price for the Common Stock averages at least $4.00 per share for the 21 consecutive trading days prior to the irrevocable notice and the Common stock is listed or quoted on the National Market, the Small Cap System, AMEX or NYSE; (ii) the $4.00 bid price is supported by a minimum of 30 times fully diluted net earnings per share of Common Stock in the aggregate for the last four consecutive fiscal quarters preceding the date of irrevocable notice, excluding any extraordinary gains of the Borrower; (iii) the average (20 days) daily trading volume shall be no less than 10,000 shares; and (iv) the Borrower shall have filed a registration statement covering the shares of Common Stock issuable upon conversion of the Debentures. The foregoing earnings per share and bid price tests shall be duly adjusted for share splits, stock dividends, mergers, consolidations, and other recapitalizations. (b) The Borrower may exercise this right to redeem prior to maturity by giving notice (the "Redemption Notice") thereof to the holder of this Debenture as such name appears on the books of the Borrower, which notice shall specify the terms of redemption (including the place at which the holder may obtain payment), the total principal amount to be redeemed (such principal amount plus the premium thereon herein called the "Redemption Amount") and the date for redemption (the "Redemption Date"), which date shall not be less than 90 days nor more than 120 days after the date of the notice. On the Redemption Date, the Borrower shall pay all accrued unpaid interest on the Debenture up to and including the Redemption Date, and shall pay to the holder a dollar amount equal to the Redemption Amount. In the case of Debentures called for redemption, the conversion rights will expire at the close of business on the Redemption Date. - 2 - 3 6. Conversion Right: The holder of this Debenture shall have the right, at holder's option, at any time, to convert all, or, in multiples of $10,000, any part of this Debenture into such number of fully paid and nonassessable shares of common stock, $0.01 par value, of Integrated Security Systems, Inc. (the "Common Stock") as shall be provided herein. The holder of this Debenture may exercise the conversion right by giving written notice (the "Conversion Notice") to Borrower of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by the Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the face amount of the Debenture divided by the Conversion Price as defined below and in effect on the date the Conversion Notice is given; provided, however, that in the event that this Debenture shall have been partially redeemed, shares of Common Stock shall be issued pro rata, rounded to the nearest whole share. Conversion shall be deemed to have been effected on the date the Conversion Notice is received (the "Conversion Date"). Within 20 business days after receipt of the Conversion Notice, Borrower shall issue and deliver by hand against a signed receipt therefor or by United States registered mail, return receipt requested, to the address designated in the Conversion Notice, a stock certificate or stock certificates of Borrower representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid on the Debenture up to and including the Conversion Date. The conversion rights will be governed by the following provisions: (a) Conversion Price: On the issue date hereof and until such time as an adjustment shall occur, the Conversion price shall be $1.0 per share; provided, however, that the Conversion Price shall be subject to adjustment at the times, and in accordance with the following provisions: (i) Adjustment for Issuance of Shares at less than the Conversion Price: If and whenever any Additional Common Stock shares shall be issued by Borrower (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the consideration per share received by Borrower for the additional shares of Common Stock then issued and the number of shares issuable to Holder upon conversion shall be proportionately increased; and, in the case of shares issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert the Debenture into shares equal in amount to the same percentage interest in the Common Stock of Integrated Security Systems, Inc. as existed for the Holder immediately proceeding the Stock Issue Date. (ii) Sale of Shares: In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of the cash received by Borrower for such shares, after any compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers - 3 - 4 or others performing similar services or for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. (iii) Reclassification of Shares: In case of the reclassification of securities into shares of Common Stock, the shares of Common Stock issued in such reclassification shall be deemed to have been issued for a consideration other than cash. Shares of Additional Common Stock issued by way of dividend or other distribution on any class of stock of Borrower shall be deemed to have been issued without consideration. (iv) Split up or Combination of Shares: In case issued and outstanding shares of Common Stock shall be subdivided or split up into a greater number of shares of the Common Stock, the Conversion Price shall be proportionately decreased, and in case issued and outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the time of record of the split-up or combination, as the case may be. (v) Exceptions: The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Borrower (including Common Stock in the treasury of Borrower), except (A) Common Stock issued upon the conversion of any of the Debentures; (B) Common Stock issued upon exercise of any warrants or stock purchase options issued and outstanding as of the date of this Debenture; (C) Common Stock issued pursuant to exercise of authorized or outstanding options under any currently existing incentive stock option plan for the officers, directors, and certain other key personnel as defined in said stock option plans of Borrower as currently established; (D) Common Stock issued pursuant to the conversion of Preferred Stock currently outstanding at its current conversion price; (E) Issuance of the first 700,000 shares of Common Stock sold or issued for less than the Conversion Price. (b) Adjustment for Mergers; Consolidations, Etc.: (i) In the event of distribution to all Common Stock holders of any stock, indebtedness of Borrower or assets (excluding cash dividends or distributions from retained earnings) or other rights to purchase securities or assets, then, after such event, the Debentures will be convertible into the kind and amount of securities, cash and other property which the holder of the Debentures would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debentures immediately prior to the occurrence of such event. (ii) In case of any capital reorganization, reclassification of the stock of Borrower (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of shares), this Debenture shall be convertible into the kind and number of shares of - 4 - 5 stock or other securities or property of Borrower to which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the immediately foregoing sentence shall similarly apply to successive reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. (iii) The term "Fair Market Value", as used herein, is the value ascribed to consideration other than cash as determined by the Board of Directors of Borrower in good faith, which determination shall be final, conclusive and binding. If the Board of Directors shall be unable to agree as to such fair market value, then the issue of fair market value shall be submitted to arbitration under and pursuant to the rules and regulations of the American Arbitration Association, and the decision of the arbitrators shall be final, conclusive and binding, and a final judgment may be entered thereon; provided, however, that such arbitration shall be limited to determination of the fair market value of assets tendered in consideration for the issue of Common Stock. (iv) Notice of Adjustment. (A) In the event Borrower shall propose to take any action which shall result in an adjustment in the Conversion Price, Borrower shall give notice to the Holder of this Debenture, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of 10 days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. (B) Following completion of an event wherein the Conversion Price shall be adjusted, Borrower shall furnish to the holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of the Borrower, of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect which statement shall constitute and amendment to this Debenture. 7. One Time Adjustment to Conversion Price. If (y) the Borrower has failed to achieve minimum projections as provided in the business plan, which minimum projections are the achievement of year end 1997 net sales of $16,500,000 and net income after tax of $2,000,000 and (z) the average closing bid price of the Common Stock for the 21 consecutive trading days following Borrower's public press release of the 1997 fiscal year end financial results (such average closing bid price herein referred to as the "1997 Conversion Price Adjustment Bid Price") is a price less than the then existing Conversion Price, then the Conversion Price shall be adjusted downward to an amount equal to seventy-five percent (75%) of the said 1997 Conversion Price Adjustment Bid Price. The adjustment shall only be utilized to adjust the Conversion Price to a lesser amount than the prior existing Conversion Price. If an adjustment is required pursuant to Section 7, then the Borrower shall furnish to the holder of this Debenture a statement, signed by the Chief Executive Officer and the Secretary of Borrower, of - 5 - 6 the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect, which statement shall continue an amendment to The Debenture. 8. Reservation of Shares: Borrower warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock or treasury shares of common stock necessary to effect conversion of this Debenture. 9. Registration Rights. Shares issued upon conversion of this Debenture shall be restricted from transfer by the holder except if and unless the shares are duly registered for sale pursuant to the Securities Act of 1933, as amended, or the transfer is duly exempt from registration. The Holder has certain rights with respect to the registration of shares of Common Stock issued upon the conversion of this Debenture pursuant to the terms of the Loan Agreement. Borrower agrees that a copy of the Loan Agreement with all amendments, additions or substitutions therefor shall be available to the Holder at the offices of Borrower. 10. Taxes: The Borrower shall pay any documentary or other transactional taxes attributable to the issuance or delivery of this Debenture or the shares of Common Stock issued upon conversion by the Holder (excluding any federal, state or local income taxes and any franchise taxes or taxes imposed upon the Holder by the jurisdiction, or any political subdivision thereof, under which such Holder is organized or is qualified to do business.) 11. Default: (a) Event of Default: An "Event of Default" shall exist if any one or more of the following events (herein collectively called "Event of Default") shall occur and be continuing: (i) Borrower shall fail to pay (or shall state in writing an intention not to pay or its inability to pay), not later than 10 days after the due date, any installment of interest on or principal of, any installment of interest on or principal of, any Debenture of any fee, expense or other payment required hereunder; (ii) Any representation or warranty made under the Loan Agreement, or any of the other Loan Documents, or in any certificate or statement furnished or made to Lender pursuant hereto or in connection herewith or with the Loans hereunder, shall prove to be untrue or inaccurate in any material respect as of the date on which such representation or warranty is made; (iii) Default in the performance of any of the covenants or agreements of Borrower of its Subsidiaries, if any, contained under the Loan Agreement, Security Agreement, Pledge Agreement, or in any of the other Loan Documents, which default is not remedied within thirty - 6 - 7 (30) days after written notice thereof to Borrower from Lender, provided that such 30 day grace period shall not apply to default of any payment requirement or notice covenant made by Borrower; (iv) Default shall occur in the payment of any Material Indebtedness (other than the Obligation) of the Borrower or its Subsidiaries, if any, or default shall occur in respect of any note, loan agreement or credit agreement relating to any such Indebtedness, and such default shall continue for more than the period of grace, if any, specified therein and any such Indebtedness shall become due before its stated maturity by acceleration of the maturity thereof or shall become due by its terms and shall not be promptly paid or extended; (v) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the Borrower in accordance with the respective terms thereof or shall in any way be terminated or become or be declared ineffective or inoperative or shall in any way whatsoever cease to give or provide the respective rights, titles, interests, remedies, powers or privileges intended to be created thereby; (vi) Borrower or its Subsidiaries, if any, shall (A) apply for a consent to the appointment of a receiver, trustee, custodian, intervenor or liquidator of itself, or of all or substantially all of such Person's assets, (B) file a voluntary petition in bankruptcy, admit in writing that such Person is unable to pay such Person's debts as they become due or generally not pay such Person's debts as they become due, (C) make a general assignment for the benefit of creditors, (D) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (E) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against such Person in any bankruptcy, reorganization or insolvency proceeding, or (F) take corporate action for the purpose of effecting any of the foregoing; (vii) An involuntary petition or complaint shall be filed against Borrower or any of its Subsidiaries seeking bankruptcy or reorganization of such Person or the appointment of a receiver, custodian, trustee, intervenor or liquidator of such Person, or all or substantially all of such Person's assets, and such petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition or complaint seeking reorganization of Borrower or its Subsidiary, if any, or appointing a receiver, custodian, trustee, intervenor or liquidator of such Person, or of all or substantially all of such Person's assets; (viii) Any final judgment(s) for the payment of money in excess of the sum of $250,000 in the aggregate shall be rendered against Borrower or any Subsidiary and such judgment or judgments shall not be satisfied or discharged at least ten (10) days prior to the date on which any of its assets could be lawfully sold to satisfy such judgment; - 7 - 8 (ix) The failure of Borrower to issue and deliver shares of Common Stock as provided herein upon conversion of the Debenture; or (x) The failure to submit Lender's nominee, if any, for election to the Board of Directors of Borrower for any reason other than good cause. (b) Remedies Upon Event of Default: If an Event of Default shall have occurred and be continuing, then Lender may exercise any one or more of the following rights and remedies, and any other remedies provided in any of the Loan Documents, as Lender in its sole discretion, may deem necessary or appropriate: (i) declare the unpaid Principal Amount (after application of any payments or installments received by Lender) of, and all interest then accrued but unpaid on, the Debentures and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives; (ii) reduce any claim to judgment; and/or (iii) without notice of default or demand, pursue and enforce any of Lender's rights and remedies under the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement, all of which rights may be specifically enforced. (c) Remedies Nonexclusive: Each right, power or remedy of the holder hereof upon the occurrence of any Event of Default as provided for in this Debenture or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Debenture or now or hereafter existing at law or in equity or by statute, and the exercise or beginning of the exercise by the holder or transferee hereof of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the holder of any or all such other rights, powers or remedies. (d) Expenses: Upon the occurrence of a Default or an Event of Default, which occurrence is not cured within the notice provisions, if any provided therefor, Borrower agrees to pay and shall pay all costs and expenses (including Lender's attorney's fees and expenses) reasonably incurred by Lender in connection with the preservation and enforcement of Lender's rights under the Loan Agreement, the Debentures, or any other Loan Document. 12. Failure to Act and Waiver. No failure or delay by the holder hereof to require the performance of any term or terms of this Debenture or not to exercise any right or any remedy shall constitute a waiver of any such term or of any right or of any default, nor shall such delay or failure preclude the holder hereof from exercising any such right, power or remedy at any later - 8 - 9 time or times. By accepting payment after the due date of any amount payable under this Debenture, the holder hereof shall not be deemed to waive the right either to require payment when due of all other amounts payable, or to later declare a default for failure to effect such payment of any such other amount. The failure of the holder of this Debenture to give notice of any failure or breach of the Borrower under this Debenture shall not constitute a waiver of any right or remedy in respect of such continuing failure or breach or any subsequent failure or breach. 13. Consent to Jurisdiction. The Borrower hereby agrees and consents that any action, suit or proceeding arising out of this Debenture may be brought in any appropriate court in the State of Texas including the United States District Court for the Northern District of Texas, or in any other court having jurisdiction over the subject matter, all at the sole election of the Holder hereof, and by the issuance and execution of this Debenture the Borrower irrevocably consents to the jurisdiction of each such court. The Borrower hereby irrevocably appoints CT Corporation, Dallas, Texas, as agent for the Borrower to accept service of process for and on behalf of the Borrower in any action, suit or proceeding arising out of this Debenture. Except for default in payment of interest or principal when and as they become due, and except as otherwise specifically set forth herein or otherwise agreed to in writing by the parties, any action dispute, claim or controversy (all such herein called "Dispute") between or among the parties as to the facts or the interpretation of the Debenture shall be resolved by arbitration as set forth in Section 12.05 of the Loan Agreement. 14. Holder's Right to Request Multiple Debentures. The Holder shall, upon written request and presentation of the Debenture, have the right, at any interest payment date, to request division of this Debenture into two or more units, each of such to be in such amounts as shall be requested; provided however that no Debentures shall be issued in denominations of face amount less than $10,000.00. 15. Transfer. This Debenture may be transferred on the books of the Borrower by the registered Holder hereof, or by Holder's attorney duly authorized in writing, only upon (i) delivery to the Borrower of a duly executed assignment of the Debenture, or part thereof, to the proposed new Holder, along with a current notation of the amount of payments received and net Principal Amount yet unfunded, and presentment of such Debenture to the Borrower for issue of a replacement Debenture, or Debentures, in the name of the new Holder, (ii) the designation by the new Holder of the Lender's agent for notice, such agent to be the sole party to whom Borrower shall be required to provide notice when notice to Lender is required hereunder and who shall be the sole party authorized to represent Lender in regard to modification or waivers under the Debenture, the Loan Agreement, or other Loan Documents; and any action, consent or waiver, (other than a compromise of principal and interest), when given or taken by Lender's agent for notice, shall be deemed to be the action of the holders of a majority in amount of the Principal Amount of the Debentures, as such holders are recorded on the books of the Borrower, and (iii) in compliance with the legend to read "The Securities represented by this Debenture have not been registered under the Securities Act of 1933, as amended ("Act"), or applicable - 9 - 10 state securities laws ("State Acts") and shall not be sold, hypothecated, donated or otherwise transferred unless the Company shall have received an opinion of Legal Counsel for the Company, or such other evidence as may be satisfactory to Legal Counsel for the Company, to the effect that such transfer shall not require registration under the Act and the State Acts. The Borrower shall be entitled to treat any holder of record of the Debentures as the Holder in fact thereof and of the Debenture and shall not be bound to recognize any equitable or other claim to or interest in this Debenture in the name of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Texas. 16. Notices. All notices and communications under this Debenture shall be in writing and shall be either delivered in person or by overnight service such as FedEx and accompanied by a signed receipt thereof, or mailed first-class United States certified mail, return receipt requested, postage prepaid, and addressed as follows: (i) if to the Borrower at its address for notice as stated in the Loan Agreement; and (ii) if to the Holder of this Debenture, to the address (a) of such Holder as it appears on the books of the Borrower, or (b) in the case of a partial assignment to one or more Holders, to the Lender's agent for notice, as the case may be. Any notice of communication shall be deemed given and received as of the date of such delivery if delivered; or if mailed, then three days after the date of mailing. 17. Maximum Interest Rate. Regardless of any provision contained in this Debenture, Lender shall never be entitled to receive, collect or apply as interest on the Debenture any amount in excess of interest calculated at the Maximum Rate, and, in the event that Lender ever receives, collects or applies as interest any such excess, the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the Debenture is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non principal payment as an expense, fee or premium rather than as interest; (ii) exclude voluntary prepayments and the effects thereof; and (iii) amortize, pro rate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Debenture; provided that, if the Debenture is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, Lender shall refund to Borrower the amount of such excess or credit the amount of excess against the principal amount of the Debenture and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of interest calculated at the Maximum Rate. "Maximum Rate" shall mean, on any day, the highest nonusurious rate of interest (if any) permitted by applicable law on such day that at any time, or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness evidenced by the Debenture under the laws which are presently in effect of the United States of America and the State of Texas or - 10 - 11 by the laws of any other jurisdiction which are or may be applicable to the holders of the Debenture and such Indebtedness or, to the extent permitted by law, under such applicable laws of the United States of America and the State of Texas or by the laws of any other jurisdiction which are or may be applicable to the holder of the Debenture and which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. 18. Rights under Loan Agreement. This Debenture is issued pursuant to that certain Convertible Debenture Loan Agreement dated December 31,1996 by and between Integrated Security Systems, Inc. and certain guarantors and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC as Lenders, (the "Loan Agreement"), and the holders hereof are entitled to all the rights and benefits, and are subject to all the obligations of Lender under said agreement, including the maximum interest rates limitations as specified in Section 11.07 thereof. Both Borrower, Guarantor and Lenders have participated in the negotiation and preparation of the Loan Agreement and of this Debenture. Borrower agrees that a copy of the Loan Agreement with all amendments, additions and substitutions therefor shall be available to the Holders at the offices of Borrower. 19. Defined Terms. Capitalized Terms used but not defined herein shall have the meaning given them in the Loan Agreement. 20. Governing Law. This Debenture shall be governed by and construed and enforced in accordance with the laws of the State of Texas, or, where applicable, the laws of the United States. IN WITNESS WHEREOF, the undersigned Borrowers have caused this Debenture to be duly issued and executed on the Date above stated. BORROWER Integrated Security Systems, Inc. By: /s/ GERALD K. BECKMANN --------------------------------------------- Gerald K. Beckmann, President Attest by: /s/ HOLLY J. BURLAGE ---------------------------------- Holly J. Burlage, Assistant Secretary - 11 - EX-4.9 5 d84523a2ex4-9.txt FORM OF CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.9 INTEGRATED SECURITY SYSTEMS, INC. March 26, 1998 Renaissance Capital Growth & Income Fund III, Inc. Suite 210, LB-59 8080 N. Central Expressway Dallas, Texas 75206 Gentlemen: This letter shall constitute an amendment to the 9.00% Convertible Debenture (the "Debenture") in the original principal amount of $2,300,000 issued on December 31, 1996 by Integrated Security Systems, Inc. (the "Company") to River Oaks Banks (predecessor of Compass Bank), FBO Renaissance Capital Growth & Income Fund III, Inc. Section 6(a) of the Debenture is hereby amended as follows: "Conversion Price: Until such time as an adjustment shall occur, the Conversion Price shall be $0.549 per share; provided, however, that the Conversion Price shall be subject to adjustment at the time and in accordance with the following provisions." Except as amended hereby, all of the terms and provisions of the Debenture shall remain in full force and effect. Capitalized terms used but not defined herein shall have the meaning given them in the Debenture. This letter amendment shall be governed by and construed and enforced in accordance with the laws of the State of Texas, or, where applicable, the laws of the United States. Sincerely, INTEGRATED SECURITY SYSTEMS, INC. By: ------------------------------- Gerald K. Beckmann, President ACCEPTED: RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- EX-4.10 6 d84523a2ex4-10.txt FORM OF NON-CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.10 INTEGRATED SECURITY SYSTEMS, INC. MARCH 26, 1998 Renaissance US Growth & Income Trust PLC Suite 210, LB-59 8080 N. Central Expressway Dallas, Texas 75206 Gentlemen: This letter shall constitute an amendment to the 9.00% Convertible Debenture (the "Debenture") in the original principal amount of $2,300,000 issued on December 31, 1996 by Integrated Security Systems, Inc. (the "Company") to River Oaks Banks (predecessor of Compass Bank), FBO Renaissance US Growth & Income Trust PLC Section 6(a) of the Debenture is hereby amended as follows: "Conversion Price: Until such time as an adjustment shall occur, the Conversion Price shall be $0.549 per share; provided, however, that the Conversion Price shall be subject to adjustment at the time and in accordance with the following provisions." Except as amended hereby, all of the terms and provisions of the Debenture shall remain in full force and effect. Capitalized terms used but not defined herein shall have the meaning given them in the Debenture. This letter amendment shall be governed by and construed and enforced in accordance with the laws of the State of Texas, or, where applicable, the laws of the United States. Sincerely, INTEGRATED SECURITY SYSTEMS, INC. By: -------------------------------- Gerald K. Beckmann, President ACCEPTED: RENAISSANCE US GROWTH & INCOME TRUST PLC By: -------------------------------- Name: ------------------------------ Title: ----------------------------- EX-4.11 7 d84523a2ex4-11.txt CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.11 [FORM OF] CONVERTIBLE PROMISSORY NOTE [Dollar Amount] [Date] For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of __________________, [an individual] [a _____________ corporation] (hereinafter referred to as "Payee"), the principal sum of _________________ and [no/100] Dollars ($_______________). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, at the offices of Payee at ____________________________________, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to ________ percent (__%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate on interest allowed from time to time by law. Interest shall be due and payable monthly on the first (1st) day of each month. 2. Payment of Note. The principal balance of, and all accrued unpaid interest on, this Note shall be due and payable ____________ (____) days after the date hereof, except as otherwise provided herein ("Maturity Date"). 3. Prepayment. This Note may be prepaid, in whole or in part in any time, at the option of Maker, without premium or penalty. 4. Conversion. This Note shall be convertible, at the option of Payee in its sole and absolute discretion, in whole or in part and at any time or from time to time, into fully paid and nonassessable shares (the "Conversion Shares") of Common Stock, $.01 par value (the "Common Stock"), of Integrated Security Systems, Inc., a Delaware corporation (the "Company"), at the conversion price of $0.20 per share. If Payee elects to exercise its option, then the following shall occur: (a) Payee shall deliver to Maker a notice of such election (the "Conversion Notice"), indicating the amount of principal of this Note to be converted (such amount to be converted referred to herein as the "Converted Amount"). (b) Promptly upon receipt of the Conversion Notice, Maker shall deliver to the Company (i) a certificate or certificates of Maker's Common Stock representing at least the number of shares issuable to Payee upon conversion of the Converted Amount, duly endorsed in blank or accompanied by a stock transfer power executed in like manner, and (ii) a copy of the Conversion Notice. (c) Upon its receipt of Maker's endorsed Common Stock certificate(s) and the Conversion Notice, the Company shall immediately issue and deliver to Payee or its designated affiliates a certificate or certificates for the number of shares of Common Stock, registered in Payee's or its designated affiliates' name(s), to 2 which Payee shall be entitled upon such conversion, bearing such legends as may be required by applicable state and federal securities laws. The Company shall issue to Maker a certificate representing any shares surrendered by Maker in excess of the shares issued to Payee upon conversion. (d) If this Note is converted in whole, Payee shall deliver this Note to Maker marked "Canceled," and Maker shall immediately pay to Payee all accrued and unpaid interest then due and owing on the date of such conversion. If this Note is converted in part, Maker shall immediately pay to Payee all accrued and unpaid interest then due and owing on the date of such conversion, and Payee shall deliver to Maker a replacement Note for any outstanding principal amount not converted, dated the date of such conversion, with the same Maturity Date and provisions as contained in this Note. (e) No fractional shares will be issued on conversion of this Note. 5. Adjustment for Issuance of Shares at Less Than the Conversion Price. If and whenever any Additional Common Stock (herein defined) shall be issued by Maker (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the price per share of the Additional Common Stock then issued, if issued in connection with a sale of shares, or the value of the Additional Common Stock then issued, as determined in accordance with general accepted accounting principles, if issued other than for cash, and the number of shares issuable to Payee upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Payee the right to convert this Note into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Payee immediately preceding the Stock Issue Date. 6.Sale of Shares. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the gross amount of the cash paid to Maker for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received. 7.Stock Dividends. Shares of Common Stock issued as a dividend or other distribution on any class of capital stock of Maker shall be deemed to have been issued without consideration. 8. Stock Splits, Subdivisions or Combinations. In the event of a stock split or subdivision of shares of Common Stock into a greater number of shares, the Conversion Price shall be proportionately decreased, and in the event of a combination of shares of Common Stock into a smaller number of shares, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the record date. 3 9. Exceptions. The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Maker (including Common Stock held in the treasury of Maker), except for (A) Common Stock issued upon the conversion of this Note; (B) Common Stock issued upon exercise of any outstanding warrants, options or convertible debt instruments; and (C) Common Stock issued upon exercise of outstanding employee stock options. 10. Adjustment for Mergers, Sales and Consolidations. In the event of any consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith, consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Payee, so that the Payee shall have the right at any time prior to the maturity of this Note to purchase, at a total price equal to the Conversion Price immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were exercisable by the Payee immediately prior to such consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Payee so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Payee shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if this Note had been converted immediately prior to such event, less the Conversion Price. Upon receipt of such payment, if any, the rights of the Payee shall terminate and cease and this Note shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Note, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Payee surrendering this Note. 11. Adequate Shares. Maker will at times reserve and keep available, for the purpose of issuance upon conversion, a sufficient number of shares of Common Stock owned by Maker deliverable upon Payee's exercise of its conversion rights under this Note. 12. Default, Enforcement. Upon default in payment of this Note, Payee may pursue any and all remedies to which Payee may be entitled. 4 13. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration or the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 14. Waiver. Except as otherwise expressly provided herein, Maker waives demand, presentment for payment, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 15. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 16. Registration Rights. The shares of Common Stock issued upon conversion of this Note shall be restricted from transfer by the Payee, unless the shares are duly registered for sale pursuant to the Securities Act of 1933, as amended, or the transfer is exempt from registration. The Payee has certain rights with respect to the registration of shares of Common Stock issued upon the conversion of this note pursuant to the terms of the Registration Rights Agreement between Payee and maker dated ___________________. 17. Security Agreement This Note is secured by the Security Agreement among Maker, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc. and Payee and Renaissance US Growth and Income Trust PLC ("RUSGIT"), dated as of October 2, 1998, and Payee is entitled to the rights and benefits thereunder. 18. Stock Pledge Agreement. This Note is secured by the Stock Pledge Agreement dated as of December 31, 1996, as amended by the First Amendment to Stock Pledge 5 Agreement, dated May 5, 2000, among Maker, Payee and RUSGIT, and Payee is entitled to the rights and benefits thereunder. 19. Successors and Assigns. This Note shall bind Maker's successors and assigns. 20. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorney's fees incurred by Payee. 21. Unenforceability. The invalidity or unenforceability in particular circumstances of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 22. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. INTEGRATED SECURITY SYSTEMS, INC. BY: ------------------------------ [Name] President and CEO 6 Schedule to Exhibit 4.11 This Schedule to the form of convertible promissory note shows the date, payee and amount of convertible promissory note issued by the Company that are in the format of this form of convertible promissory note. Each of these notes accrues interest at a rate of 8% per year, except for the two promissory notes dated February 22, 1999, which have a 9% interest rate. Each of these notes has a conversion rate of $0.20 per share, except for the two promissory notes dated February 22, 1999, which have a $0.549 conversion rate.
Date Payee Amount of Loan ($) - ---- ----- ----------------- February 22, 1999 Renaissance Capital Growth & Income Fund III, Inc. $375,000 February 22, 1999 Renaissance US Growth & Income Trust PLC 225,000 October 30, 2000 Renaissance Capital Growth & Income Fund III, Inc. 100,000 October 30, 2000 Renaissance US Growth & Income Trust PLC 100,000 November 3, 2000 Renaissance Capital Growth & Income Fund III, Inc. 100,000 November 3, 2000 Renaissance US Growth & Income Trust PLC 100,000 November 17, 2000 Renaissance Capital Growth & Income Fund III, Inc. 100,000 November 17, 2000 Renaissance US Growth & Income Trust PLC 100,000 December 22, 2000 Renaissance Capital Growth & Income Fund III, Inc. 75,000 December 22, 2000 Renaissance US Growth & Income Trust PLC 75,000 January 12, 2001 Renaissance Capital Growth & Income Fund III, Inc. 125,000 January 12, 2001 Renaissance US Growth & Income Trust PLC 125,000
EX-4.12 8 d84523a2ex4-12.txt CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.12 [FORM OF] PROMISSORY NOTE [Dollar Amount] [Date] For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of __________________, [an individual] [a _____________ corporation] (hereinafter referred to as "Payee"), the principal sum of _________________ and [no/100] Dollars ($_______________). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, at the offices of Payee at ____________________________________, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to ______ percent (__%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate on interest allowed from time to time by law. 2. Payment of Note. The principal balance of and all accrued unpaid interest on this Note shall be due and payable on demand. 3. Prepayment. This Note may be prepaid, in whole or in part in any time, at the option of Maker, without premium or penalty. 4. Default, Enforcement. Upon default in payment of this Note, Payee may pursue any and all remedies to which Payee may be entitled. 5. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration or the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limits of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto the ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread 2 throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 6. Waiver. Except as otherwise expressly provided herein, Maker waives demand, presentment for payment, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 7. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 8. Security Agreement This Note is secured by the Security Agreement among Maker, B&B Electromatic, Inc., Golston Company, Inc., Innovative Security Technologies, Inc. (now named Intelli-Site, Inc.) and Tri-Coastal Systems, Inc. and Payee and Renaissance US Growth and Income Trust PLC ("RUSGIT"), dated as of October 2, 1998, and Payee is entitled to the rights and benefits thereunder. 9. Stock Pledge Agreement. This Note is secured by the Stock Pledge Agreement dated as of December 31, 1996, as amended by the First Amendment to Stock Pledge Agreement, dated May 5, 2000, among Maker, Payee and RUSGIT, and Payee is entitled to the rights and benefits thereunder. 10. Successors and Assigns. This Note shall bind Maker's successors and assigns. 11. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorney's fees incurred by Payee. 12. Unenforceability. The invalidity or unenforceability in particular circumstances of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 13. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. INTEGRATED SECURITY SYSTEMS, INC. BY: ------------------------------ [Name] President and CEO 3 Schedule to Exhibit 4.12 This Schedule to the form of promissory note shows the date, payee, and amount of promissory note issued by the Company that are in the format of this form of promissory note. Each of these notes accrues interest at a rate of 9% per year.
Date Payee Amount of Loan ($) - ---- ----- ----------------- August 12, 1999 Renaissance Capital Growth & Income Fund III, Inc. $115,000 August 12, 1999 Renaissance US Growth & Income Trust PLC 115,000 May 5, 2000 Renaissance Capital Growth & Income Fund III, Inc. 150,000 May 5, 2000 Renaissance US Growth & Income Trust PLC 150,000 August 25, 2000 Renaissance Capital Growth & Income Fund III, Inc. 100,000 August 25, 2000 Renaissance US Growth & Income Trust PLC 100,000 September 15, 2000 Renaissance Capital Growth & Income Fund III, Inc. 100,000 September 15, 2000 Renaissance US Growth & Income Trust PLC 100,000 September 29, 2000 Renaissance Capital Growth & Income Fund III, Inc. 50,000 September 29, 2000 Renaissance US Growth & Income Trust PLC 50,000
EX-4.13 9 d84523a2ex4-13.txt AMENDMENT TO CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.13 SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Agreement"), dated as of March 8, 1999, between INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation, B&B ELECTROMATIC, INC., a Delaware corporation, GOLSTON COMPANY, INC., a Texas corporation, INNOVATIVE SECURITY TECHNOLOGIES, INC., a Texas corporation, and TRI-COASTAL SYSTEMS, INC., a Delaware corporation (collectively, "Debtor"), and THE RUNDELL FOUNDATION ("Secured Party"). Capitalized terms used herein, unless otherwise defined herein, have the definitions given them in the Notes (as defined below). WHEREAS, Debtor has issued to Secured Party a promissory note of even date herewith (the "Notes"), in the aggregate principal amount of $200,000 (the "Loan"); WHEREAS, as a condition for providing the Loan, Secured Party required that Debtor grant a security interest in its assets as collateral for such Loan; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereto and hereby agree as follows: 1. Grant of Security Interest. In order to secure payment when due of all obligations arising under the Notes and all other indebtedness of Debtor to Secured Party, whether pursuant to subsequently-issued notes or otherwise, now existing or hereafter incurred (the "Obligations"), Debtor hereby irrevocably grants to Secured Party a continuing security interest in the following property of Debtor, whether now owned or existing, or hereafter acquired, owned, existing or arising (whether by contract or operation by law), and wherever located (the "Collateral"), which shall be retained by Secured Party until the Obligations have been paid in full and the Notes has been terminated: a. All accounts, contract rights, chattel paper and rights of payment of every kind (collectively, "Accounts") and instruments and general intangibles of Debtor. b. All bank accounts of Debtor. c. All monies, residues and property of any kind, now or at any time or times hereafter, in the possession or under the control of Secured Party or a bailee of Secured Party. d. All licenses, patents, patent applications, copyrights, trademarks, trademark applications, trade names, assumed names, service marks and service mark applications of Debtor. e. All inventory, equipment (including any and all computer hardware and components), machinery and fixtures of Debtor in all forms and wherever located, and all parts and products thereof, all accessories thereto, and all documents therefor. f. All books and records (including, without limitation, customer lists, credit files, tapes, ledger cards, computer software and hardware, electronic data processing software, 2 computer programs, printouts and other computer materials and records) of Debtor evidencing or containing information regarding or otherwise pertaining to any of the foregoing. g. All accessories to, substitutions for and all replacements, products and proceeds of the foregoing, including, without limitation, proceeds of insurance policies insuring the Collateral (including, but not limited to, claims paid and premium refunds). 2. Insurance on Collateral. Debtor further warrants and agrees that in each case where the terms of any such Accounts require Debtor or the account debtor named in such Account to place or carry insurance in respect of the property to which such Account relates, Debtor or the account debtor will pay for and maintain such insurance. 3. Delivery of Receivables. Upon Secured Party's request, upon the occurrence of an Event of Default, Debtor will, at any reasonable time and at Debtor's own expense, physically deliver to Secured Party all Accounts assigned to Secured Party at any reasonable place or places designated by Secured Party. Failure to deliver any Account, or failure to deliver physical possession of any instruments, documents or writings in respect of any Account shall not invalidate Secured Party's Lien and security interest therein, except to the extent that possession may be required by applicable law for the perfection of said Lien or security interest, in which latter case, the Account shall be deemed to be held by Debtor as the custodian agent of Secured Party, for the benefit of Secured Party. Failure of Secured Party to demand or require Debtor to include any Account in any schedule, to execute any schedule, to assign and deliver any schedule or to deliver physical possession of any instruments, documents or writings related to any Account shall not relieve Debtor of its duty so to do. 4. Collection of Receivables. Debtor hereby agrees that it shall use commercially reasonable efforts, at its sole cost and expense and in its own name, to promptly and diligently collect and enforce payment of all Accounts and Debtor will defend and hold Secured Party harmless from any and all loss, damage, penalty, fine or expense arising from such collection or enforcement. 5. Financing Statements. Debtor agrees to execute all financing statements and amendments thereto as Secured Party may request from time to time to evidence the security interest granted to Secured Party hereunder and will pay all filing fees and taxes, if any, necessary to effect the filing thereof. Wherever permitted by law, Debtor authorizes Secured Party to file financing statements with respect to the Collateral without the signature of Debtor. Without the written consent of Secured Party, Debtor will not allow any financing statement or notice of assignment to be on file in any public office covering any Collateral, proceeds thereof or other matters subject to the security interest granted to Secured Party herein, unless such financing statement relates to a Permitted Lien. 6. Secured Party's Payment of Claims. Secured Party may, in its sole discretion, discharge or obtain the release of any security interest, lien, claim or encumbrance asserted by any Person against the Collateral, other than a Permitted Lien. All sums paid by Secured Party in respect thereof shall be payable, on demand, by Debtor to such Secured Party and shall be a part of the Obligations. 2 3 7. Default and Remedies. a. Debtor shall be in default hereunder upon the occurrence of an Event of Default, as set forth in the Notes. b. Upon the occurrence of any Event of Default which shall be continuing, (i) unless Secured Party shall elect otherwise, the entire unpaid amount of due under the Continuing Guaranty as are not then otherwise due and payable shall become immediately due and payable without notice to Debtor or demand by Secured Party and (ii) Secured Party may, at its option, exercise from time to time any and all rights and remedies available to them under the Uniform Commercial Code or otherwise, including the right to foreclose or otherwise realize upon the Collateral and to dispose of any of the Collateral at one or more public or private sales or other proceedings, and Debtor agrees that Secured Party or its nominee may become the purchaser at any such sale or sales. Debtor agrees that ten (10) days shall be reasonable prior notice of the date of any public sale or other disposition of the same may be made. All rights and remedies granted Secured Party hereunder or under any other agreement between Secured Party and Debtor shall be deemed concurrent and cumulative and not alternative, and Secured Party may proceed with any number of remedies at the same time or at different times until all the Obligations are fully satisfied. The exercise of any one right or remedy shall not be deemed a waiver or release of or an election against any other right or remedy. Debtor shall pay to Secured Party on demand any and all expenses (including reasonable attorneys' fees and legal expenses) which may have been incurred by Secured Party (i) in the prosecution or defense of any action growing out of or connected with the subject matter of this Agreement, the Continuing Guaranty, the Collateral or any of Secured Party's rights therein or thereto; or (ii) in connection with the custody, preservation, use, operation, preparation for sale or sale of the Collateral, the incurring of all of which are hereby authorized to the extent Secured Party deems the same advisable. Debtor's liability to Secured Party for any such payment shall be included in the Obligations. The proceeds of any Collateral received by Secured Party at any time before or after default, whether from a sale or other disposition of Collateral or otherwise, or the Collateral itself, may be applied to the payment in full or in part of such of the Obligations and in such order and manner as Secured Party may elect. 8. Representations and Covenants of Debtor. Debtor hereby represents to and agrees with Secured Party as follows: a. Debtor owns the Collateral as sole owner, free and clear of any Liens, except as set forth on SCHEDULE A hereto. b. So long as any amounts due pursuant to the Notes remain unpaid, Debtor agrees not to sell, assign or transfer the Collateral and to maintain it free and clear of any Liens. 9. Miscellaneous. a. This Agreement shall bind and inure to the benefit of the parties and their respective heirs, personal representatives, successors and assigns, except that Debtor shall not assign any of its rights hereunder without Secured Party's prior written consent. 3 4 b. Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remainder of this Agreement or the validity or enforceability of such provision in any other jurisdiction. c. All issues arising hereunder shall be governed by the laws of the State of Texas. d. Debtor hereby consents to the jurisdiction of the courts of the State of Texas in any action or proceeding which may be brought against it under or in connection with this Agreement or any transaction contemplated hereby or to enforce any agreement contained herein, and in the event any such action or proceeding shall be brought against it, Debtor agrees not to raise any objection to such jurisdiction or to the laying of venue in Dallas County, Texas or, if applicable, any other county in any state in which Collateral is located. 4 5 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date and year written above. DEBTOR: INTEGRATED SECURITY SYSTEMS, INC. By: ------------------------------------- Gerald K. Beckmann President and Chief Executive Officer B&B ELECTROMATIC, INC. By: ------------------------------------- GOLSTON COMPANY, INC. By: ------------------------------------- INNOVATIVE SECURITY TECHNOLOGIES, INC. By: ------------------------------------- TRI-COASTAL SYSTEMS, INC. By: ------------------------------------- 5 6 SECURED PARTY: THE RUNDELL FOUNDATION By: ------------------------------------- 6 7 SCHEDULE A LIENS ON COLLATERAL 1. Lien in favor of USL Corporation 2. Lien in favor of Frost National Bank 3. Lien in favor of Renaissance Capital Growth & Income Fund III, Inc. 4. Lien in favor of Renaissance US Growth & Income Trust PLC EX-4.14 10 d84523a2ex4-14.txt AMENDMENT TO CONVERTIBLE PROMISSORY NOTE 1 EXHIBIT 4.14 STOCK PLEDGE AGREEMENT BY AND BETWEEN INTEGRATED SECURITY SYSTEMS, INC. AND RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. AND RENAISSANCE US GROWTH & INCOME TRUST PLC This Stock Pledge Agreement (the "Pledge Agreement") is entered into as of December 31, 1996 by and between Integrated Security Systems, Inc., a Texas corporation, whose mailing address is 8200 Springwood Drive, Suite 230, Irving, Texas 75063 ("Pledgor") and Renaissance Capital Growth & Income Fund III, Inc., a Texas corporation, whose mailing address is 8080 North Central Expressway, Suite 210, LB. 59, Dallas, Texas 75206 and Renaissance US Growth and Income Trust PLC, a public limited company registered in England and Wales whose mailing address is 8080 North Central Expressway, Suite 210, LB. 59, Dallas, Texas 75206 (individually and collectively "Lender"). WITNESSETH: WHEREAS, Pledgor shall be indebted to Lender pursuant to the terms of that certain Convertible Debenture Loan Agreement executed as of December 31, 1996, (as the same may hereafter be amended and modified from time to time, the "Loan Agreement"), in the original principal amount of $4,600,000; and WHEREAS, Lender requires that Pledgor execute this Pledge Agreement in consideration for making the loan and in order to secure payment of the Secured Indebtedness (as hereinafter defined); NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parities hereby agree as follows: SECTION 1. DEFINED TERMS. (a) Terms defined in the Loan Agreement. All capitalized terms used herein and defined in the Loan Agreement shall be used herein as so defined, except as otherwise provided herein. (b) For the purposes of this Pledge Agreement, unless the context otherwise requires, the following terms shall have the meanings assigned to them in this Section 1: "Code" shall mean the Texas Uniform Commercial Code, TEX. BUS. & COM. CODE, as amended. "Pledged Collateral" shall mean all Pledged Shares (defined below), substitutions therefor, certificates, Securities, instruments, documents, dividends, increases, distributions, profits and all other property and rights described in items (a), (b) and (c) of Section 2. 2 "Pledged Shares" (i) any Securities now or hereafter delivered to Lender or to any agent or custodian for Lender, and (ii) all Securities now or hereafter described in any supplements to this Pledge Agreement as being pledged to Lender to secure repayment of the Secured Indebtedness. "Secured Indebtedness" shall mean (a) the Obligation, (b) all costs incurred by Lender to obtain, preserve, perfect and enforce the security interest granted hereby and any other liens and security interests securing the Obligation, to collect the Obligation and to maintain, preserve and collect any collateral securing the Obligation and (c) any renewals, extensions and modifications of the above-referenced indebtedness, or any part thereof. "Security" shall mean a "security" as deemed in Section 8.102 of the Code, and "Securities" shall mean more than one Security. SECTION 2. Pledge. As security for the full and punctual payment of the Secured Indebtedness, Pledgor hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto Lender, and hereby grants to Lender a security interest in, the following: (a) the Pledged Shares and all rights and privileges pertaining thereto; (b) all proceeds, products, cash, securities, dividends, increases, distributions and profits received from or on the Pledged Shares, including distributions or payments in partial or complete liquidation or redemption, or as a result of reclassifications, readjustments, reorganizations or changes in the capital structure of the issuer of the Pledged Shares; and (c) all subscriptions, warrants, options, preemptive rights and other rights issued or otherwise granted by the issuer of the Pledged Shares or any other person whatsoever upon or in connection with the Pledged Shares or any other item of the Pledged Collateral. TO HAVE AND TO HOLD the Pledged Collateral, together with all rights, titles, interests, privileges and preferences appertaining to or incidental thereto, unto Lender, and its successors and assigns forever, subject, however, to the terms, covenants and conditions hereinafter set forth. The security interest granted and the assignments made hereunder are made as security only and shall not subject Lender to, or transfer or in any way affect or modify, any obligation of Pledgor with respect to any of the Pledged Collateral or any transaction involving or giving rise thereto. SECTION 3. Physical Possession of Pledged Shares. So long as any Secured Indebtedness is outstanding and unpaid, Pledgor shall forthwith deliver to and deposit with Lender the certificates or instruments representing or evidencing the Pledged Shares (along with stock powers duly executed in blank) which are now in, or hereafter come into, the possession of Pledgor. Lender shall return the Pledged Shares to Pledgor after payment in full of the Secured Indebtedness. SECTION 4. Representations and Warranties. Pledgor does hereby represent and warrant to Lender that: (i) Pledgor has the authority to execute, deliver and perform this Pledge Agreement and the execution and performance hereof has been authorized by all necessary action of Pledgor, (ii) Pledgor is the sole record and beneficial owner of the Pledged Shares free and clear of any Liens, charges, pledges, encumbrances and security interests of every kind and nature; (iii) the Pledged Shares pledged to Lender contemporaneously with the execution of this Pledge Agreement constitute the Securities represented by 100% of the following companies: B&B Electromatic, Inc. Tri-Coastal Systems Technologies, Inc. Innovative Systems Technologies, Inc. and Golston Company: 3 (iv) each Pledged Share has been validly authorized and issued, and is fully paid and nonassessable; (v) Pledgor has good right and lawful authority to pledge the Pledged Collateral in the manner hereby contemplated; (vi) no consent or approval of any governmental body or regulatory authority, or of any securities exchange, which has not been obtained is necessary to the validity of the rights created hereunder; (vii) except for any financing statement which may be filed by Lender, no financing statement covering the Pledged Collateral or any part thereof has been filed with any filing office; (viii) no security agreement (except for this Pledge Agreement) covering the Pledged Collateral or any part thereof, to the extent covered by Article 8 of the Code, has been executed by Pledgor and no Lien, other than the one herein created, has attached or been perfected in the Pledged Collateral or any part thereof, to the extent covered by Article 8 of the Code, (ix) the execution, delivery and consummation of this Pledge Agreement will not violate any law, regulation, mortgage, indenture, contract, instrument, judgment or decree applicable to or binding on Pledgor and will not give rise to the imposition of any Lien on any assets of Pledgor except as contemplated by this Pledge Agreement; and (x) this Pledge Agreement has been duly authorized, executed and delivered by Pledgor and constitutes a legal, valid and binding obligation of Pledgor enforceable in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights generally and except as enforceability may be limited by general principles of equity. The delivery at the time by Pledgor to Lender of instruments, cash or other items evidencing Pledged Collateral shall constitute a representation and warranty by Pledgor that, with respect to such Pledged Collateral, and each item thereof, the matters heretofore warranted in clauses (i) through (x) immediately above are true and correct on, and as if they were made upon, the date of such delivery. SECTION 5. Covenants. (a) Affirmative Covenants. So long as any Secured Indebtedness is outstanding and unpaid, Pledgor covenants and agrees (unless Lender shall otherwise consent in writing) that Pledgor will: (i) from time to time promptly execute and deliver to Lender all such stock powers, assignments, certificates, supplemental writings, financing statements and other items do all other acts or things as Lender may reasonably request in order more fully to evidence and perfect the security interest of Lender in the Pledged Collateral; (ii) promptly furnish Lender with any information or writings which Lender may reasonably request concerning the Pledged Collateral; (iii) allow Lender to inspect all records of Pledgor relating to the Pledged Collateral, and to make and take away copies of such records; (iv) promptly notify Lender of any change in any fact or circumstance warranted or represented by Pledgor in this Pledge Agreement or in any other writing furnished by Pledgor to Lender in connection with the Pledged Collateral; (v) promptly notify Lender of any claim, action or proceeding affecting title to the Pledged Collateral, or any part thereof, or the security interest therein, and, at the request of Lender, appear in and defend, at Pledgor's expense, any such action or proceeding; and (vi) promptly, after being requested by Lender, pay to Lender the amount of all reasonable expenses, including reasonable attorneys' fees and other legal expenses, incurred by Lender in perfecting, maintaining and enforcing the security interest created hereunder. (b) Negative Covenant. Pledgor covenants and agrees (unless Lender shall otherwise consent in writing) that Pledgor shall not: (i) sell, assign, or transfer any rights of Pledgor in the Pledged Collateral; (ii) create any Lien in, or mortgage on, or otherwise encumber, the Pledged Collateral, or any part thereof, or permit the same to be or become subject to any Lien, attachment, execution, sequestration, or other legal or equitable process, or any encumbrance of any kind or character, except the security interest herein created in favor of Lender; (iii) permit the issuer(s) of the Pledged Shares to merge or consolidate with or into any corporation or other person to the extent the foregoing is in violation of the provision of the Loan Agreement; 4 or (iv) permit the issuer(s) of the Pledged Shares to issue any additional Securities unless such additional Securities are pledged to Lender and certificates evidencing such additional Securities are delivered to Lender (accompanied by proper instruments of assignment and/or stock powers executed in accordance with instructions from Lender) to be held as Pledged Collateral subject to the terms of this Pledge Agreement. (c) Delivery of Collateral. So long as any Secured Indebtedness is outstanding and unpaid, should (i) the Pledged Collateral, or any part thereof, ever be in any manner converted into shares of a company other than the current issuer(s) thereof, (ii) another type of property or if any money or other proceeds are ever paid or delivered to Pledgor as a result of Pledgor's rights in the Pledged Collateral, or (iii) the issuer(s) of the Pledged Shares ever issues any capital stock in addition to the Securities delivered to Lender on the date hereof, then, in any such event, all such shares, property, money and other proceeds shall become part of the Pledged Collateral, and shall be delivered to Lender by Pledgor (accompanied by such instruments or documents as Lender shall require) to be held pursuant to the terms of this Pledge Agreement. SECTION 6. Voting Rights: Dividends, Etc., Prior to Default. (a) Right Prior to the Event of Default. So long as no Default or Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting rights and powers relating or pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of the Loan Agreement or this Pledge Agreement. (ii) Pledgor shall be entitled to receive, retain and expend any cash dividends payable on the Pledged Shares, but any and all stock and/or liquidating dividends, distributions in property, or other distributions made on or in respect of the Pledged Shares, whether resulting from a subdivision, combination or reclassification of the Securities of any issuer thereof or received in exchange for Pledged Shares or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any such issuer may be a party or otherwise, and any and all cash and other property received in exchange for the Pledge Shares or received in payment of the principal of or in redemption of the Pledged Shares (either at maturity, upon call for redemption or otherwise), shall be and become part of the Pledged Shares and, if received by Pledgor shall be held in trust for the benefit of Lender and shall forthwith be delivered to Lender (accompanied by proper instruments of assignment and/or stock powers executed by Pledgor in accordance with instructions from Lender) to be held subject to the terms of this Pledge Agreement. (b) Termination of Rights. During any period when both (i) a Default or Event of Default shall have occurred and be continuing, and (ii) after Lender has given written notice to Pledgor that Lender has exercised its rights under this Section 6(b), which notice may not be given until three (3) months after Lender first gives Pledgor notice of the Event of Default, all rights of Pledgor to exercise the voting powers which it is entitled to exercise pursuant to Section 6(a)(i) hereof and/or to receive the dividends which it is authorized to receive and retain pursuant to Section 6(a)(ii) hereof shall cease and all such rights shall thereupon become vested in Lender, which shall have the sole and exclusive right and authority to exercise such voting powers. Further, Lender shall have the right, during the continuance of any Event of Default and after the three (3) month period specified above, to notify and direct the issuer of the Pledged Shares to make all payments, distributions, dividends and any other distributions payable in respect thereof directly to Lender. The issuer of the Pledged Shares making any payment or distribution to Lender hereunder shall be fully protected in relying on the written statement of Lender that it then holds a security interest which entitles Lender to receive such payments and distributions. Any and all money and other property paid over 5 to or received by Lender pursuant to the provisions of this Section 6(b) shall be retained by Lender as additional collateral hereunder and may be applied in accordance with the provisions hereof. SECTION 7. Rights and Remedies of Lender Upon an Event of Default (a) Remedies. Upon the occurrence and at any time during the continuation of an Event of Default, and in addition to any and all other rights and remedies which Lender may then have hereunder, or under the laws of the United States, or the Code, or otherwise, Lender may at any time three (3) months after Lender first gives Pledgor notice of the Event of Default in question: (i) after notification, if any, expressly provided for herein, sell or otherwise dispose of, at the office of Lender, or elsewhere as chosen by Lender, all or any part of the Pledged Collateral, and any such sale or other disposition may be as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Pledged Collateral shall not exhaust the power of sale granted hereunder, but sales may be made from time to time until all of the Pledged Collateral has been sold or until the Secured Indebtedness has been paid in full), and at any such sale it shall not be necessary to exhibit the Pledged Collateral; (ii) at Lender's discretion retain the Pledged Collateral in satisfaction of the Secured Indebtedness whenever the circumstances are such that Lender is entitled to do so under the Code; (iii) apply by appropriate judicial proceedings for appointment of a receiver for the Pledged Collateral, or any part thereof, and Pledgor hereby consents to any such appointment; and/or (iv) purchase the Pledged Collateral at any public sale to the extent permitted by law. (b) Sale of Pledged Shares. Pledgor recognizes that Lender may be unable to effect a public sale of any or all of the Pledged Shares by reason of certain prohibitions contained in the federal securities laws and applicable state or foreign securities laws, but may resort to one or more private sales thereof to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such Securities for their own account for investment and not with a view to the distribution or resale thereof, Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner, assuming all other circumstances surrounding such sales are reasonable. Lender shall be under no obligation to delay a sale of any of the Pledged Shares for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the federal securities laws, or under applicable state securities laws, even if such issuer would agree to do so. Upon the consummation of any private or public sale, Lender shall have the right to deliver, assign, and transfer to the purchaser thereof the Pledged Shares so sold. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right of whatsoever kind, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Lender shall give Pledgor notice of Lender's intention to make any such public or private sale or sale at broker's board or on a securities exchange to the extent required hereunder or by the Code. Such notice in case of sale at broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Pledged Shares, or that portion thereof so being sold, will first be offered for sale at such board or exchange. At any such sale the Pledged Shares maybe sold in one lot as an entirety or in separate parcels, as Lender may determine. Lender shall not be obligated to make any such sale pursuant to any such notice if Lender shall determine not to do so, regardless of the act that notice of sale of the Pledged Shares may have been given. Lender may without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Pledged Shares on credit or for future delivery, the Pledged Shares so sold shall be retained by Lender until the selling price is paid by the purchaser thereof, but Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the 6 Pledged Shares so sold and, in case of any such failure, such Pledged Shares may again be sold upon like notice. Lender may also , at its discretion, proceed by a suit or suits at law, or in equity foreclose its security interests and sell the Pledged Shares, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or other disposition of the Pledged Shares or any part thereof, Pledgor shall execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use Pledgor's best efforts to secure the same. (c) Notification. Reasonable notification of the time and place of any public sale of the Pledged Collateral, or reasonable notification of the time after which any private sale or other intended disposition of the Pledged Collateral is to be made, shall be sent to Pledgor and to any other person entitled under the Code to notice; provided, that if the Pledged Collateral threatens to decline quickly in value, or if otherwise permitted by the Code, Lender may (but shall not be obligated to) sell or otherwise dispose of the Pledged Collateral without notification, advertisement or other notice of any kind. It is agreed that notice set or given not less than ten (10) calendar days prior to the taking of the action to which the notice relates is reasonable notification and notice for the purposes of this Pledge Agreement. (d) Application of Proceeds. Upon the maturity of the secured Indebtedness or any part thereof, whether such maturity be by such terms of such instruments or through the exercise of any power of acceleration, Lender is authorized and empowered to apply any and all funds realized from the sale of the Pledged Collateral not previously credited against the Secured Indebtedness first toward the payment of the costs, charges and expenses, if any, incurred in the collection of such funds hereunder, and then toward the payment of the Secured Indebtedness in such order as Lender, in its sole discretion, shall deem appropriate, and shall pay the balance remaining (if any) to Pledgor as prescribed by the Code or as a court of competent jurisdiction may direct. (e) Notices. Any notice required or permitted to be given hereunder shall be given in accordance with the provisions for notices set forth in the Loan Agreement and shall be deemed to have been received as set forth in the Loan Agreement. SECTION 8. Lender Appointed Attorney-in-Fact. Pledgor hereby appoints Lender as the attorney-in-fact for Pledgor for the purposes of carrying out the provisions of this Pledge Agreement and taking any action and executing any instrument which Lender may deem necessary or advisable to accomplish the purposes hereof which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Lender shall have the right and power to receive, endorse and collect all checks and other orders for the payment of money made payable to Pledgor representing any dividend or other distribution payable or distributions in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. SECTION 9. Certain Other Rights of Lender. (a) Responsibility for Pledged Collateral. Lender shall not have a duty to fix or preserve rights against prior parties to the Pledged Collateral, and shall never be liable for its failure to use diligence to collect any amount payable with respect to the Pledged Collateral, but shall be liable only to the account of Pledgor for what Lender may actually collect or receive thereon. (b) Financing Statement. Lender shall have the right at any time to execute and file this Pledge Agreement as a financing statement, but the failure of Lender to do so shall not impair the validity or enforceability of this Pledge Agreement. 7 (c) Disclosure. Lender is granted the right to discuss Pledgor's affairs, finances and accounts with Pledgor's employees and accountants to such degree as Lender deems necessary or advisable to protect its security interest and/or the repayment of the Secured Indebtedness. (d) Deposit of Proceeds. Except as expressly prescribed above, all payments received by Lender with respect to the Pledged Collateral may, at Lender's option, be deposited in a special account (which may be, but need not be, a trust account or escrow account maintained at Lender) to be designated by Lender in the name of Pledgor styled "Collateral Account." Funds in said account are hereby assigned to Lender and shall be impressed with a Lien to secure the Secured Indebtedness and shall be applied by Lender as provided for above. (e) Payment of Expenses. At Lender's option, Lender may discharge taxes, liens, and interest, perform or cause to be performed, for and on behalf of Pledgor, any actions and conditions, obligations or covenants which Pledgor has failed or refused to perform and may pay for the repair, maintenance or preservation of any of the Pledged Collateral, and all sums so expended, including but not limited to, attorneys' fees, court costs, agents' fees or commissions, or any other costs or expenses, shall bear interest from the date of payment at the lower of (i) 12% per annum or (ii) the highest legal rate and shall be payable by Pledgor on demand at the place designated for payment of the Secured Indebtedness and shall be secured by this Pledge Agreement. SECTION 10. Cumulative Rights and Remedies. All rights and remedies of Lender hereunder are cumulative of each other and of every other right or remedy which Lender my otherwise have at law or in equity or under any other contract or other writing for the enforcement of the security interest herein or the collection of the Secured Indebtedness, and the exercise by Lender of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. Should Pledgor have heretofore executed or hereafter executed any other security agreement in favor of Lender in which a security interest is created as security for the debts of another or others, in respect of which Pledgor may not be personally liable, the security interest therein created and in all other rights, powers and privileges vested in Lender by the terms thereof shall exist concurrently with the security interest created herein, and, in addition, all property in which Lender holds a security interest under any such other security agreement shall also be part of the Pledged Collateral hereunder, and all or any part of the proceeds of the sale or other disposition of such property may, in the discretion of Lender, be applied by Lender in accordance with the terms hereof, and of such other security agreement, or agreements, or any of them. SECTION 11. Assignability of Lender's Rights, etc. The rights, powers and interest held by Lender hereunder, together with Lender's interest in the Pledged Collateral, may be transferred and assigned by Lender in whole or in part, at such time and upon such terms as Lender may deem advisable. Ten days prior notice shall be given to the Pledgor before the Pledged Collateral is assigned. This right shall be exercisable by the Lender only to the extent as permitted in the Loan Agreement. SECTION 12. No Waiver. Should any part of the Secured Indebtedness be payable in installments, the acceptance by Lender at any time and from time to time of part payment of the aggregate amount of all installments then matured shall not be deemed to be a waiver of the default then existing. No waiver by Lender of any default shall be deemed to be, a waiver of any other subsequent default. No delay or omission by Lender in exercising any right or power hereunder, or under any other writings executed by Pledgor as security for or in connection with the Secured Indebtedness, shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof, or the exercise of any other right or power of Lender hereunder or under such other writings. No action or omission of Lender shall constitute a waiver by Lender of any rights or remedies hereunder. 8 SECTION 13. Subrogation. If the Secured Indebtedness, or any part thereof, be given in renewal or extension, or applied toward the payment of indebtedness secured by mortgage, pledge, security agreement or other Lien, Lender shall be, and is hereby subrogated to all of the rights, titles, security interests and other liens securing the indebtedness so renewed, extended or paid. SECTION 14. Waiver of Notices. Pledgor hereby waives (a) notice of acceptance of this Pledge Agreement, (b) notice of any extension of credit by Lender to Pledgor, (c) notice of the occurrence of any breach or default by Pledgor in respect of the Secured Indebtedness, (d) notice of the sale or foreclosure on any collateral for the Secured Indebtedness, and (e) demand for payment, presentment, protest, notice of protest and non-payment, or other notice of default, notice of acceleration and notice of intention to accelerate. SECTION 15. No Release. Pledgor hereby consents and agrees to, and acknowledges that the pledge hereunder is absolute and unconditional and shall not be released or discharged by, the following: (a) the renewal, extension, modification, increase, amendment or alteration of either of the Loan Agreement, the Secured Indebtedness or any related document or instrument, (b) any forbearance, waiver, extension or compromise granted to Pledgor by Lender; (c) the insolvency, bankruptcy, liquidation or dissolution of Pledgor or any other obligor; (d) the invalidity, illegality or unenforceability of any of the Loan Documents or of all or any part of the Secured Indebtedness; (e) partial release of Pledgor or any other obligor; (f) the release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustifiable impairment) of any collateral for the Secured Indebtedness; (g) the failure of Lender to properly obtain, perfect or preserve any security interest or lien in any such collateral; (h) the failure of Lender to exercise diligence, commercial reasonableness or reasonable care in the preservation, enforcement or sale of any such collateral; (i) the time for the Pledgor's performance of or compliance with any covenant or agreement contained in the Loan Documents may be extended or such performance or compliance may be waived; (j) the merger or consolidation of Pledgor into or with any corporation or any sale or transfer by Pledgor or all or any part of its property, or (k) any other circumstances whatsoever (with or without notice to or knowledge of Pledgor) which may or might in any manner or to any extent vary the risk of Pledgor, or might otherwise constitute a legal or equitable discharge of a surety or guarantor, it being the purpose and intent of Pledgor that the liabilities and obligations of Pledgor under this Pledge Agreement shall be absolute and unconditional under any and all circumstances, and shall not be discharged except by payment and performance as provided in this Pledge Agreement. SECTION 16. Waiver of Subrogation. Pledgor hereby agrees that no payment made by it or for its account pursuant to this Pledge Agreement shall entitle Pledgor by subrogation, indemnification, contribution, reimbursement or otherwise to any payment by Pledgor or from or out of any property of Pledgor, and Pledgor hereby expressly waives, to the fullest extent possible, any rights or remedies it has or may in the future have with respect to any of the foregoing. SECTION 17. Benefit to Pledgor. Pledgor represents and warrants that it has received or will receive direct or indirect benefit form the making of this Pledge Agreement and the creation of the Secured Indebtedness, that Pledgor is familiar with the financial condition of Pledgor and the value of any collateral security for the Secured Indebtedness and the Lender has made no representations other than the Loan Agreement to Pledgor in order to induce Pledgor to execute this Pledge Agreement. SECTION 18. Unenforceability of Secured Indebtedness. This Pledge Agreement shall remain in full force and effect, notwithstanding any finding that the Secured Indebtedness cannot be enforced personally against Pledgor for any of the following reasons: The Secured Indebtedness at any time hereafter exceeds the amount permitted by law, or the act of creating the Secured Indebtedness is ultra vires, or the officers or persons creating the Secured Indebtedness acted in excess of their authority. 9 SECTION 19. Binding Effect. This Pledge Agreement shall be binding on Pledgor and Pledgor's administrators, other legal representatives, successors, heirs and assigns except that Pledgor shall not be entitled to make any assignments without the prior written consent of Lender. No provision of this Pledge Agreement may be amended, waived or modified nor may any of the Pledged Collateral be released from the security interest created hereunder except pursuant to a written instrument executed by Lender and Pledgor. SECTION 20. CHOICE OF LAW. THIS PLEDGE AGREEMENT IS EXECUTED AND DELIVERED IN, AND IS TO BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. SECTION 21. Counterparts. This Pledge Agreement may be executed in any number of multiple counterparts and by different parties on separate counterparts, all of which when taken together shall constitute but one and the same agreement. SECTION 22. Severability. In case any lien, security interest or other right of any party hereto shall be held to be invalid, illegal and/or unenforceable, such invalidity, illegality and/or unenforceability shall not affect any other lien, security interest or other right granted hereunder. SECTION 23. Arbitration. The provisions concerning arbitration in the Loan Agreement will apply to this document by reference, except to the extent judicial proceeding are necessary for foreclosure purposes. SECTION 24. Headings. The Section headings used herein are for convenience of reference only and shall not define or limit the provisions of this Pledge Agreement. EXECUTED AS OF (ALTHOUGH NOT NECESSARILY ON) THE DATE AND YEAR FIRST WRITTEN ABOVE. PLEDGOR Address for Notice: - ------------------- 8200 Springwood Drive Suite 230 Irving, Texas 75063 By: ---------------------------------------- Title: President LENDER Address for Notice: - ------------------ 8080 North Central Expressway Renaissance Capital Growth & Income Suite 210/LB 59 Fund III, Inc. Dallas, Texas 75206 214.891.8294 By: Fax: (214) 891-8291 ---------------------------------------- Title: Vice President EX-4.15 11 d84523a2ex4-15.txt SECURITY AGREEMENT DATED OCTOBER 2, 1998 1 EXHIBIT 4.15 FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT AMONG INTEGRATED SECURITY SYSTEMS, INC. AND RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. AND RENAISSANCE US GROWTH & INCOME TRUST PLC This First Amendment to Stock Pledge Agreement ("Agreement"), dated as of May 5, 2000, among Integrated Security Systems, Inc., a Texas corporation ("Pledgor") and Renaissance Capital Growth & Income Fund III, Inc., a Texas corporation, and Renaissance US Growth and Income Trust PLC, a public limited company registered in England and Wales (collectively, the "Lenders"). 1. The defined term "Obligation," as referenced in definition of "Secured Indebtedness" under Section 1(b) of the Stock Pledge Agreement, dated as of December 31, 1996, among the original signatories thereto (the "Pledge Agreement"), is hereby amended to include the following, without limitation: (i) the two Convertible Promissory Notes of the Pledgor to the Lender, dated February 22, 1999, in the principal amount of $375,000 and $225,000, respectively; (ii) the two Renewed and Extended Promissory Notes of the Pledgor to the Lenders, dated May 5, 2000, each in the principal amount of $115,000; (iii) the two Promissory Notes of the Pledgor to the Lenders, dated May 5, 2000, each in the principal amount of $150,000; and (iv) any renewals, extension, amendments or modifications of the Obligations. 2. All references to "Innovative Systems Technologies, Inc." in the Pledge Agreement are amended to "Intelli-Site, Inc." Upon execution of the Agreement, Pledgor has delivered certificates representing all of the outstanding capital stock of Intelli-Site, Inc. to Lenders, free and clean of all liens, adverse claims and encumbrances. -1- 2 3. All references to "Tri-Coastal System, Inc." and "Golston Company" are hereby removed form the Pledge Agreement. 4. Except as amended hereby, the Pledge Agreement shall remain in full force and effect. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as of and on the date first written above. PLEDGOR By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ LENDERS Renaissance Capital Growth & Income Fund III, Inc. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Renaissance US Growth & Income Trust PLC By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ -2- EX-4.16 12 d84523a2ex4-16.txt STOCK PLEDGE AGREEMENT DATED DECEMBER 31, 1996 1 EXHIBIT 4.16 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement"), dated as of February 22, 1999, is by and between INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"), and RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation , and RENAISSANCE US GROWTH & INCOME TRUST PLC, a public limited company registered in England and Wales (collectively, "Renaissance"). WITNESSETH: WHEREAS, the Company has issued to Renaissance two (2) Convertible Promissory Notes in the aggregate principal amount of Six Hundred Thousand Dollars ($600,000.00) (the "Notes") dated as of the date hereof, convertible at the option of Renaissance into Common Stock of the Company at the price of $0.549 per share, subject to adjustment as set forth therein (together with all other equity securities of the Company owned by Renaissance, hereinafter referred to as the "Registrable Shares"); WHEREAS, the Registrable Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and, as an inducement to Renaissance, the Company has agreed to grant to Renaissance certain registration rights with respect to the Registrable Shares as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEMAND REGISTRATION. (a) The Company hereby agrees to use its best efforts to register all or any portion of the Registrable Shares on two (2) occasions upon receipt of a written request from a holder (the "Holder" or "Holders") of record of the Registrable Shares that the Company file a registration statement under the 1933 Act covering the registration of at least twenty-five (25%) of the Registrable Shares then outstanding. The Company shall, within twenty (20) days of its receipt thereof, give written notice of such request to all holders of record of Registrable Shares. The Holders of said Registrable Shares shall then have fifteen (15) days from the date of mailing of such notice by the Company to request that all or a portion of their respective Registrable Shares be included in said registration. (b) If the Holders intend to distribute the Registrable Shares covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Agreement, and the Company shall include such information in the written notice to the other Holders of Registrable Shares referred to in Section 1(a) above. In such event, the right of any Holder to include its Registrable Shares in such registration shall be conditioned 2 upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Shares in the underwriting (unless otherwise mutually agreed by the Company, the underwriter, the Initiating Holder and such Holder) is limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 4(e) below) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by mutual agreement of the Company and the Initiating Holder, which agreement shall not be unreasonably withheld. Notwithstanding any other provision of this Section 1, if the underwriter advises the Initiating Holder and the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holder shall so advise all Holders of Registrable Shares which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Shares that may be included in the underwriting shall be allocated on a pro rata basis among all Holders that have requested to participate in such registration. The rights of the Holders shall be senior to those of any Persons subsequently granted demand registration rights. (c) Each such registration shall remain effective for a period of one hundred eighty (180) days, unless the Initiating Holder requests that such registration be terminated prior to the expiration of such period. Notwithstanding the foregoing, if the Holders' elect not to sell all or any portion of the Registrable Shares pursuant to a demand registration which has become effective, such demand registration right shall nonetheless be deemed satisfied. (d) If, after a registration statement becomes effective, the Company advises the Holders that the registration statement is required to be amended under applicable federal securities laws, the Holders shall suspend any further sales of their Registrable Shares, until the Company advises them that the registration statements has been amended, but not more than thirty (30) days. The one hundred eighty (180)_day time period referred to in subsection (c) during which the registration statement must be kept current after its effective date shall be extended for an additional number of business days equal to the number of business days during which the right to sell the Registrable Shares was suspended pursuant to the preceding sentence. (e) the Company shall have the right to exclude an underwriter not reasonably acceptable to it. 2. "PIGGY-BACK" REGISTRATION. If the Company proposes to register any of its capital stock under the 1933 Act in connection with the public offering of such securities for its own account or for the account of its security Holders, other than Holders of Registrable Shares pursuant hereto (a "Piggy-Back Registration Statement"), except for (i) a registration relating solely to the sale of securities to participants in the Company's stock plans or employee benefit plans or (ii) a registration relating solely to an transaction for which Form S-4 may be used, then: (a) the Company shall give written notice of such determination to each Holder of Registrable Shares, and each such Holder shall have the right to request, by written notice given to the Company within fifteen (15) days of the date that such written notice was mailed by the 2 3 Company to such Holder, that a specific number of Registrable Shares held by such Holder be included in the Piggy-Back Registration Statement (and related underwritten offering, if any); (b) If the Piggy-Back Registration Statement relates to an underwritten offering, the notice given to each Holder shall specify the name or names of the managing underwriter or underwriters for such offering. In addition, such notice shall also specify the number of securities to be registered for the account of the Company and for the account of its shareholders (other than the Holders of Registrable Shares), if any; (c) If the Piggy-Back Registration Statement relates to an underwritten offering, each Holder of Registrable Shares to be included therein must agree (i) to sell such Holder's Registrable Shares on the same basis as provided in the underwriting arrangement approved by the Company, and (ii) to timely complete and execute all questionnaires, powers of attorney, indemnities, hold-back agreements, underwriting agreements and other documents required under the terms of such underwriting arrangements or by the SEC or by any state securities regulatory body; (d) If the managing underwriter or underwriters for the underwritten offering under the Piggy-Back Registration Statement determines that inclusion of all or any portion of the Registrable Shares in such offering would materially adversely affect the ability of the underwriters for such offering to sell all of the securities requested to be included for sale in such offering at the best price obtainable therefor, the aggregate number of Registrable Shares that may be sold by the Holders shall be limited to such number of Registrable Shares, if any, that the managing underwriter or underwriters determine may be included therein without such adverse effect as provided below. If the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering, there shall be included in the offering, first, up to the maximum number of securities to be sold by the Company for its own account and for the account of other stockholders (other than Holders of Registrable Shares), as they may agree among themselves, and second, as to the balance, if any, Registrable Shares requested to be included therein by the Holders thereof (pro rata as between such Holders based upon the number of Registrable Shares initially proposed to be registered by each), or in such other proportions as the managing underwriter or underwriters for the offering may require; provided, however, that in the event that the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering pursuant to the terms and conditions set forth above and the Piggy-Back Registration Statement is a result of public offering by the Company of its securities for its own account, there shall be included in the offering, first, up to the maximum number of securities to be sold by the Company for its own account and second, as to the balance, if any, securities to be sold for the account of the Company's stockholders (both the Holders of Registrable Shares requested and such other stockholders of the Company requested to be included therein) on a pro rata basis; (e) Holders of Registrable Shares shall have the right to withdraw their Registrable Shares from the Piggy-Back Registration Statement, but if the same relates to an underwritten offering, they may only do so during the time period and on the terms agreed upon among the underwriters for such underwritten offering and the Holders of Registrable Shares; 3 4 (f) The Holders will advise the Company at the time a registration becomes effective whether the Registrable Shares included in the registration will be underwritten or sold directly by the Holders; (g) All demand and piggy-back registration rights of the Holders shall terminate when all of the Registrable Shares then outstanding may be sold pursuant to Rule 144(k). 3. SHELF REGISTRATION. The Company shall file a "shelf" registration statement under the 1933 Act (the "Shelf Registration") covering all of the Registrable Shares within 90 days of the date of the Notes, and the Company shall use its best efforts to cause the Shelf Registration to be declared effective and to keep the Shelf Registration continuously effective until all of the Registrable Shares registered therein cease to be Registrable Shares. The securities shall cease to be Registrable Shares (a) when the Shelf Registration shall have become effective under the 1933 Act and such securities shall have been disposed of pursuant to the Shelf Registration, or (b) such securities shall have been sold as permitted by Rule 144 under the 1933 Act or the date on which the Registrable Shares may be sold pursuant to Rule 144(k), whichever is the first to occur. The Holders of the Notes shall utilize Rule 144 in their sole discretion to the extent it meets their distribution requirements. The Company agrees, if necessary, to supplement or amend the Shelf Registration, as required by the registration form utilized by the Company or by the instructions applicable to such registration form or by the 1933 Act, and the Company agrees to furnish to the Holders of the Registrable Shares copies of any such supplement or amendment prior to its being used. 4. OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Shares pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Shares and use all reasonable efforts to cause such registration statement to become effective, and keep such registration statement effective until the sooner of all such Registrable Shares having been distributed, or until one hundred twenty (120) days have elapsed since such registration statement became effective (subject to extension of this period as provided below); (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement, or one hundred twenty (120) days have elapsed since such registration statement became effective (subject to the extension of this period as provided below); (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other 4 5 documents as they may reasonably request in order to facilitate the disposition of Registrable Shares owned by them; (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify as a broker-dealer in any states or jurisdictions or to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with the managing underwriter of such offering, in usual and customary form reasonably satisfactory to the Company and the Holders of a majority of the Registrable Shares to be included in such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) Notify each Holder of Registrable Shares covered by such registration statement, at any time when a prospectus relating thereto and covered by such registration statement is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (g) In the event of the notification provided for in Section 4(f) above, the Company shall use its best efforts to prepare and file with the SEC (and to provide copies thereof to the Holders) as soon as reasonably possible an amended prospectus complying with the 1933 Act, and the period during which the prospectus referred to in the notice provided for in Section 4(f) above cannot be used and the time period prior to the use of the amended prospectus referred to in this Section 4(g) shall not be counted in the one hundred twenty (120)-day period of this Section 4. 5. FURNISH INFORMATION. (a) It shall be a condition precedent to the obligations of the Company that the selling Holders shall furnish to the Company any and all information reasonably requested by the Company, its officers, directors, employees, counsel, agents or representatives, the underwriter or underwriters, if any, and the SEC or any other Governmental Authority, including, but not limited to: (i) such information regarding themselves, the Registrable Shares held by them, and the intended method of disposition of such securities, as shall be required to effect the registration of their Registrable Shares; and (ii) the identity of and compensation to be paid to any proposed underwriter or broker-dealer to be employed in connection therewith. (b) In connection with the preparation and filing of each registration statement registering Registrable Shares under the 1933 Act, the Company shall give the Holders of Registrable Shares on whose behalf such Registrable Shares are to be registered and their 5 6 underwriters, if any, and their respective counsel and accountants, at such Holders' sole cost and expense (except as otherwise set forth herein), such access to copies of the Company's records and documents and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be reasonably necessary in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. 6. EXPENSES OF REGISTRATION. All expenses, other than underwriting discounts and commissions applicable to the Registrable Shares sold by selling Holders, incurred in connection with the registration of the Registrable Shares pursuant to this section, including, without limitation, all registration, filing and qualification fees, printer's expenses, accounting and legal fees and expenses of the Company and Holder, shall be borne by the Company. 7. INDEMNIFICATION REGARDING REGISTRATION RIGHTS. If any Registrable Shares are included in a registration statement pursuant to this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, liabilities (joint or several) or any legal or other costs and expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action to which they may become subject under the 1933 Act, the 1934 Act or state law, insofar as such losses, claims, damages, costs, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact with respect to the Company or its securities contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements therein; (ii) the omission or alleged omission to state therein a material fact with respect to the Company or its securities required to be stated therein or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law. Notwithstanding the foregoing, the indemnity agreement contained in this Section 7(a) shall not apply and the Company shall not be liable (i) in any such case for any such loss, claim, damage, costs, expenses, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person, (ii) for amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld, or (iii) if the statement or omission was corrected in a subsequent 6 7 preliminary or final prospectus or amendment or supplement thereto, and the Holder failed to deliver such document to the purchaser of its securities. (b) To the extent permitted by law, each Holder who participates in a registration pursuant to the terms and conditions of this Agreement shall indemnify and hold harmless the Company, each of its directors and officers who have signed the registration statement, each Person, if any, who controls the Company within the meaning of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law, each of the Company's employees, agents, counsel and representatives, any underwriter and any other Holder selling securities in such registration statement, or any of its directors or officers, or any person who controls such Holder, against any losses, claims, damages, costs, expenses, liabilities (joint or several) to which the Company or any such director, officer, controlling person, employee, agent, representative, underwriter, or other such Holder, or director, officer or controlling person thereof, may become subject, under the 1933 Act, the 1934 Act or other federal or state law, only insofar as such losses, claims, damages, costs, expenses or liabilities or actions in respect thereto arise out of or are based upon any Violation, in each case to the extent and only to the extent that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such. Each such Holder will indemnify any legal or other expenses reasonably incurred by the Company or any such director, officer, employee, agent representative, controlling person, underwriter or other Holder, or officer, director or of any controlling person thereof, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, costs, expenses, liability or action if such settlement is effected without the prior written consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonable fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve the indemnifying party of its obligations under this Section 7, except to the extent that the failure results in a failure of actual notice to the indemnifying party and such indemnifying party is materially prejudiced in its ability to defend such action solely as a result of the failure to give such notice. 7 8 (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under this Section 7 in respect of any losses, claims, damages, costs, expenses, liabilities or actions referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, costs, expenses, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand and of the Holder, on the other, in connection with the Violation that resulted in such losses, claims, damages, costs, expenses, liabilities or actions. The relative fault of the Company, on the one hand, and of the Holder, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of the material fact or the omission to state a material fact relates to information supplied by the Company or by the Holder, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) the Company, on the one hand, and the Holders, on the other, agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of losses, claims, damages, costs, expenses, liabilities and actions referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this Section 7, neither the Company nor the Holders shall be required to contribute any amount in excess of the amount by which the total price at which the securities were offered to the public exceeds the amount of any damages which the Company or each such Holder has otherwise been required to pay by reason of such Violation. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 8. REPORTS UNDER THE 1934 ACT. So long as the Company has a class of securities registered pursuant to Section 12 of the 1934 Act, with a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, if applicable, the Company agrees to use its reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; (c) Use its best efforts to include all Common Stock covered by such registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ; or list all Common Stock covered by such registration statement on such securities exchange on which any of the 8 9 Common Stock is then listed; or, if the Common Stock is not then quoted on NASDAQ or listed on any national securities exchange, use its best efforts to have such Common Stock covered by such registration statement quoted on NASDAQ or, at the option of the Company, listed on a national securities exchange; and (d) Furnish to any Holder, so long as the Holder owns any Registrable Shares, (i) forthwith upon request a copy of the most recent annual or quarterly report of the Company and such other SEC reports and documents so filed by the Company, and (ii) such other information (but not any opinion of counsel) as may be reasonably requested by any Holder seeking to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 9. ASSIGNMENT OF REGISTRATION RIGHTS. Subject to the terms and conditions of this Agreement, and the Notes, the right to cause the Company to register Registrable Shares pursuant to this Agreement may be assigned by Holder to any transferee or assignee of such securities; provided that said transferee or assignee is a transferee or assignee of at least ten percent (10%) of the Registrable Shares and provided that the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; it being the intention that so long as Holder holds any Registrable Shares hereunder, either Holder or its transferee or assignee of at least ten percent may exercise the registration rights hereunder. Other than as set forth above, the parties hereto hereby agree that the registration rights hereunder shall not be transferable or assigned and any contemplated transfer or assignment in contravention of this Agreement shall be deemed null and void and of no effect whatsoever. 10. OTHER MATTERS. (a) Each Holder of Registrable Shares hereby agrees by acquisition of such Registrable Shares that, with respect to each offering of the Registrable Shares, whether each Holder is offering such Registrable Shares in an underwritten or nonunderwritten offering, such Holder will comply with Regulation M or such other or additional anti-manipulation rules then in effect until such offering has been completed, and in respect of any nonunderwritten offering, in writing will inform the Company, any other Holders who are selling shareholders, and any national securities exchange upon which the securities of the Company are listed, that the Registrable Shares have been sold and will, upon the Company's request, furnish the distribution list of the Registrable Shares. In addition, upon the request of the Company, each Holder will supply the Company with such documents and information as the Company may reasonably request with respect to the subject matter set forth and described in this Section 10. (b) Each Holder of Registrable Shares hereby agrees by acquisition of such Registrable Shares that, upon receipt of any notice from the Company of the happening of any event which makes any statement made in the registration statement, the prospectus or any document incorporated therein by reference, untrue in any material respect or which requires the making of any changes in the registration statement, the prospectus or any 9 10 document incorporated therein by reference, in order to make the statements therein not misleading in any material respect, such Holder will forthwith discontinue disposition of Registrable Shares under the prospectus related to the applicable registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus, or until it is advised in writing by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 11. WAIVERS AND MODIFICATIONS. All modifications, consents, amendments or waivers (herein "Waivers") of any provision of this Agreement shall be effective only if the same shall be in writing by Renaissance and then shall be effective only in the specific instance and for the purpose for which given. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. No failure to exercise, and no delay in exercising, on the part of Renaissance, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise any other right. The rights of Renaissance hereunder shall be in addition to all other rights provided by law. 12. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION. Any suit, action or proceeding against the Company with respect to this Agreement or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Dallas, or in the United States federal courts located in the State of Texas, as Renaissance in its sole discretion may elect, and the Company hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. The Company hereby agrees that service of all writs, process and summonses in any such suit, action or proceeding brought in the State of Texas may be brought upon, and the Company hereby irrevocably appoints, the CT Corporation System, Dallas, Texas, as its true and lawful attorney-in-fact in the name, place and stead of the Company to accept such service of any and all such writs, process and summonses. The Company hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any Note brought in such courts, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. 13. ARBITRATION. (a) Upon the demand of Renaissance or the Company (collectively the "parties"), made before the institution of any judicial proceeding or not more than sixty (60) days after service of a complaint, third party complaint, cross-claim or counterclaim or any answer thereto or any amendment to any of the above, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this arbitration clause. A "Dispute" shall include any action, dispute, claim, or controversy of any kind, whether founded in contract, tort, 10 11 statutory or common law, equity, or otherwise, now existing or hereafter occurring between the parties arising out of, pertaining to or in connection with this Agreement, any document evidencing, creating, governing, or securing any indebtedness guaranteed pursuant to the terms hereof, or any related agreements, documents, or instruments (the "Documents"). The parties understand that by this Agreement they have decided that the Disputes may be submitted to arbitration rather that being decided through litigation in court before a judge or jury and that once decided by an arbitrator the claims involved cannot later be brought, filed, or pursued in court. If the Company shall fail to pay (or shall state in writing an intention not to pay or its inability to pay) not later than three (3) days after the due date, any installment of interest on or principal of, any Note or any fee, expense or other payment required hereunder, Renaissance may, at its option, enforce its rights outside the arbitration provision found in this Section 13 or any Note. (b) Arbitrations conducted pursuant to this Agreement, including selection of arbitrators, shall be administered by the American Arbitration Association ("Administrator") pursuant to the Commercial Arbitration Rules of the Administrator. Arbitrations conducted pursuant to the terms hereof shall be governed by the provisions of the Federal Arbitration Act (Title 9 of the United States Code), and to the extent the foregoing are inapplicable, unenforceable or invalid, the laws of the State of Texas. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction; provided, however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. 91 or similar governing state law. Any party who fails to submit to binding arbitration following a lawful demand by the opposing party shall bear all costs and expenses, including reasonable attorneys' fees, incurred by the opposing party in compelling arbitration of any Dispute. (c) No provision of, nor the exercise of any rights under, this arbitration clause shall limit the right of any party to (i) foreclose against any real or personal property collateral or other security, (ii) exercise self-help remedies (including repossession and set off rights) or (iii) obtain provisional or ancillary remedies such as injunctive relief, sequestration, attachment, replevin, garnishment, or the appointment of a receiver from a court having jurisdiction. Such rights can be exercised at any time except to the extent such action is contrary to a final award or decision in any arbitration proceeding. The institution and maintenance of an action as described above shall not constitute a waiver of the right of any party, including the plaintiff, to submit the Dispute to arbitration, nor render inapplicable the compulsory arbitration provisions hereof. Any claim or Dispute related to exercise of any self-help, auxiliary or other exercise of rights under this Section 13 shall be a Dispute hereunder. (d) Arbitrator(s) shall resolve all Disputes in accordance with the applicable substantive law of the State of Texas. Arbitrator(s) may make an award of attorneys' fees and expenses if permitted by law or the agreement of the parties. All statutes of limitation applicable to any Dispute shall apply to any proceeding in accordance with this arbitration clause. Any arbitrator selected to act as the only arbitrator in a Dispute shall be required to be a practicing attorney with not less than five (5) years practice in commercial law in the State of Texas. With respect to a Dispute in which the claims or amounts in controversy do not exceed five hundred thousand dollars ($500,000), a single arbitrator shall be chosen and shall resolve the Dispute. In 11 12 such case the arbitrator shall have authority to render an award up to but not to exceed five hundred thousand dollars ($500,000), including all damages of any kind whatsoever, costs, fees and expenses. Submission to a single arbitrator shall be a waiver of all parties' claims to recover more than five hundred thousand dollars ($500,000). A Dispute involving claims or amounts in controversy exceeding five hundred thousand dollars ($500,000) shall be decided by a majority vote of a panel of three arbitrators ("Arbitration Panel"), one of whom must possess the qualifications to sit as a single arbitrator in a Dispute decided by one arbitrator. If the arbitration is consolidated with one conducted pursuant to the terms of a guaranty of the Indebtedness, then the Arbitration Panel shall be one which meets the criteria set forth between Renaissance and the Company. Arbitrator(s) may, in the exercise of their discretion, at the written request of a party, (i) consolidate in a single proceeding any multiple party claims that are substantially identical and all claims arising out of a single loan or series of loans, including claims by or against borrower(s), guarantors, sureties and/or owners of collateral if different from the Company, and (ii) administer multiple arbitration claims as class actions in accordance with Rule 23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall be empowered to resolve any dispute regarding the terms of this Agreement or any Dispute or any claim that all or any part (including this provision) is void or voidable but shall have no power to change or alter the terms of this Agreement. The award of the arbitrator(s) shall be in writing and shall specify the factual and legal basis for the award. (e) To the maximum extent practicable, the Administrator, the arbitrator(s) and the parties shall take any action reasonably necessary to require that an arbitration proceeding hereunder be concluded within one hundred eighty (180) days of the filing of the Dispute with the Administrator. The arbitrator(s) shall be empowered to impose sanctions for any party's failure to proceed within the times established herein. Arbitration proceedings hereunder shall be conducted in Texas at a location determined by the Administrator. In any such proceeding, a party shall state as a counterclaim any claim which arises out of the transaction or occurrence or is in any way related to this Agreement which does not require the presence of a third party which could not be joined as a party in the proceeding, The provisions of this arbitration clause shall survive any termination, amendment or expiration of this Agreement and repayment in full of sums owed to Renaissance by the Company unless the parties otherwise expressly agree in writing. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the parties or as required by applicable law or regulation. 14. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid or unenforceable provision shall be added as part of this Agreement a provision mutually agreeable to the Company and Renaissance as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In the 12 13 event the Company and Renaissance are unable to agree upon a provision to be added to this Agreement within a period of ten (10) business days after a provision of this Agreement is held to be illegal, invalid or unenforceable, then a provision acceptable to independent arbitrators, such to be selected in accordance with the provisions of the American Arbitration Association, as similar in terms to the illegal, invalid or unenforceable provision as is possible and be legal, valid and enforceable shall be added automatically to this Agreement. In either case, the effective date of the added provision shall be the date upon which the prior provision was held to be illegal, invalid or unenforceable. 15. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company and Renaissance and their respective successors, assigns and legal representatives; provided, however, that the Company may not, without the prior written consent of Renaissance, assign any rights, powers, duties or obligations thereunder. 16. NO THIRD PARTY BENEFICIARY. The parties do not intend the benefits of this Agreement to inure to any third party, nor shall this Agreement be construed to make or render Renaissance liable to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by the Company, or for debts or claims accruing to any such persons against the Company. Notwithstanding anything contained herein, no conduct by any or all of the parties hereto, before or after signing this Agreement, shall be construed as creating any right, claim or cause of action against Renaissance, or any of its officers, directors, agents or employees, in favor of any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by the Company, nor to any other person or entity other than the Company. 17. ENTIRETY. This Agreement and any other documents or instruments issued or entered into pursuant hereto and thereto contain the entire agreement between the parties and supersede all prior agreements and understandings, written or oral (if any), relating to the subject matter hereof and thereof. 18. HEADINGS. Section headings are for convenience of reference only and, except as a means of identification of reference, shall in no way affect the interpretation of this Agreement. 19. SURVIVAL. All representations and warranties made by the Company herein shall survive delivery of the Notes and the making of the Loan. 13 14 20. MULTIPLE COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. 21. NOTICES. (a) Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. (b) Any notice to be mailed, sent or personally delivered shall be mailed or delivered to the principal offices of the party to whom such notice is addressed, as that address is specified herein below. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is mailed, postage prepaid, or sent by overnight service or personally delivered or, if transmitted by telex or facsimile transmission, on the day that such notice is transmitted; provided, however, that any notice by telex or facsimile transmission, received by any the Company or Renaissance after 4:00 p.m., Dallas, Texas time, at the recipient's address, on any day, shall be deemed to have been given on the next succeeding business day. Any party may change its address for purposes of this Agreement by giving notice of such change to the other parties. If to the Company to: Integrated Security Systems, Inc. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (972) 444-8280 (972) 869-3843 (fax) with a copy to: David H. Oden, Esq. Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 (214) 651-5000 (214) 651-5940 (fax) 14 15 If to Renaissance to: Renaissance Capital Growth & Income Fund III, Inc. Renaissance US Growth & Income Trust PLC 8080 North Central Expressway, Suite 210, LB59 Dallas, Texas 75206 (214) 891-8294 (214) 891-8291 (fax) with a copy to: Norman R. Miller, Esq. Wolin, Ridley & Miller LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 (214) 939-4906 (214) 939-4949 (fax) Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided here will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. 22. GOVERNING LAW. THIS AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT. 15 16 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed and delivered, as of the date and year first above written. COMPANY: INTEGRATED SECURITY SYSTEMS, INC. By: ----------------------------------------- Gerald K. Beckmann President and Chief Executive Officer RENAISSANCE: RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. By: ----------------------------------------- RENAISSANCE US GROWTH & INCOME TRUST PLC By: Renaissance Capital Group, Inc., Investment Manager By: -------------------------------- EX-4.17 13 d84523a2ex4-17.txt FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT 1 EXHIBIT 4.17 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement"), dated as of October 20, 2000, is by and between INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"), and RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation , and RENAISSANCE US GROWTH & INCOME TRUST PLC, a public limited company registered in England and Wales (collectively, "Renaissance"). WITNESSETH: WHEREAS, the Company has issued to Renaissance Convertible Promissory Notes in the aggregate principal amount of up to One Million Dollars ($1,000,000.00) (the "Notes"), convertible at the option of Renaissance into Common Stock of the Company at the price of $0.20 per share, subject to adjustment as set forth therein (together with all other equity securities of the Company owned by Renaissance, hereinafter referred to as the "Registrable Shares"); WHEREAS, the Registrable Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act") and, as an inducement to Renaissance, the Company has agreed to grant to Renaissance certain registration rights with respect to the Registrable Shares as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEMAND REGISTRATION. (a) The Company hereby agrees to use its best efforts to register all or any portion of the Registrable Shares on two (2) occasions upon receipt of a written request from a holder (the "Holder" or "Holders") of record of the Registrable Shares that the Company file a registration statement under the 1933 Act covering the registration of at least twenty-five (25%) of the Registrable Shares then outstanding. The Company shall, within twenty (20) days of its receipt thereof, give written notice of such request to all holders of record of Registrable Shares. The Holders of said Registrable Shares shall then have fifteen (15) days from the date of mailing of such notice by the Company to request that all or a portion of their respective Registrable Shares be included in said registration. (b) If the Holders intend to distribute the Registrable Shares covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Agreement, and the Company shall include such information in the written notice to the other Holders of Registrable Shares referred to in Section 1(a) above. In such event, the right of any Holder to include its Registrable Shares in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's 2 Registrable Shares in the underwriting (unless otherwise mutually agreed by the Company, the underwriter, the Initiating Holder and such Holder) is limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 4(e) below) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by mutual agreement of the Company and the Initiating Holder, which agreement shall not be unreasonably withheld. Notwithstanding any other provision of this Section 1, if the underwriter advises the Initiating Holder and the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holder shall so advise all Holders of Registrable Shares which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Shares that may be included in the underwriting shall be allocated on a pro rata basis among all Holders that have requested to participate in such registration. The rights of the Holders shall be senior to those of any Persons subsequently granted demand registration rights. (c) Each such registration shall remain effective for a period of one hundred eighty (180) days, unless the Initiating Holder requests that such registration be terminated prior to the expiration of such period. Notwithstanding the foregoing, if the Holders' elect not to sell all or any portion of the Registrable Shares pursuant to a demand registration which has become effective, such demand registration right shall nonetheless be deemed satisfied. (d) If, after a registration statement becomes effective, the Company advises the Holders that the registration statement is required to be amended under applicable federal securities laws, the Holders shall suspend any further sales of their Registrable Shares, until the Company advises them that the registration statements has been amended, but not more than thirty (30) days. The one hundred eighty (180)-day time period referred to in subsection (c) during which the registration statement must be kept current after its effective date shall be extended for an additional number of business days equal to the number of business days during which the right to sell the Registrable Shares was suspended pursuant to the preceding sentence. (e) the Company shall have the right to exclude an underwriter not reasonably acceptable to it. 2. "PIGGY-BACK" REGISTRATION. If the Company proposes to register any of its capital stock under the 1933 Act in connection with the public offering of such securities for its own account or for the account of its security Holders, other than Holders of Registrable Shares pursuant hereto (a "Piggy-Back Registration Statement"), except for (i) a registration relating solely to the sale of securities to participants in the Company's stock plans or employee benefit plans or (ii) a registration relating solely to an transaction for which Form S-4 may be used, then: (a) the Company shall give written notice of such determination to each Holder of Registrable Shares, and each such Holder shall have the right to request, by written notice given to the Company within fifteen (15) days of the date that such written notice was mailed by the Company to such Holder, that a specific number of Registrable Shares held by such Holder be included in the Piggy-Back Registration Statement (and related underwritten offering, if any); 2 3 (b) If the Piggy-Back Registration Statement relates to an underwritten offering, the notice given to each Holder shall specify the name or names of the managing underwriter or underwriters for such offering. In addition, such notice shall also specify the number of securities to be registered for the account of the Company and for the account of its shareholders (other than the Holders of Registrable Shares), if any; (c) If the Piggy-Back Registration Statement relates to an underwritten offering, each Holder of Registrable Shares to be included therein must agree (i) to sell such Holder's Registrable Shares on the same basis as provided in the underwriting arrangement approved by the Company, and (ii) to timely complete and execute all questionnaires, powers of attorney, indemnities, hold-back agreements, underwriting agreements and other documents required under the terms of such underwriting arrangements or by the SEC or by any state securities regulatory body; (d) If the managing underwriter or underwriters for the underwritten offering under the Piggy-Back Registration Statement determines that inclusion of all or any portion of the Registrable Shares in such offering would materially adversely affect the ability of the underwriters for such offering to sell all of the securities requested to be included for sale in such offering at the best price obtainable therefor, the aggregate number of Registrable Shares that may be sold by the Holders shall be limited to such number of Registrable Shares, if any, that the managing underwriter or underwriters determine may be included therein without such adverse effect as provided below. If the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering, there shall be included in the offering, first, up to the maximum number of securities to be sold by the Company for its own account and for the account of other stockholders (other than Holders of Registrable Shares), as they may agree among themselves, and second, as to the balance, if any, Registrable Shares requested to be included therein by the Holders thereof (pro rata as between such Holders based upon the number of Registrable Shares initially proposed to be registered by each), or in such other proportions as the managing underwriter or underwriters for the offering may require; provided, however, that in the event that the number of securities proposed to be sold in such underwritten offering exceeds the number of securities that may be sold in such offering pursuant to the terms and conditions set forth above and the Piggy-Back Registration Statement is a result of public offering by the Company of its securities for its own account, there shall be included in the offering, first, up to the maximum number of securities to be sold by the Company for its own account and second, as to the balance, if any, securities to be sold for the account of the Company's stockholders (both the Holders of Registrable Shares requested and such other stockholders of the Company requested to be included therein) on a pro rata basis; (e) Holders of Registrable Shares shall have the right to withdraw their Registrable Shares from the Piggy-Back Registration Statement, but if the same relates to an underwritten offering, they may only do so during the time period and on the terms agreed upon among the underwriters for such underwritten offering and the Holders of Registrable Shares; (f) The Holders will advise the Company at the time a registration becomes effective whether the Registrable Shares included in the registration will be underwritten or sold directly by the Holders; 3 4 (g) All demand and piggy-back registration rights of the Holders shall terminate when all of the Registrable Shares then outstanding may be sold pursuant to Rule 144(k). 3. SHELF REGISTRATION. The Company shall file a "shelf" registration statement under the 1933 Act (the "Shelf Registration") covering all of the Registrable Shares within 90 days of the date of the Notes, and the Company shall use its best efforts to cause the Shelf Registration to be declared effective and to keep the Shelf Registration continuously effective until all of the Registrable Shares registered therein cease to be Registrable Shares. The securities shall cease to be Registrable Shares (a) when the Shelf Registration shall have become effective under the 1933 Act and such securities shall have been disposed of pursuant to the Shelf Registration, or (b) such securities shall have been sold as permitted by Rule 144 under the 1933 Act or the date on which the Registrable Shares may be sold pursuant to Rule 144(k), whichever is the first to occur. The Holders of the Notes shall utilize Rule 144 in their sole discretion to the extent it meets their distribution requirements. The Company agrees, if necessary, to supplement or amend the Shelf Registration, as required by the registration form utilized by the Company or by the instructions applicable to such registration form or by the 1933 Act, and the Company agrees to furnish to the Holders of the Registrable Shares copies of any such supplement or amendment prior to its being used. 4. OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Shares pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Shares and use all reasonable efforts to cause such registration statement to become effective, and keep such registration statement effective until the sooner of all such Registrable Shares having been distributed, or until one hundred twenty (120) days have elapsed since such registration statement became effective (subject to extension of this period as provided below); (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement, or one hundred twenty (120) days have elapsed since such registration statement became effective (subject to the extension of this period as provided below); (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the 1933 Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Shares owned by them; (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall 4 5 be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify as a broker-dealer in any states or jurisdictions or to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with the managing underwriter of such offering, in usual and customary form reasonably satisfactory to the Company and the Holders of a majority of the Registrable Shares to be included in such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) Notify each Holder of Registrable Shares covered by such registration statement, at any time when a prospectus relating thereto and covered by such registration statement is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (g) In the event of the notification provided for in Section 4(f) above, the Company shall use its best efforts to prepare and file with the SEC (and to provide copies thereof to the Holders) as soon as reasonably possible an amended prospectus complying with the 1933 Act, and the period during which the prospectus referred to in the notice provided for in Section 4(f) above cannot be used and the time period prior to the use of the amended prospectus referred to in this Section 4(g) shall not be counted in the one hundred twenty (120)-day period of this Section 4. 5. FURNISH INFORMATION. (a) It shall be a condition precedent to the obligations of the Company that the selling Holders shall furnish to the Company any and all information reasonably requested by the Company, its officers, directors, employees, counsel, agents or representatives, the underwriter or underwriters, if any, and the SEC or any other Governmental Authority, including, but not limited to: (i) such information regarding themselves, the Registrable Shares held by them, and the intended method of disposition of such securities, as shall be required to effect the registration of their Registrable Shares; and (ii) the identity of and compensation to be paid to any proposed underwriter or broker-dealer to be employed in connection therewith. (b) In connection with the preparation and filing of each registration statement registering Registrable Shares under the 1933 Act, the Company shall give the Holders of Registrable Shares on whose behalf such Registrable Shares are to be registered and their underwriters, if any, and their respective counsel and accountants, at such Holders' sole cost and expense (except as otherwise set forth herein), such access to copies of the Company's records and documents and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be 5 6 reasonably necessary in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. 6. EXPENSES OF REGISTRATION. All expenses, other than underwriting discounts and commissions applicable to the Registrable Shares sold by selling Holders, incurred in connection with the registration of the Registrable Shares pursuant to this section, including, without limitation, all registration, filing and qualification fees, printer's expenses, accounting and legal fees and expenses of the Company and Holder, shall be borne by the Company. 7. INDEMNIFICATION REGARDING REGISTRATION RIGHTS. If any Registrable Shares are included in a registration statement pursuant to this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, liabilities (joint or several) or any legal or other costs and expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action to which they may become subject under the 1933 Act, the 1934 Act or state law, insofar as such losses, claims, damages, costs, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact with respect to the Company or its securities contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements therein; (ii) the omission or alleged omission to state therein a material fact with respect to the Company or its securities required to be stated therein or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law. Notwithstanding the foregoing, the indemnity agreement contained in this Section 7(a) shall not apply and the Company shall not be liable (i) in any such case for any such loss, claim, damage, costs, expenses, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person, (ii) for amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld, or (iii) if the statement or omission was corrected in a subsequent preliminary or final prospectus or amendment or supplement thereto, and the Holder failed to deliver such document to the purchaser of its securities. (b) To the extent permitted by law, each Holder who participates in a registration pursuant to the terms and conditions of this Agreement shall indemnify and hold harmless the 6 7 Company, each of its directors and officers who have signed the registration statement, each Person, if any, who controls the Company within the meaning of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any state securities law, each of the Company's employees, agents, counsel and representatives, any underwriter and any other Holder selling securities in such registration statement, or any of its directors or officers, or any person who controls such Holder, against any losses, claims, damages, costs, expenses, liabilities (joint or several) to which the Company or any such director, officer, controlling person, employee, agent, representative, underwriter, or other such Holder, or director, officer or controlling person thereof, may become subject, under the 1933 Act, the 1934 Act or other federal or state law, only insofar as such losses, claims, damages, costs, expenses or liabilities or actions in respect thereto arise out of or are based upon any Violation, in each case to the extent and only to the extent that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such. Each such Holder will indemnify any legal or other expenses reasonably incurred by the Company or any such director, officer, employee, agent representative, controlling person, underwriter or other Holder, or officer, director or of any controlling person thereof, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, costs, expenses, liability or action if such settlement is effected without the prior written consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonable fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve the indemnifying party of its obligations under this Section 7, except to the extent that the failure results in a failure of actual notice to the indemnifying party and such indemnifying party is materially prejudiced in its ability to defend such action solely as a result of the failure to give such notice. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under this Section 7 in respect of any losses, claims, damages, costs, expenses, liabilities or actions referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, costs, expenses, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand and of the Holder, on 7 8 the other, in connection with the Violation that resulted in such losses, claims, damages, costs, expenses, liabilities or actions. The relative fault of the Company, on the one hand, and of the Holder, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of the material fact or the omission to state a material fact relates to information supplied by the Company or by the Holder, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) the Company, on the one hand, and the Holders, on the other, agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of losses, claims, damages, costs, expenses, liabilities and actions referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this Section 7, neither the Company nor the Holders shall be required to contribute any amount in excess of the amount by which the total price at which the securities were offered to the public exceeds the amount of any damages which the Company or each such Holder has otherwise been required to pay by reason of such Violation. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 8. REPORTS UNDER THE 1934 ACT. So long as the Company has a class of securities registered pursuant to Section 12 of the 1934 Act, with a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, if applicable, the Company agrees to use its reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; (c) Use its best efforts to include all Common Stock covered by such registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ; or list all Common Stock covered by such registration statement on such securities exchange on which any of the Common Stock is then listed; or, if the Common Stock is not then quoted on NASDAQ or listed on any national securities exchange, use its best efforts to have such Common Stock covered by such registration statement quoted on NASDAQ or, at the option of the Company, listed on a national securities exchange; and 8 9 (d) Furnish to any Holder, so long as the Holder owns any Registrable Shares, (i) forthwith upon request a copy of the most recent annual or quarterly report of the Company and such other SEC reports and documents so filed by the Company, and (ii) such other information (but not any opinion of counsel) as may be reasonably requested by any Holder seeking to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 9. ASSIGNMENT OF REGISTRATION RIGHTS. Subject to the terms and conditions of this Agreement, and the Notes, the right to cause the Company to register Registrable Shares pursuant to this Agreement may be assigned by Holder to any transferee or assignee of such securities; provided that said transferee or assignee is a transferee or assignee of at least ten percent (10%) of the Registrable Shares and provided that the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act; it being the intention that so long as Holder holds any Registrable Shares hereunder, either Holder or its transferee or assignee of at least ten percent may exercise the registration rights hereunder. Other than as set forth above, the parties hereto hereby agree that the registration rights hereunder shall not be transferable or assigned and any contemplated transfer or assignment in contravention of this Agreement shall be deemed null and void and of no effect whatsoever. 10. OTHER MATTERS. (a) Each Holder of Registrable Shares hereby agrees by acquisition of such Registrable Shares that, with respect to each offering of the Registrable Shares, whether each Holder is offering such Registrable Shares in an underwritten or nonunderwritten offering, such Holder will comply with Regulation M or such other or additional anti-manipulation rules then in effect until such offering has been completed, and in respect of any nonunderwritten offering, in writing will inform the Company, any other Holders who are selling shareholders, and any national securities exchange upon which the securities of the Company are listed, that the Registrable Shares have been sold and will, upon the Company's request, furnish the distribution list of the Registrable Shares. In addition, upon the request of the Company, each Holder will supply the Company with such documents and information as the Company may reasonably request with respect to the subject matter set forth and described in this Section 10. (b) Each Holder of Registrable Shares hereby agrees by acquisition of such Registrable Shares that, upon receipt of any notice from the Company of the happening of any event which makes any statement made in the registration statement, the prospectus or any document incorporated therein by reference, untrue in any material respect or which requires the making of any changes in the registration statement, the prospectus or any document incorporated therein by reference, in order to make the statements therein not misleading in any material respect, such Holder will forthwith discontinue disposition of Registrable Shares under the prospectus related to the applicable registration statement until such Holder's receipt of the 9 10 copies of the supplemented or amended prospectus, or until it is advised in writing by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 11. WAIVERS AND MODIFICATIONS. All modifications, consents, amendments or waivers (herein "Waivers") of any provision of this Agreement shall be effective only if the same shall be in writing by Renaissance and then shall be effective only in the specific instance and for the purpose for which given. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. No failure to exercise, and no delay in exercising, on the part of Renaissance, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise any other right. The rights of Renaissance hereunder shall be in addition to all other rights provided by law. 12. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION. Any suit, action or proceeding against the Company with respect to this Agreement or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Dallas, or in the United States federal courts located in the State of Texas, as Renaissance in its sole discretion may elect, and the Company hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. The Company hereby agrees that service of all writs, process and summonses in any such suit, action or proceeding brought in the State of Texas may be brought upon, and the Company hereby irrevocably appoints, the CT Corporation System, Dallas, Texas, as its true and lawful attorney-in-fact in the name, place and stead of the Company to accept such service of any and all such writs, process and summonses. The Company hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any Note brought in such courts, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. 13. ARBITRATION. (a) Upon the demand of Renaissance or the Company (collectively the "parties"), made before the institution of any judicial proceeding or not more than sixty (60) days after service of a complaint, third party complaint, cross-claim or counterclaim or any answer thereto or any amendment to any of the above, any Dispute (as defined below) shall be resolved by binding arbitration in accordance with the terms of this arbitration clause. A "Dispute" shall include any action, dispute, claim, or controversy of any kind, whether founded in contract, tort, statutory or common law, equity, or otherwise, now existing or hereafter occurring between the parties arising out of, pertaining to or in connection with this Agreement, any document evidencing, creating, governing, or securing any indebtedness guaranteed pursuant to the terms hereof, or any related agreements, documents, or instruments (the "Documents"). The parties understand that by this Agreement they have decided that the Disputes may be submitted to 10 11 arbitration rather that being decided through litigation in court before a judge or jury and that once decided by an arbitrator the claims involved cannot later be brought, filed, or pursued in court. If the Company shall fail to pay (or shall state in writing an intention not to pay or its inability to pay) not later than three (3) days after the due date, any installment of interest on or principal of, any Note or any fee, expense or other payment required hereunder, Renaissance may, at its option, enforce its rights outside the arbitration provision found in this Section 13 or any Note. (b) Arbitrations conducted pursuant to this Agreement, including selection of arbitrators, shall be administered by the American Arbitration Association ("Administrator") pursuant to the Commercial Arbitration Rules of the Administrator. Arbitrations conducted pursuant to the terms hereof shall be governed by the provisions of the Federal Arbitration Act (Title 9 of the United States Code), and to the extent the foregoing are inapplicable, unenforceable or invalid, the laws of the State of Texas. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction; provided, however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. 91 or similar governing state law. Any party who fails to submit to binding arbitration following a lawful demand by the opposing party shall bear all costs and expenses, including reasonable attorneys' fees, incurred by the opposing party in compelling arbitration of any Dispute. (c) No provision of, nor the exercise of any rights under, this arbitration clause shall limit the right of any party to (i) foreclose against any real or personal property collateral or other security, (ii) exercise self-help remedies (including repossession and set off rights) or (iii) obtain provisional or ancillary remedies such as injunctive relief, sequestration, attachment, replevin, garnishment, or the appointment of a receiver from a court having jurisdiction. Such rights can be exercised at any time except to the extent such action is contrary to a final award or decision in any arbitration proceeding. The institution and maintenance of an action as described above shall not constitute a waiver of the right of any party, including the plaintiff, to submit the Dispute to arbitration, nor render inapplicable the compulsory arbitration provisions hereof. Any claim or Dispute related to exercise of any self-help, auxiliary or other exercise of rights under this Section 13 shall be a Dispute hereunder. (d) Arbitrator(s) shall resolve all Disputes in accordance with the applicable substantive law of the State of Texas. Arbitrator(s) may make an award of attorneys' fees and expenses if permitted by law or the agreement of the parties. All statutes of limitation applicable to any Dispute shall apply to any proceeding in accordance with this arbitration clause. Any arbitrator selected to act as the only arbitrator in a Dispute shall be required to be a practicing attorney with not less than five (5) years practice in commercial law in the State of Texas. With respect to a Dispute in which the claims or amounts in controversy do not exceed five hundred thousand dollars ($500,000), a single arbitrator shall be chosen and shall resolve the Dispute. In such case the arbitrator shall have authority to render an award up to but not to exceed five hundred thousand dollars ($500,000), including all damages of any kind whatsoever, costs, fees and expenses. Submission to a single arbitrator shall be a waiver of all parties' claims to recover more than five hundred thousand dollars ($500,000). A Dispute involving claims or amounts in controversy exceeding five hundred thousand dollars ($500,000) shall be decided by a majority 11 12 vote of a panel of three arbitrators ("Arbitration Panel"), one of whom must possess the qualifications to sit as a single arbitrator in a Dispute decided by one arbitrator. If the arbitration is consolidated with one conducted pursuant to the terms of a guaranty of the Indebtedness, then the Arbitration Panel shall be one which meets the criteria set forth between Renaissance and the Company. Arbitrator(s) may, in the exercise of their discretion, at the written request of a party, (i) consolidate in a single proceeding any multiple party claims that are substantially identical and all claims arising out of a single loan or series of loans, including claims by or against borrower(s), guarantors, sureties and/or owners of collateral if different from the Company, and (ii) administer multiple arbitration claims as class actions in accordance with Rule 23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall be empowered to resolve any dispute regarding the terms of this Agreement or any Dispute or any claim that all or any part (including this provision) is void or voidable but shall have no power to change or alter the terms of this Agreement. The award of the arbitrator(s) shall be in writing and shall specify the factual and legal basis for the award. (e) To the maximum extent practicable, the Administrator, the arbitrator(s) and the parties shall take any action reasonably necessary to require that an arbitration proceeding hereunder be concluded within one hundred eighty (180) days of the filing of the Dispute with the Administrator. The arbitrator(s) shall be empowered to impose sanctions for any party's failure to proceed within the times established herein. Arbitration proceedings hereunder shall be conducted in Texas at a location determined by the Administrator. In any such proceeding, a party shall state as a counterclaim any claim which arises out of the transaction or occurrence or is in any way related to this Agreement which does not require the presence of a third party which could not be joined as a party in the proceeding, The provisions of this arbitration clause shall survive any termination, amendment or expiration of this Agreement and repayment in full of sums owed to Renaissance by the Company unless the parties otherwise expressly agree in writing. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the parties or as required by applicable law or regulation. 14. INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid or unenforceable provision shall be added as part of this Agreement a provision mutually agreeable to the Company and Renaissance as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In the event the Company and Renaissance are unable to agree upon a provision to be added to this Agreement within a period of ten (10) business days after a provision of this Agreement is held to be illegal, invalid or unenforceable, then a provision acceptable to independent arbitrators, such to be selected in accordance with the provisions of the American Arbitration Association, as similar in terms to the illegal, invalid or unenforceable provision as is possible and be legal, valid 12 13 and enforceable shall be added automatically to this Agreement. In either case, the effective date of the added provision shall be the date upon which the prior provision was held to be illegal, invalid or unenforceable. 15. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company and Renaissance and their respective successors, assigns and legal representatives; provided, however, that the Company may not, without the prior written consent of Renaissance, assign any rights, powers, duties or obligations thereunder. 16. NO THIRD PARTY BENEFICIARY. The parties do not intend the benefits of this Agreement to inure to any third party, nor shall this Agreement be construed to make or render Renaissance liable to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by the Company, or for debts or claims accruing to any such persons against the Company. Notwithstanding anything contained herein, no conduct by any or all of the parties hereto, before or after signing this Agreement, shall be construed as creating any right, claim or cause of action against Renaissance, or any of its officers, directors, agents or employees, in favor of any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by the Company, nor to any other person or entity other than the Company. 17. ENTIRETY. This Agreement and any other documents or instruments issued or entered into pursuant hereto and thereto contain the entire agreement between the parties and supersede all prior agreements and understandings, written or oral (if any), relating to the subject matter hereof and thereof. 18. HEADINGS. Section headings are for convenience of reference only and, except as a means of identification of reference, shall in no way affect the interpretation of this Agreement. 19. SURVIVAL. All representations and warranties made by the Company herein shall survive delivery of the Notes and the making of the Loan. 20. MULTIPLE COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. 13 14 21. NOTICES. (a) Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail. (b) Any notice to be mailed, sent or personally delivered shall be mailed or delivered to the principal offices of the party to whom such notice is addressed, as that address is specified herein below. Any such notice or other communication shall be deemed to have been given (whether actually received or not) on the day it is mailed, postage prepaid, or sent by overnight service or personally delivered or, if transmitted by telex or facsimile transmission, on the day that such notice is transmitted; provided, however, that any notice by telex or facsimile transmission, received by any the Company or Renaissance after 4:00 p.m., Dallas, Texas time, at the recipient's address, on any day, shall be deemed to have been given on the next succeeding business day. Any party may change its address for purposes of this Agreement by giving notice of such change to the other parties. If to the Company to: Integrated Security Systems, Inc. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (972) 444-8280 (972) 869-3843 (fax) with a copy to: ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- If to Renaissance to: Renaissance Capital Growth & Income Fund III, Inc. Renaissance US Growth & Income Trust PLC 8080 North Central Expressway, Suite 210, LB59 Dallas, Texas 75206 (214) 891-8294 (214) 891-8291 (fax) 14 15 with a copy to: Norman R. Miller, Esq. Wolin, Ridley & Miller LLP 1717 Main Street, Suite 3100 Dallas, Texas 75201 (214) 939-4906 (214) 939-4949 (fax) Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party's (or its agent's) actual receipt. Any notice addressed and mailed in the manner provided here will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt. 22. GOVERNING LAW. THIS AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT. 15 16 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed and delivered, as of the date and year first above written. COMPANY: INTEGRATED SECURITY SYSTEMS, INC. By: ------------------------------------ C. A. Rundell, Jr. Chairman and Chief Executive Officer RENAISSANCE: RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. By: ------------------------------------ RENAISSANCE US GROWTH & INCOME TRUST PLC By: Renaissance Capital Group, Inc., Investment Manager By: ------------------------------ 16 EX-4.18 14 d84523a2ex4-18.txt REGISTRATION RIGHTS AGREEMENT DATED FEB 22, 1999 1 EXHIBIT 4.18 PROMISSORY NOTE $200,000.00 April 12, 2000 For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of C.A. RUNDELL, JR., an individual (hereinafter referred to as "Payee"), the principal sum of Two Hundred Thousand and no/100 Dollars ($200,000.00). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, at the offices of Payee at 2200 Ross Avenue, Suite 4660 West, Dallas, Texas 75201, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to nine percent (9%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate on interest allowed from time to time by law. 2. Payment of Note. The principal balance of and all accrued unpaid interest on this Note shall be due and payable on demand. 3. Default Enforcement. Upon default in payment of this Note, Payee may pursue any and all remedies to which Payee may be entitled. 4. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration or the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limits of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto the ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 2 5. Waiver. Except as otherwise expressly provided herein, Maker waives demand, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 6. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 7. Security Agreement This Note is secured by the accounts receivable of Intelli-Site, Inc. due from Coken Company delineated as follows: COKEN COMPANY ACCOUNTS RECEIVABLE
INVOICE DATE INVOICE NUMBER INVOICE AMOUNT ------------ -------------- -------------- 4-9-99 5066 $ 29,368.73 5-19-99 5072 12,000.00 9-20-99 5119 20,000.00 10-15-99 5136 12,053.82 12-20-99 5166 25,000.00 4-4-00 5065 122,500.00 Total $ 220,922.55
8. Successors and Assigns. This Note shall bind Maker's successors and assigns. 9. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorney's fees incurred by Payee. 10. Unenforceability. The invalidity or unenforceability in particular circumstances of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 11. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. INTEGRATED SECURITY SYSTEMS, INC. BY: ------------------------------------------- Gerald K. Beckmann President and CEO EX-4.19 15 d84523a2ex4-19.txt PROMISSORY NOTE DATED APRIL 12, 2000 1 EXHIBIT 4.19 PROMISSORY NOTE $100,000.00 June 28, 2000 For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of THE RUNDELL FOUNDATION, an individual (hereinafter referred to as "Payee"), the principal sum of One Hundred Thousand and no/100 Dollars ($100,000.00). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, at the offices of Payee at 2200 Ross Avenue, Suite 4660 West, Dallas, Texas 75201, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to nine percent (9%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate on interest allowed from time to time by law. 2. Payment of Note. The principal balance of and all accrued unpaid interest on this Note shall be due and payable on demand. 3. Default Enforcement. Upon default in payment of this Note, Payee may pursue any and all remedies to which Payee may be entitled. 4. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration or the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limits of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto the ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 2 5. Waiver. Except as otherwise expressly provided herein, Maker waives demand, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 6. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 7. Security Agreement. This Note is secured by the accounts receivable of Intelli-Site, Inc. due from Coken Company. 8. Successors and Assigns. This Note shall bind Maker's successors and assigns. 9. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorney's fees incurred by Payee. 10. Unenforceability. The invalidity or unenforceability in particular circumstances of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 11. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. INTEGRATED SECURITY SYSTEMS, INC. BY: ------------------------------------------- Gerald K. Beckmann President and CEO EX-4.20 16 d84523a2ex4-20.txt PROMISSORY NOTE DATED JUNE 28, 2000 1 EXHIBIT 4.20 CONVERTIBLE PROMISSORY NOTE $50,000.00 November 17, 2000 For value received, INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (hereinafter referred to as "Maker"), promises to pay to the order of C.A. RUNDELL, JR. an individual (hereinafter referred to as "Payee"), the principal sum of Fifty Thousand and No/100 Dollars ($50,000.00). The principal of and interest on this Note shall be due and payable in lawful money of the United States of America, at the offices of Payee at 2200 Ross Avenue, Suite 4660 West, Dallas, Texas 75201, or at such other place as the holder hereof may from time to time designate by written notice to Maker. 1. Interest. Interest shall accrue on the unpaid principal balance due under this Note at an annual rate equal to eight percent (8%). Interest shall accrue from and including the date of this Note until, but not including, the day on which it is paid in full. In no event shall the interest charged hereunder exceed the maximum rate on interest allowed from time to time by law. Interest shall be due and payable monthly on the first (1st) day of each month. 2. Payment of Note. The principal balance of, and all accrued unpaid interest on, this Note shall be due and payable one hundred twenty (120) days after the date hereof, except as otherwise provided herein ("Maturity Date"). 3. Prepayment. This Note may be prepaid, in whole or in part in any time, at the option of Maker, without premium or penalty. 4. Conversion. This Note shall be convertible, at the option of Payee in its sole and absolute discretion, in whole or in part and at any time or from time to time, into fully paid and nonassessable shares (the "Conversion Shares") of Common Stock, $.01 par value (the "Common Stock"), of Integrated Security Systems, Inc., a Delaware corporation (the "Company"), at the conversion price of $.20 per share. If Payee elects to exercise its option, then the following shall occur: (a) Payee shall deliver to Maker a notice of such election (the "Conversion Notice"), indicating the amount of principal of this Note to be converted (such amount to be converted referred to herein as the "Converted Amount"). (b) Promptly upon receipt of the Conversion Notice, Maker shall deliver to the Company (i) a certificate or certificates of Maker's Common Stock representing at least the number of shares issuable to Payee upon conversion of the Converted Amount, duly endorsed in blank or accompanied by a stock transfer power executed in like manner, and (ii) a copy of the Conversion Notice. (c) Upon its receipt of Maker's endorsed Common Stock certificate(s) and the Conversion Notice, the Company shall immediately issue and deliver to Payee or its designated affiliates a certificate or certificates for the number of shares of Common Stock, registered in Payee's or its designated affiliates' name(s), to 2 which Payee shall be entitled upon such conversion, bearing such legends as may be required by applicable state and federal securities laws. The Company shall issue to Maker a certificate representing any shares surrendered by Maker in excess of the shares issued to Payee upon conversion. (d) If this Note is converted in whole, Payee shall deliver this Note to Maker marked "Canceled," and Maker shall immediately pay to Payee all accrued and unpaid interest then due and owing on the date of such conversion. If this Note is converted in part, Maker shall immediately pay to Payee all accrued and unpaid interest then due and owing on the date of such conversion, and Payee shall deliver to Maker a replacement Note for any outstanding principal amount not converted, dated the date of such conversion, with the same Maturity Date and provisions as contained in this Note. (e) No fractional shares will be issued on conversion of this Note. 5. Adjustment for Issuance of Shares at Less Than the Conversion Price. If and whenever any Additional Common Stock (herein defined) shall be issued by Maker (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the price per share of the Additional Common Stock then issued, as determined in accordance with general accepted accounting principles, if issued other than for cash, and the number of shares issuable to Payee upon conversion shall be proportionately increased; and, in the case of Additional Common Stock issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Payee the right to convert this Note into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Payee immediately preceding the Stock Issue Date. 6. Sale of Shares. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cashed, the amount of the cash consideration therefore shall be deemed to be the gross amount of the cash paid to Maker for such shares, before deducting any underwriting compensation or discount in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services for any expenses incurred in connection therewith. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefore, other than cash, shall be deemed to be the then fair market value of the property received. 7. Stock Dividends. Shares of Common Stock issued as a dividend or other distribution on any class of capital stock of Maker shall be deemed to have been issued without consideration. 8. Stock Splits, Subdivisions or Combinations. In the event of a stock split or subdivision of shares of Common Stock into a greater number of shares, the Conversion Price shall be proportionately decreased, and in the event of a combination of shares of Common Stock into a smaller number of shares, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the record date. 3 9. Exceptions. The term "Additional Common Stock" herein shall mean all shares of Common Stock hereafter issued by Maker (including Common Stock held in the treasury of Maker), except for (A) Common Stock issued upon the conversion of this Note; (B) Common Stock issued upon exercise of any outstanding warrants, options or convertible debt instruments; and (C) Common Stock issued upon exercise of outstanding employee stock options. 10. Adjustment for Mergers, Sales and Consolidations. In the event of any consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith, consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Payee, so that the Payee shall have the right at any time prior to the maturity of this Note to purchase, at a total price equal to the Conversion Price immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were exercisable by the Payee immediately prior to such consolidation, merger or sale. In any such case, appropriate provision shall be made with respect to the rights and interest of the Payee so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Payee shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if this Note had been converted immediately prior to such event, less the Conversion Price. Upon receipt of such payment, if any, the rights of the Payee shall terminate and cease and this Note shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Note, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Payee surrendering this Note. 11. Adequate Shares. Maker will at times reserve and keep available, for the purpose of issuance upon conversion, a sufficient number of shares of Common Stock owned by Maker deliverable upon Payee's exercise of its conversion rights under this Note. 12. Default, Enforcement. Upon default in payment of this Note, Payee may pursue any and all remedies to which Payee may be entitled. 13. Limitation of Interest. All agreements between Maker and Payee, whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration or the maturity of the unpaid principal balance hereof, or otherwise, shall the amount contracted for, charged, received, paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money evidenced by this Note or for the payment or performance of any covenant or obligation contained herein or in any other document pertaining to the indebtedness evidenced by this Note exceed the maximum amount permissible under 4 applicable usury laws. If, from any circumstance whatsoever, fulfillment of any provision hereof or of any other agreement shall, at the time fulfillment of such provision be due, involve transcending the limits of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto the ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if from any circumstance the holder hereof shall ever receive as interest an amount which would exceed the maximum lawful rate, any amount equal to any excessive interest shall (a) be applied to the reduction of the unpaid principal balance due hereunder and not to the payment of interest, or (b) if such excess interest exceeds the unpaid principal balance of this Note, such excess shall be refunded to Maker. All sums contracted for, charged or received hereunder for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between Maker and the holder hereof. 14. Waiver. Except as otherwise expressly provided herein, Maker waives demand, notice of intent to accelerate, notice of acceleration, notice of nonpayment or dishonor, grace, protest, notice of protest, all other notices, and any and all diligence or delay in collection or the filing of suit hereon. 15. Governing Law and Venue. This Note shall be construed according to and governed by the laws of the State of Texas. The obligations of Maker under this Note are performable in Dallas County, Texas. 16. Registration Rights. The shares of Common Stock issued upon conversion of this Note shall be restricted from transfer by the Payee, unless the shares are duly registered for sale pursuant to the Securities Act of 1933, as amended, or the transfer is exempt from registration. 17. Security Agreement. This Note is secured by the accounts receivable of Intelli-Site, Inc. 18. Successors and Assigns. This Note shall bind Maker's successors and assigns. 19. Collection Costs. If this Note is collected by legal proceeding or through a probate or bankruptcy court, or is placed in the hands of an attorney for collection after default (whether or not suit is filed), Maker agrees to pay all costs of collection and/or suit, including but not limited to reasonable attorney's fees incurred by Payee. 20. Unenforceability. The invalidity or unenforceability in particular circumstances of any provision of this Note shall not extend beyond such provision or such circumstances, and no other provision of this Note shall be affected thereby. 21. Headings. The paragraph headings of the sections of this Note are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Note. IN WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first above written. INTEGRATED SECURITY SYSTEMS, INC. BY: ------------------------------------------ Holly J. Burlage Executive Vice President and Chief Financial Officer EX-21.1 17 d84523a2ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Subsidiaries of the Company. B&B Electromatic, Inc. Intelli-Site, Inc. EX-23.1 18 d84523a2ex23-1.txt CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.1 Consent of Grant Thornton LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated August 4, 2000, accompanying the consolidated financial statements included in the Annual Report of Integrated Security Systems, Inc. on form 10-KSB for the year ended June 30, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statements of Integrated Security Systems, Inc. on Form S-3 (File No. 33-89218) and on Form S-8 (File No. 33-59870-S). /s/ GRANT THORNTON LLP Dallas, Texas February 1, 2001 -----END PRIVACY-ENHANCED MESSAGE-----