-----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, G34WCbi0mF8Z++0wXZFgBoEuQRxsVszn0dwvKUX4NiUkBjZUulBAiwcX1CbqBsgO ModpwZsfdOch4lzZFu83dQ== 0001158957-05-000111.txt : 20050611 0001158957-05-000111.hdr.sgml : 20050611 20050609103416 ACCESSION NUMBER: 0001158957-05-000111 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050525 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050609 DATE AS OF CHANGE: 20050609 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 05886626 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 CITY: IRVING STATE: TX ZIP: 75063 8-K 1 form8k060805.txt INTEGRATED SECURITY SYSTEMS, INC. 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): May 25, 2005 INTEGRATED SECURITY SYSTEMS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-11900 75-2422983 ------------------------ --------------------- ------------------- (State of incorporation) (Commission File No.) (IRS Employer Identification No.) 8200 Springwood Drive Suite 230 Irving, Texas 75063 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 444-8280 Not Applicable ------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) SECTION 1 - REGISTRANT'S BUSINESS AND OPERATIONS Item 1.01 Entry into a Material Definitive Agreement. On May 25, 2005, B&B ARMR Corporation ("Borrower"), a wholly-owned subsidiary of Integrated Security Systems, Inc. ("ISSI"), executed an amendment to that certain Loan Agreement ("Loan Agreement") dated November 10, 2004. The applicable amended items are as follows: o Amendment of Definition of Eligible Accounts - permits for inclusion within the borrowing base, those accounts receivable arising from the sale of products manufactured by subcontractors, with certain limitations and restrictions. o Pledge of Stock - ISSI pledge to Lender of its ownership interest in Borrower, Intelli-Site, Inc. and Doortek Corporation. o Issuance of Stock - prohibition of the issuance of stock of Borrower, Intelli-Site, Inc. or DoorTek Corporation or the admission of additional shareholders of Borrower without prior written consent of Lender. o Dividends, Distribution and Redemptions - limitation of the amount of distributions or other payments to affiliates. SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS Item 9.01 Financial Statements and Exhibits. (c) Exhibits. 4.1 Second Amendment to Loan Agreement, dated May 25, 2005, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. 4.2 Stock Pledge Agreement, dated May 25, 2005, between Integrated Security Systems, Inc. and Briar Capital, L.P. 4.3 Subordination Agreement, dated May 25, 2005 among B&B ARMR Corporation, Integrated Security Systems, Inc., and Briar Capital, L.P. 4.4 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., Renaissance Capital Growth & Income Fund III, Inc., and Briar Capital, L.P. 4.5 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., Renaissance US Growth Investment Trust PLC, and Briar Capital, L.P. 4.6 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., BFS US Special Opportunities Trust PLC, and Briar Capital, L.P. 4.7 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., C.A. Rundell, Jr., and Briar Capital, L.P. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INTEGRATED SECURITY SYSTEMS, INC. Dated: June 9, 2005 By: /s/ C.A. RUNDELL, JR. ----------------------------------- Name: C.A. Rundell, Jr. Title: Director, Chairman of the Board and Chief Executive Officer (Principal Executive and Financial Officer) 3 Exhibit Index Exhibit No. Description 4.1 Second Amendment to Loan Agreement, dated May 25, 2005, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. 4.2 Stock Pledge Agreement, dated May 25, 2005, between Integrated Security Systems, Inc. and Briar Capital, L.P. 4.3 Subordination Agreement, dated May 25, 2005 among B&B ARMR Corporation, Integrated Security Systems, Inc., and Briar Capital, L.P. 4.4 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., Renaissance Capital Growth & Income Fund III, Inc., and Briar Capital, L.P. 4.5 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., Renaissance US Growth Investment Trust PLC, and Briar Capital, L.P. 4.6 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., BFS US Special Opportunities Trust PLC, and Briar Capital, L.P. 4.7 Subordination Agreement, dated May 25, 2005 among Integrated Security Systems, Inc., C.A. Rundell, Jr., and Briar Capital, L.P. 4 EX-4 2 exhibit4-18k060805.txt EXHIBIT 4.1 SECOND AMENDMENT OF LOAN AGREEMENT EXHIBIT 4.1 SECOND AMENDMENT TO LOAN AGREEMENT This Second Amendment to Loan Agreement (this "Second Amendment") is made and entered into as of the 25th day of May, 2005 (the "Effective Date"), by and among B&B ARMR CORPORATION, a Delaware corporation, with its principal office and mailing address at 14113 Main Street, Norwood, Louisiana 70761 (hereinafter called the "Borrower"), BRIAR CAPITAL, L.P., a Texas limited partnership, with its principal office at 1500 City West Boulevard, Suite 225, Houston, Harris County, Texas 77042 (hereinafter called the "Lender"), INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation ("ISSI"), INTELLI-SITE, INC., a Texas corporation ("Intelli"), and as validity guarantors, C.A. RUNDELL, JR., an individual ("Rundell"), and PETER BEARE, an individual ("Beare") (ISSI, Intelli, Rundell, and Beare, being, collectively, the "Guarantors"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, in accordance with the terms and provisions of that certain Loan Agreement (the "Original Agreement") dated November 10, 2004, by and among Lender, Borrower, and the Guarantors, Lender agreed to make the Loan to Borrower as provided therein; WHEREAS, Lender, Borrower, and the Guarantors executed that certain First Amendment to Loan Agreement dated effective as of March 7, 2005 (the "Amendment", Amendment and Original Agreement being, collectively, the "Loan Agreement"); WHEREAS, Borrower, Lender, and Guarantors now desire to further modify and amend certain terms and provisions of the Loan Agreement, as hereinafter provided, and to make certain agreements related thereto; NOW, THEREFORE, in consideration of the terms and conditions hereof and other good and valuable consideration, the receipt and sufficiency of which is hereby agreed to by the parties hereto, Borrower, Lender and Guarantors hereby agree as follows: 1. Amendments to Loan Agreement. 1.1 Amendment of Definition of Eligible Accounts. Clause (b)(xiv) of the definition of Eligible Accounts is deleted in its entirety and replaced with the following clause: "(xiv) Accounts related to projects in which (A) Borrower engages any subcontractor (1) pursuant to a written manufacturing agreement, (2) which provides Borrower units costing at least $5,000.00 per unit, and (3) which does not deliver the units directly to Borrower's facility in Norwood, Louisiana for inclusion in Borrower's physical inventory, and (B) Borrower has not received from each such subcontractor a fully executed and notarized lien waiver in the form attached hereto as Exhibit 1.1(c)." 1.2 Pledge of Stock. The following section is added as Section 7.12 of the Loan Agreement: "(e) Pledge of Stock. ISSI shall have pledged to Lender its ownership interest in the following stock as Collateral securing its obligations under that certain Guaranty Agreement dated November 10, 2004 by ISSI in favor of Lender: (i) 1,000 shares of common stock in Borrower, formerly known as ISSI Merger Sub, Inc., a Delaware corporation; (ii) 1,000 shares of common stock in Intelli, formerly known as Innovative Security Technologies, Inc., a Texas corporation; (iii) 1,000 shares of common stock in Doortek Corporation, a Texas corporation;" 1.3 Section 5.04. Section 5.04 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "Section 5.04 Dividends, Distributions and Redemptions. Unless approved in writing by Lender prior to such event, Borrower shall not declare or pay any dividend, distribution, purchase, redeem or otherwise acquire for value any of its ownership interests now or hereafter outstanding, return any capital to its owners, or make any distribution of its assets to its Affiliates as such. Notwithstanding the foregoing in this Section 5.04 so long as an Event of Default has not occurred and is continuing, Borrower may make monthly distributions or other payments to Affiliates in an aggregate amount equal to the lesser of: (i) $40,000.00; or (ii) 40% percent of Borrower's monthly Net Income; provided, however, that the foregoing restriction on distributions and other payments shall not apply to reimbursements made by Borrower to its Affiliates for payments made by such Affiliates on behalf of Borrower for expenses directly related to Borrower on or after the Effective Date hereof." 1.4 Exhibit 1.1(c). The form of Exhibit 1.1(c) attached hereto is hereby attached to and incorporated in the Loan Agreement as Exhibit 1.1(c) thereto. 1.5 Section 5.10. Section 5.10 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "Section 5.10 Issuance of Stock. During the term of this Agreement, Borrower shall not permit Borrower, Intelli, or Doortek to issue any stock or admit any additional Person as a shareholder of the Borrower without the prior written consent of Lender." 2. Fees and Expenses. Notwithstanding anything in the Loan Agreement to the contrary, Borrower shall reimburse Lender for all of Lender's reasonable fees and expenses (including attorneys' fees) incurred in connection with the preparation, negotiation, and execution of this Second Amendment and all documents required by Lender in connection therewith. 2 3. Defined Terms. Words and terms used herein which are defined in the Loan Agreement are used herein as defined therein, except as specifically modified by the terms of this Second Amendment, or otherwise provided for herein. 4. Counterparts. This Second Amendment may be executed in any number of counterparts and by different parties on separate counterparts. 5. Preservation of Documents and Liens. Except as specifically modified by the terms of this Second Amendment, all of the terms, provisions, covenants, warranties, and agreements contained in the Loan Agreement, and all liens and security interests granted in each Security Instrument (which liens and security interests are acknowledged to be valid and subsisting and are hereby specifically granted again as of the date hereof) remain in full force and effect and secure the obligations provided for therein. Except as otherwise expressly provided herein, by execution of this Second Amendment, Borrower and Lender do not intend to in any manner impair the indebtedness and other obligations described in and secured by each Security Instrument or to in any way impair, waive, or release the liens and security interests granted in each Security Instrument. 6. Entire Agreement. THE LOAN AGREEMENT, AS AMENDED BY THIS SECOND AMENDMENT, AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. 7. Representations and Warranties. The representations and warranties made by Borrower in the Loan Agreement and Security Instruments are true and correct as of the date of this Second Amendment. 8. Release. Borrower hereby releases, remises, acquits and forever discharges Lender, together with its employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter accruing, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date hereof, and in any way directly or indirectly arising out of or in any way connected to this Second Amendment or any other Security Instrument, or any of the transactions associated therewith, including specifically but not limited to claims of usury. THE FOREGOING RELEASE INCLUDES ACTIONS AND CAUSES OF ACTION, JUDGMENTS, EXECUTIONS, SUITS, DEBTS, CLAIMS, DEMANDS, LIABILITIES, OBLIGATIONS, DAMAGES AND EXPENSES ARISING AS A RESULT OF THE NEGLIGENCE OF ONE OR MORE OF THE RELEASED PARTIES. 3 9. Reaffirmation of Security Agreements. The undersigned Guarantors and Validity Guarantors, being parties to their respective Guaranties, Validity Guaranties, and/or Security Agreements (collectively the "Security Agreements") executed in connection with the extension of the Loan, and certain other related agreements, do hereby consent to the terms of this Second Amendment and do further agree that their respective Guaranties, Validity Guaranties, and Security Agreements, as the case may be, shall remain in full force and effect and continue to secure and/or guaranty the timely payment of the Loan. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Loan Agreement to be duly executed as of the Effective Date. LENDER: BORROWER: --------------------------- ----------------------- BRIAR CAPITAL, L.P., B&B ARMR CORPORATION, a a Texas limited partnership Delaware corporation By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ PETER BEARE --------------------- Peter Beare, Chairman By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President GUARANTORS: VALIDITY GUARANTORS: ---------------------------------- ------------------------------- INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation /S/ C.A. RUNDELL, JR. ------------------------------- C.A. RUNDELL, JR., Individually By: /S/ C.A. RUNDELL, JR. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO /S/ PETER BEARE ------------------------- PETER BEARE, Individually INTELLI-SITE, INC., a Texas corporation By: /S/ C.A. RUNDELL, JR. --------------------------- C.A. Rundell, Jr., Chairman
5 EXHIBIT "1.1(c)" FORM OF SUBCONTRACTOR'S WAIVER OF LIEN RIGHTS ADDENDUM REGARDING WAIVER OF LIEN RIGHTS WHEREAS, this addendum (this "Addendum") is hereby attached to and incorporated as a portion of that certain dated , 200 (the "Subcontract"), by and between , as the subcontractor (the "Subcontractor"), and B&B ARMR CORPORATION, a Delaware corporation, as the contractor ("B&B"), pursuant to which Subcontractor has agreed to, among other things, furnish certain materials and labor and to produce certain products to be delivered to B&B's customers (the "Services"), such Services being more particularly described in the Subcontract; WHEREAS, as a condition to B&B's execution of the Subcontract, Subcontractor has agreed to waive all of its lien rights, regardless of their source, with respect to (i) any of the products created pursuant to the Subcontract and/or any of the materials used by the Subcontractor in performing the Services (collectively, the "Personal Property"), and (ii) any real property, including any improvements, onto which the products created pursuant to the Subcontract are delivered, installed or affixed (the "Real Property") (the owner of such Real Property being referred to herein as the "Owner"); NOW, THEREFORE, notwithstanding anything to the contrary in the Subcontract, Subcontractor hereby agrees as follows: 1. Subcontractor hereby waives any and all lien rights, including, without limitation, all liens created in favor of Subcontractor by contract, statute, common law, constitutional law, or otherwise, which now exist or might in the future arise on or against the above-described Personal Property or Real Property on account of the work completed, labor performed, Services performed, materials furnished, or claims incurred by Subcontractor arising out of or related to the Subcontract. 2. In the event that for any reason any lien is filed against the Real Property or the Personal Property by Subcontractor or any party claiming by, through, or under Subcontractor for the Services, Subcontractor shall immediately obtain and deliver to B&B and the Owner (if the lien is filed against the Real Property), at B&B's sole cost and expense, a full and proper release thereof, in recordable form. Subcontractor further hereby agrees to indemnify, defend and hold harmless B&B, the Owner, and Briar Capital, L.P., a Texas limited partnership, from and against any and all claims, damages, losses, liabilities, actions, causes of action, expenses, costs and fees (including, without limitation, court costs and attorney's fees) relating to any such lien or claim or the removal or release thereof. 3. Subcontractor agrees and acknowledges that the interpretation and enforcement of this Addendum, and all of the lien waiver matters and other matters described herein, shall be governed by the laws of the state of Texas, without regard to principles of conflicts of laws. 6 4. Subcontractor agrees to execute and deliver any additional documents and instruments, and to perform any additional acts necessary or appropriate, to perform the terms, provisions, and conditions of this Addendum. 5. If any provision in this Addendum is for any reason held to be unenforceable by a court of law, the unenforceability will not affect any other provision hereof, and this Addendum will be construed as if the unenforceable provision had never been a part of the Addendum. 6. The recitals in this Addendum constitute a substantive part of the Addendum. EXECUTED THIS _____________ day of __________________, 200____. SUBCONTRACTOR: ____________________________________ By:_________________________________ Name:_______________________________ Title:______________________________ SUBSCRIBED AND SWORN TO before me on this ___ day of __________________ _____, 200__, by ________________________________. ____________________________ NOTARY PUBLIC, IN AND FOR (PERSONALIZED SEAL) THE STATE OF________________ 7 EX-4 3 exhibit4-28k060805.txt EXHIBIT 4.2 STOCK PLEDGE AGREEMENT EXHIBIT 4.2 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of May 25, 2005 (the "Agreement"), is executed by and between INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation ("Pledgor"), and BRIAR CAPITAL, L.P., a Texas limited partnership ("Pledgee"). W I T N E S S E T H: WHEREAS, Pledgee has agreed to extend to B&B certain credit facilities, pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated effective as of March 7, 2005 (the "First Amendment"), and as further amended by that certain Second Amendment to Loan Agreement of even date herewith (the "Second Amendment") (the Original Agreement, the First Amendment, and the Second Amendment collectively are referred to as the "Loan Agreement"); WHEREAS, as an inducement for Pledgee to perform its obligations under the Loan Agreement, Pledgor executed that certain Guaranty Agreement date November 10, 2004 (the "Guaranty"); WHEREAS, in order to induce Pledgee to execute the Second Amendment and in order to secure performance of Pledgor's obligations under the Guaranty, Pledgor agreed to pledge to Pledgee all of the stock of B&B ARMR Corporation, a Delaware corporation, formerly known as ISSI Merger Sub, Inc. ("B&B"), Intelli-Site, Inc., a Texas corporation, formerly known as Innovative Security Technologies, Inc. ("Intelli"), and Doortek Corporation, a Texas corporation ("Doortek"); WHEREAS, Pledgor is the owner of one thousand (1,000) shares of the outstanding capital stock of each of B&B, Intelli, and Doortek; NOW, THEREFORE, for and in consideration of the foregoing, and intending to be legally bound hereby, Pledgor and Pledgee agree as follows: 1. (a) The term "Pledged Stock" shall mean: (i) One thousand (1,000) shares of common stock, $0.01 par value, of B&B issued in the name of Pledgor and evidenced by certificate(s) numbered 001 (the "B&B Stock"); (ii) One thousand (1,000) shares of common stock, $0.01 par value, of Intelli issued in the name of Pledgor and evidenced by certificate(s) numbered 001 (the "Intelli Stock"); (iii) One thousand (1,000) shares of common stock, $0.01 par value, of Doortek issued in the name of Pledgor and evidenced by certificate(s) numbered 001 (the "Doortek Stock"); as well as such other shares as are pledged pursuant to the terms hereof, together with all certificates, options, rights, or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such shares, and all proceeds of all of the foregoing, now or hereafter owned or acquired by Pledgor. (b) The term "Obligations" shall mean (i) the obligations of B&B, Pledgor, or any other guarantor under the Loan Agreement and related documents, (ii) the obligations of Pledgor under the Guaranty and related documents, and (iii) the obligations of Pledgor hereunder, whether such obligations are now existing or hereafter incurred, matured or unmatured, direct or contingent, joint or several, including any modifications, renewals or amendments thereto. 2. (a) As security for the prompt satisfaction of the Obligations, Pledgor hereby pledges to Pledgee the Pledged Stock and grants to Pledgee a lien thereon and security interest therein. (b) If Pledgor shall become entitled to receive or shall receive, in connection with any of the Pledged Stock, any: (i) Stock certificates, including, but without limitation, any certificates representing a stock dividend or issued in connection with any increase or reduction of capital, reclassification, conversion, merger, consolidation, sale of assets, combination of shares, stock split, spin-off, or split-off; (ii) Options, warrants, or rights, whether as an addition to, or in substitution or in exchange for, any of the Pledged Stock, or otherwise; (iii) Dividends or distributions payable in property, including securities issued by other than the issuer of any of the Pledged Stock; or (iv) Dividends or distributions of any sort other than cash dividends described in Section 2(d) below; then Pledgor shall accept the same as Pledgee's agent, in trust for Pledgee, and shall deliver them forthwith to Pledgee in the exact form received with, as applicable, Pledgor's endorsement when necessary, or appropriate stock powers duly executed in blank, to be held by Pledgee, subject to the terms hereof, as part of the Pledged Stock. 2 (c) Upon the occurrence and during the continuance of any Event of Default (as hereinafter defined), Pledgee, at its option, may have any part or all of the Pledged Stock registered in its name or that of its nominee, and Pledgor hereby covenants that, upon Pledgee's request, Pledgor will cause the issuer, transfer agent or registrar of the Pledged Stock to effect such registration. Immediately and without further notice, upon the occurrence and during the continuance of an Event of Default, whether or not the Pledged Stock shall have been registered in the name of Pledgee or its nominee, Pledgee or its nominee shall have the right to exercise all voting rights as to all shares and all other corporate rights and all conversion, exchange, subscription or other rights, privileges or options pertaining thereto as if it were the absolute owner thereof, including, without limitation, the right to exchange any or all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization, or other readjustment of the issuer thereof, or upon the exercise by such issuer of any right, privilege, or option pertaining to any of the Pledged Stock, and, in connection therewith, to deliver any of the Pledged Stock to any committee, depository, transfer agent, registrar, or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it; but (i) Pledgee shall have no duty to exercise any of the aforesaid rights, privileges, or options and shall not be responsible for any failure to do so or delay in so doing; and (ii) Pledgee may by written notice to Pledgor relinquish, either partially or completely in accordance with any terms or conditions Pledgee may set forth in such notice, any or all voting rights Pledgee may acquire pursuant to this Section 2(c). (d) Unless an Event of Default shall have occurred and be continuing, Pledgor shall be entitled to receive for his own use cash dividends on the Pledged Stock paid out of current earnings or earned surplus. Upon the occurrence of an Event of Default, Pledgee may require any such cash dividends to be delivered to Pledgee as additional security hereunder. (e) If any of the Obligations are not satisfied pursuant to the terms and conditions for such satisfaction (as described in the Loan Agreement and related supporting documents) (such event being referred to herein as an "Event of Default"), Pledgee may, without demand of performance or other demand, advertisement, or notice of any kind (except the notice specified below of the time and place of public or private sale) to or upon Pledgor or any other person (all of which are, to the extent permitted by law, hereby expressly waived), forthwith realize upon the Pledged Stock or any part thereof, and may forthwith sell or otherwise dispose of and deliver the Pledged Stock or any part thereof or interest therein, or agree to do so, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Pledgee's offices or elsewhere, at such prices and on such terms (including, but without limitation, a requirement that any purchaser of all or any part of the Pledged Stock purchase the shares constituting the Pledged Stock for investment and without any intention to make distribution thereof) as it may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right to Pledgee or any purchaser to purchase upon any such sale the whole or any part of the Pledged Stock free of any right or equity of redemption in Pledgor, which right or equity is hereby expressly waived and released. (f) The proceeds of any such disposition or other action by Pledgee shall be applied as follows: (i) First, to the costs and expenses incurred in connection therewith or incidental thereto or to the care or safekeeping of any of the Pledged Stock or in any way relating to the rights of Pledgee hereunder, including reasonable attorneys' fees and legal expenses; 3 (ii) Second, to the satisfaction of the Obligations; (iii) Third, to the payment of any other amounts required by applicable law; and (iv) Fourth, to Pledgor to the extent of any surplus proceeds. (g) Except as may otherwise be expressly required by applicable laws, Pledgee need not give more than ten (10) days' notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Pledgor hereby deems reasonable; provided, however, that Pledgee at any time, without notice to Pledgor, may sell any shares of Pledged Stock for which a market exists at the market price for such shares. 3. Pledgor represents and warrants that: (a) It has, and has duly exercised, all requisite power and authority to enter into this Agreement, to pledge the Pledged Stock for the purposes described in Section 2(a), and to carry out the transactions contemplated by this Agreement; (b) It is the legal and beneficial owner of all the Pledged Stock; (c) All of the shares of the Pledged Stock have been duly and validly issued, and are fully paid and nonassessable; (d) All of the shares of Pledged Stock are owned by Pledgor free of any pledge, mortgage, hypothecation, lien, charge, encumbrance, or security interest in such shares or the proceeds thereof except such as are granted hereunder; (e) The execution and delivery of this Agreement, and the performance of its terms, will not constitute a default under the terms of any agreement, indenture or other instrument, license, judgment, decree, order, law, statute, ordinance, or other governmental rule or regulation applicable to Pledgor or any of his property; and (f) Upon delivery of the Pledged Stock to Pledgee or its agent, this Pledge Agreement shall create a valid first lien upon, and perfected security interest in, the Pledged Stock and the proceeds thereof, subject to no prior security interest, lien, charge, encumbrance, or agreement purporting to grant to any third party a security interest in the property or assets of Pledgor which would include the Pledged Stock. 4. (a) Pledgor hereby covenants that until all of the Obligations have been satisfied in full, it will not sell, convey, or otherwise dispose of any of the Pledged Stock or any interest therein or any security interest whatsoever in, or with respect to, any of the Pledged Stock or the proceeds thereof, other than that created hereby or specifically referenced herein. 4 (b) Pledgor warrants and will, at its own expense, defend Pledgee's right, title, special property, and security interest in and to the Pledged Stock against the claims of any person, firm, corporation, or other entity. 5. (a) In connection with any disposition of the Pledged Stock by Pledgee pursuant to the terms hereof, Pledgor recognizes that Pledgee may be compelled or deem it best to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire the Pledged Stock for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable to Pledgee than those of public sales, and agrees that such private sales shall be deemed to have been made in a commercially reasonable manner and that Pledgee has no obligation to delay sale of any Pledged Stock to permit the issuer thereof to register it for public sale under the Securities Act of 1933, as amended (the "Securities Act"). (b) In connection with any disposition of the Pledged Stock by Pledgee following an Event of Default, Pledgor shall use its best efforts to cause any issuer, transfer agent, or registrar of the Pledged Stock to take all such actions and execute all such documents as may be necessary or appropriate, upon the request of Pledgee, to (i) remove any restrictive legends placed on the Pledged Stock that are not legally required for such Pledged Stock held by Pledgee; (ii) effect any sale or sales of Pledged Stock in accordance with Rule 144 under the Securities Act (if such rule is applicable); and (iii) effect any sale or other disposition of the Pledged Stock in any otherwise permitted public or private sale or other disposition. 6. Pledgor will promptly deliver to Pledgee all written notices and will promptly give Pledgee written notice of any other notices received by it with respect to the Pledged Stock, and Pledgee will promptly give like notice to Pledgor of any such notices received by it or its nominee. 7. Pledgor shall at any time, and from time to time, upon the written request of Pledgee, execute and deliver such further documents and do such further acts and things as Pledgee may reasonably request to effect the purposes of this Pledge Agreement, including, without limitation, delivering to Pledgee irrevocable proxies with respect to the Pledged Stock in form satisfactory to Pledgee. Until receipt thereof, from and after an Event of Default, this Agreement shall constitute Pledgor's proxy to Pledgee or its nominee to vote all shares of Pledged Stock then registered in Pledgor's name at any and all such times as Pledgee has the right to vote such shares pursuant to the terms of this Agreement. Such power of attorney granted hereby is coupled with an interest and is irrevocable. Notwithstanding the foregoing, Pledgor shall be permitted to vote the Pledged Stock except during the occurrence of an Event of Default hereunder. 8. Upon satisfaction in full of all Obligations as well as all additional costs and expenses of Pledgee as provided herein, this Agreement shall terminate, and Pledgee shall deliver to Pledgor, at Pledgor's expense, such of the Pledged Stock as shall not have been sold or otherwise disposed of pursuant to this Agreement. 9. Beyond the exercise of reasonable care to assure the safe custody of the Pledged Stock while held hereunder, Pledgee shall have no duty or liability to preserve rights pertaining thereto and shall be relieved of all responsibility for the Pledged Stock upon surrendering it or tendering surrender of it to Pledgor. 5 (a) No course of dealing between Pledgor and Pledgee, nor any failure to exercise, nor any delay in exercising, any right, power or privilege of Pledgee hereunder or under the Loan Agreement or the Guaranty shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) The rights and remedies provided herein and in the Loan Agreement and the Guaranty are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law, including, but without limitation, the rights and remedies of a secured party under the Texas Business and Commerce Code. (c) The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision or part thereof in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision in this Agreement in any jurisdiction. 10. By the execution of this Agreement, Pledgor hereby irrevocably constitutes and appoints Pledgee as true and lawful attorney-in-fact and agent of Pledgee, with full power and authority to act in its name, place and stead to undertake all reasonable and necessary acts to assign and transfer unto Pledgee or any other person or persons the Pledged Stock. The power of attorney herein granted is coupled with an interest, is irrevocable, and shall continue until the Obligations have been paid and performed in full. Notwithstanding the foregoing, the power of attorney described herein shall not be utilized except during the occurrence of an Event of Default. 11. Any notice required or permitted by this Agreement shall be effective if delivered by hand or mailed, certified mail with postage prepaid: (a) If to Pledgor, to: 8200 Springwood Drive, Suite 230, Irving, Texas 75063, Attn: President; (b) If to Pledgee, to: 1500 City West Blvd., Suite 225, Houston, Texas 77042, Attn: Steve Rosencranz. 12. This Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the parties hereto. 6 13. This Agreement shall be construed in accordance with the substantive laws of the State of Texas, without regard to principles of conflicts of law. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE PLEDGOR HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF THE PLEDGOR'S PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE PLEDGOR PURSUANT TO SECTION 11, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF THE PLEDGEE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE PLEDGOR IN ANY OTHER JURISDICTION. THE PLEDGOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH THE PLEDGOR MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN THIS SECTION 13 AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 14. THE PLEDGOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR ARISING FROM OR RELATING TO ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 15. Attorneys' Fees. If any litigation or arbitration proceeding is instituted to enforce or interpret the provisions of this Agreement, or the transactions described herein or therein, the prevailing party in such action shall be entitled to recover its reasonable attorneys' fees from the other party hereto. (Remainder of Page Intentionally Left Blank) 7 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on this 25th day of May, 2005, effective as of the date and year first above written. PLEDGOR: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. RUNDELL, JR. --------------------- Name: C. A. Rundell, Jr. Title: Chairman and CEO PLEDGEE: BRIAR CAPITAL, L.P. By: Briar Capital General, LLC, its general partner By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President Signature Page To Stock Pledge Agreement (Integrated Security Systems, Inc. to Briar Capital, L.P.) 8 EX-4 4 exhibit4-38k060805.txt EXHIBIT 4.3 SUBORDINATION AGREEMENT EXHIBIT 4.3 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 25th day of May, 2005, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Subordinated Lender"), and B&B ARMR CORPORATION, a Delaware corporation (the "Company"). BACKGROUND Briar has agreed to extend to the Company certain credit facilities (the "Loan"), pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated March 7, 2005 (the "First Amendment"), each by and among Briar, the Company, and certain other parties; Subordinated Lender has executed that certain Guaranty Agreement dated effective November 10, 2004, in favor of Briar (the "Guaranty"), pursuant to which Subordinated Lender guaranteed payment of certain obligations of the Company, which obligations are more particularly set forth in the Guaranty; As an inducement for Briar to enter into a second amendment to the Loan, Subordinated Lender hereby enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. 2 "Loan Agreement" shall mean that certain Loan Agreement dated effective as of November 10, 2004, as amended from time to time, by and among the Company, Subordinated Lender, and Briar, as the same has or may be amended, supplemented, modified or restated from time to time. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to any Company debt to Subordinated Lender, including without limitation that certain debt in the amount of $825,000 advanced by Subordinated Lender to Company in April and May of 2005. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 3 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into a second amendment to the Loan and to loan funds pursuant thereto, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. 4 (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. 6 (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 7 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 8 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: Integrated Security Systems, Inc. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Telephone: 972-444-8280 Facsimile: 972-869-3843 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 9 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President COMPANY: B&B ARMR CORPORATION, a Delaware corporation By: /S/ PETER BEARE --------------------- Peter Beare, Chairman SUBORDINATED LENDER: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. RUNDELL, JR. ---------------------------------- C.A Rundell, Jr., Chairman and CEO 12 EX-4 5 exhibit4-48k060805.txt EXHIBIT 4.4 SUBORDINATION AGREEMENT EXHIBIT 4.4 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 25th day of May, 2005, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), FROST NATIONAL BANK, CUSTODIAN, FBO RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., TRUST NO. W00740000, a Texas corporation (the "Subordinated Lender"), and INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"). BACKGROUND Briar has agreed to extend to B&B ARMR Corporation, a Delaware corporation ("B&B"), certain credit facilities pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated March 7, 2005 (the "First Amendment"), each by and among Briar, the Company, and certain other parties; The Company has executed that certain Guaranty Agreement dated effective November 10, 2004, in favor of Briar (the "Guaranty"), pursuant to which the Subordinated Lender guaranteed payment of certain obligations of B&B, which obligations are more particularly set forth in the Guaranty; As an inducement for Briar to enter into that certain Second Amendment to Loan Agreement of even date herewith, by and among the Company, B&B, and Briar, and certain other parties (the "Second Amendment") (the Original Agreement, the First Amendment and Second Amendment collectively are referred to as the "Loan Agreement"), the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, the Guaranty, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. 2 "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan Agreement" shall have the definition given to such term in the recitals hereof. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to any Company debt to Subordinated Lender, including without limitation that certain debt evidenced by a Promissory Note by Company in favor of Subordinated Lender dated May 5, 2005 in the amount of One Hundred Seventy-Five Thousand and No/100 dollars ($175,000.00). 3 "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Second Amendment, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 4 (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. 6 (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 7 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 8 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: Frost National Bank, Custodian FBO Renaissance Capital Growth & Income Fund III, Inc. Trust No. W00740000 100 West Houston Street San Antonio, TX 78205 Telephone: 210-220-5216 Facsimile: 210-220-5213 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President COMPANY: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. RUNDELL, JR. ------------------------------ C.A. Rundell, Chairman and CEO SUBORDINATED LENDER: FROST NATIONAL BANK, CUSTODIAN, FBO RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., TRUST NO. W00740000, a Texas corporation By: /S/ RUSSELL CLEVELAND --------------------- Name: Russell Cleveland Title: President 12 EX-4 6 exhibit4-58k060805.txt EXHIBIT 4.5 SUBORDINATION AGREEMENT EXHIBIT 4.5 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 25th day of May, 2005, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), FROST NATIONAL BANK, CUSTODIAN, FBO RENAISSANCE US GROWTH INVESTMENT TRUST PLC, TRUST NO. W00740100, a Texas corporation (the "Subordinated Lender"), and INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"). BACKGROUND Briar has agreed to extend to B&B ARMR Corporation, a Delaware corporation ("B&B"), certain credit facilities pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated March 7, 2005 (the "First Amendment"), each by and among Briar, the Company, and certain other parties; The Company has executed that certain Guaranty Agreement dated effective November 10, 2004, in favor of Briar (the "Guaranty"), pursuant to which the Subordinated Lender guaranteed payment of certain obligations of B&B, which obligations are more particularly set forth in the Guaranty; As an inducement for Briar to enter into that certain Second Amendment to Loan Agreement of even date herewith, by and among the Company, B&B, and Briar, and certain other parties (the "Second Amendment") (the Original Agreement, the First Amendment and Second Amendment collectively are referred to as the "Loan Agreement"), the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, the Guaranty, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. 2 "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan Agreement" shall have the meaning given to such term in the recitals hereof. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to any Company debt to Subordinated Lender, including without limitation that certain debt evidenced by a Promissory Note by Company in favor of Subordinated Lender dated May 5, 2005 in the amount of One Hundred Seventy-Five Thousand and No/100 dollars ($175,000.00). "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 3 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Second Amendment, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 4 (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. 6 (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 7 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 8 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: Frost National Bank, Custodian FBO US Growth Investment Trust PLC Trust No. W00740100 100 West Houston Street San Antonio, TX 78205 Telephone: 210-220-5216 Facsimile: 210-220-5213 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 9 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. 11 [SIGNATURE PAGE FOLLOWS] 12 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ STEVE ROZENCRANZ --------------------------- Steve Rosencranz, President COMPANY: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /C/ C.A. RUNDELL, JR. ----------------------------- C.A Rundell, Chairman and CEO SUBORDINATED LENDER: FROST NATIONAL BANK, CUSTODIAN, FBO RENAISSANCE US GROWTH INVESTMENT TRUST PLC, TRUST NO. W00740100, a Texas corporation By: /S/ RUSSELL CLEVELAND --------------------- Name: Russell Cleveland Title: Director 13 EX-4 7 exhibit4-68k060805.txt EXHIBIT 4.6 SUBORDINATION AGREEMENT EXHIBIT 4.6 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 25th day of May, 2005, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), FROST NATIONAL BANK, CUSTODIAN, FBO BFS US SPECIAL OPPORTUNITIES TRUST PLC, TRUST NO. W00118000, a Texas corporation (the "Subordinated Lender"), and INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"). BACKGROUND Briar has agreed to extend to B&B ARMR Corporation, a Delaware corporation ("B&B"), certain credit facilities pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated March 7, 2005 (the "First Amendment"), each by and among Briar, the Company, and certain other parties; The Company has executed that certain Guaranty Agreement dated effective November 10, 2004, in favor of Briar (the "Guaranty"), pursuant to which the Subordinated Lender guaranteed payment of certain obligations of B&B, which obligations are more particularly set forth in the Guaranty; As an inducement for Briar to enter into that certain Second Amendment to Loan Agreement of even date herewith, by and among the Company, B&B, and Briar, and certain other parties (the "Second Amendment") (the Original Agreement, the First Amendment and Second Amendment collectively are referred to as the "Loan Agreement"), the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, the Guaranty, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. 2 "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan Agreement" shall mean have the meaning given to such term in the recitals hereof. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to any Company debt to Subordinated Lender, including without limitation that certain debt evidenced by a Promissory Note by Company in favor of Subordinated Lender dated May 5, 2005 in the amount of One Hundred Seventy-Five Thousand and No/100 Dollars ($175,000.00). "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 3 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Second Amendment, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 4 (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. 6 (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 7 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 8 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: Frost National Bank, Custodian FBO BFS US Special Opportunities Trust PLC, Trust No. W00118000 100 West Houston Street San Antonio, TX 78205 Telephone: 210-220-5216 Facsimile: 210-220-5213 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 9 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President COMPANY: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. RUNDELL, JR. ------------------------------ C.A. Rundell, Chairman and CEO SUBORDINATED LENDER: FROST NATIONAL BANK, CUSTODIAN, FBO BFS US SPECIAL OPPORTUNITIES TRUST PLC, TRUST NO. W00118000, a Texas corporation By: /S/ RUSSELL CLEVELAND --------------------- Name: Russell Cleveland Title: Director 12 EX-4 8 exhibit4-78k060805.txt EXHIBIT 4.7 SUBORDINATION AGREEMENT EXHIBIT 4.7 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 25th day of May, 2005, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), C.A. RUNDELL, JR. (the "Subordinated Lender"), and INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation (the "Company"). BACKGROUND Briar has agreed to extend the Company certain credit facilities pursuant to the terms of that certain Loan Agreement dated November 10, 2004 (the "Original Agreement"), as amended by that certain First Amendment to Loan Agreement dated March 7, 2005 (the "First Amendment"), each by and among Briar, the Company, and certain other parties; As an inducement for Briar to enter into that certain Second Amendment to Loan Agreement of even date herewith, by and among the Company, Briar, and certain other parties (the "Second Amendment") (the Original Agreement, the First Amendment and Second Amendment collectively are referred to as the "Loan Agreement"), the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. As an inducement for Briar to enter into a loan arrangement with the Company, the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. 2 "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan Agreement" shall mean that certain Loan Agreement dated effective as of the date hereof between the Company and Briar, as the same has or may be amended, supplemented, modified or restated from time to time. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to any Company debt to Subordinated Lender, including without limitation, that certain debt evidenced by a Promissory Note dated May 4, 2005, by the Company in favor of Subordinated Lender. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 3 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Second Amendment and to loan funds pursuant thereto, notwithstanding any other provision of the ubordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 4 (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. 6 (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 7 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 8 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: C.A. Rundell, Jr. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Telephone: 214.978.6400 Facsimile: 214.978.6401 with a copy to: Haynes & Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 Attention: Jeffrey L. Curtis Telephone: 214.651.5006 Facsimile: 214.200.0720 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 9 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ STEVE ROSENCRANZ --------------------------- Steve Rosencranz, President COMPANY: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ PETER BEARE ---------------------- Peter Beare, President SUBORDINATED LENDER: /S/ C.A. RUNDELL, JR. ------------------------------- C.A. RUNDELL, JR., Individually 12 -----END PRIVACY-ENHANCED MESSAGE-----