EXHIBIT 4.3
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN A MANNER CONSISTENT WITH THE SECURITIES ACT IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.
No. [ ] $[ ]
Original Issue Date: November 30, 2004
INTEGRATED SECURITY SYSTEMS, INC.
SUBORDINATED 10% CONVERTIBLE NOTE DUE NOVEMBER 30, 2009
THIS NOTE is one of a series of duly authorized and issued notes
of Integrated Security Systems, Inc., a Delaware corporation (the "Company"),
designated as its Subordinated 10% Convertible Notes due November 30, 2009, in
the original aggregate principal amount of [ ] ($[ ]) (collectively, the "Notes"
and each Note comprising the Notes, a "Note").
FOR VALUE RECEIVED, the Company promises to pay to the order of
[ ] or its registered assigns (the "Investor"), the principal sum of [ ] ($), on
November 30, 2009 or such earlier date as this Note is required to be repaid as
provided hereunder (the "Maturity Date"), and to pay interest to the Investor on
the principal amount of this Note outstanding from time to time in accordance
with the provisions hereof. All holders of Notes are referred to collectively,
as the "Investors." This Note is subject to the following additional provisions:
1. Definitions. In addition to the terms defined elsewhere
in this Note: (a) capitalized terms that are used but not otherwise defined
herein have the meanings given to such terms in the Loan Agreement, dated as of
the Original Issue Date, among the Company and the Investors identified therein
(the "Loan Agreement"), and (b) the following terms have the meanings indicated
below:
"Bankruptcy Event" means any of the following events: (a) the Company
or any Subsidiary commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Company or any Subsidiary thereof; (b) there is commenced against the Company or
any Subsidiary any such case or proceeding that is not dismissed within 90 days
after commencement; (c) the Company or any Subsidiary is adjudicated by a court
of competent jurisdiction insolvent or bankrupt or any order of relief or other
order approving any such case or proceeding is entered; (d) the Company or any
Subsidiary suffers any appointment of any custodian or the like for it or any
substantial part of its property that is not discharged or stayed within 90
days; (e) under applicable law the Company or any Subsidiary makes a general
assignment for the benefit of creditors; (f) the Company or any Subsidiary fails
to pay, or states that it is unable to pay or is unable to pay, its debts
generally as they become due; or (g) the Company or any Subsidiary, by any act
or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.
"Closing Price" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then listed or
quoted on an Eligible Market, the closing bid price per share of the Common
Stock for such date (or the nearest preceding date) on the primary Eligible
Market or exchange on which the Common Stock is then listed or quoted; (b) if
prices for the Common Stock are then quoted on the OTC Bulletin Board, the
closing bid price per share of the Common Stock for such date (or the nearest
preceding date) so quoted; (c) if prices for the Common Stock are then reported
in the "Pink Sheets" published by the National Quotation Bureau Incorporated (or
a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock as
determined by an independent qualified appraiser selected in good faith and paid
for by a majority in interest of the Investors.
"Common Stock" means the common stock of the Company, $0.01 par value
per share, and any securities into which such common stock may hereafter be
reclassified.
"Common Stock Equivalents" means any securities of the Company or a
Subsidiary thereof which entitle the holder thereof to acquire Common Stock at
any time, including without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.
"Company Prepayment Amount" for any principal amount of Notes which
shall be subject to prepayment, shall equal the sum of: (A) 100% of such
outstanding principal amount, plus all accrued but unpaid interest on such
Notes, through the date of payment, and (2) the amount of any unpaid liquidated
damages and other amounts then owing (other than interest and principal) under
the Transaction Documents.
"Conversion Date" means the date a Conversion Notice together with the
Conversion Schedule is delivered to the Company in accordance with Section 5(a).
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"Conversion Notice" means a written notice in the form attached hereto
as Exhibit A.
"Conversion Price" means $0.38, subject to adjustment in accordance
with Section 11.
"Default" means any event or condition which constitutes an Event of
Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Eligible Market" means any of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market
or the Over-The-Counter Bulletin Board.
"Equity Conditions Are Satisfied" means, as of any date of
determination, that each of the following conditions is (or would be) satisfied
on such date, if the Company were to issue on such date all of the Underlying
Shares then issuable upon (1) conversion in full of the outstanding principal
amount of all Notes, and (2) the payment of accrued and unpaid interest on such
Interest Payment Date under all the Notes of the Company: (i) the number of
authorized but unissued and otherwise unreserved shares of Common Stock is
sufficient for such issuance, (ii) the Common Stock is listed or quoted (and is
not suspended from trading) on an Eligible Market and such shares of Common
Stock are approved for listing on such Eligible Market upon issuance, (iii) such
Common Stock is registered for resale under the Registration Statement and the
prospectus under such Registration Statement is available for the sale of all
Registrable Securities held by the Investor, (iv) such issuance would be
permitted in full without violating, (x) in the case of Section 13, Section 5(b)
hereof, or (y) in all other cases, Section 5(b) hereof or the rules or
regulations of the Eligible Market on which such shares are listed or quoted,
(v) both immediately before and after giving effect thereto, no Default shall or
would exist, and (vi) no public announcement of a pending or proposed Change of
Control transaction has occurred that has not been consummated.
"Event of Default" means any one of the following events (whatever the
reason and whether it shall be voluntary or involuntary or effected by operation
of law or pursuant to any judgment, decree or order of any court, or any order,
rule or regulation of any administrative or governmental body):
(i) any default in the payment (free of any claim of
subordination), when the same becomes due and payable, of (a) liquidated damages
payable pursuant to the Transaction Documents which default continues unremedied
for a period of 30 days after the date on which written notice of such default
is first given to the Company by the Investor, (b) interest in respect of this
Note which default continues unremedied for a period of 30 days after the date
on which written notice of such default is first given to the Company by the
Investor, or (c) principal.
(ii) the occurrence and continuance of an Event of Default
under any other Note.
(iii) any of the notes issued to Renaissance Capital Growth &
Income Fund III, Inc., Renaissance US Growth Investment Trust PLC, or BFS US
Special Opportunities Trust PLC are repaid prior to its stated maturity date.
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(iv) any prepayment by the Company of any other Note except in
each case (i) if the Company offers to the Investor in writing the same
prepayment of this Note and all other Notes then held by such Investor on the
same economic terms on which the Company prepays or offers to prepay (whichever
is more favorable to the holder of such Note) such Notes, and (ii) in accordance
with the prepayment provisions of Section 13 of this Note.
(v) the occurrence of a Bankruptcy Event.
(vi) any Transaction Document shall cease, for any reason, to
be in full force and effect, or the Company shall so assert in writing or shall
disavow any of its obligations thereunder.
"Indebtedness" of the Company shall mean, without duplication, (a) all
obligations of the Company for borrowed money, (b) all obligations of the
Company evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of the Company under conditional sale or other title retention
agreements relating to property or assets purchased by such Person, (d) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by the Company, whether or not the obligations
secured thereby have been assumed, (e) all obligations of the Company in respect
of interest rate protection agreements, foreign currency exchange agreements or
other interest or exchange rate hedging arrangements that exceed amounts
necessary to hedge the Company's cross-currency exposure and (h) all obligations
of the Company as an account party in respect of letters of credit and bankers'
acceptances. The Indebtedness of the Company shall include the Indebtedness of
any partnership in which the Company is a general partner.
"Original Issue Date" has the meaning set forth on the face of this
Note.
"Proceeding" means an action, claim, suit or proceeding (including,
without limitation, a partial proceeding, such as a deposition), whether
commenced or threatened.
"Registration Statement" shall have the meaning set forth in the Loan
Agreement.
"Trading Day" means (i) a day on which the Common Stock is traded on an
Eligible Market (other than the OTC Bulletin Board), or (ii) if the Common Stock
is not listed on an Eligible Market (other than the OTC Bulletin Board), a day
on which the Common Stock is traded in the over-the-counter market, as reported
by the OTC Bulletin Board or the National Quotation Bureau Incorporated, or
(iii) if the Common Stock is not quoted on an Eligible Market or the OTC
Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not
listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
shall mean a Business Day.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Notes and payment of interest thereunder.
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2. Interest. The Company shall pay interest to the Investor
on the aggregate unconverted and then outstanding principal amount of this Note
at the rate of 10% per annum, payable semi-annually in cash, in arrears, on each
May 31 and November 30, beginning May 31, 2005, except if such date is not a
Trading Day, in which case such interest shall be payable on the next succeeding
Trading Day (an "Interest Payment Date"). Interest shall be calculated on the
basis of a 360-day year for the actual number of days elapsed and shall accrue
daily commencing on the Original Issue Date.
3. Registration of Notes. The Company shall register the
Notes upon records maintained by the Company for that purpose (the "Note
Register") in the name of each record Investor thereof from time to time. The
Company may deem and treat the registered Investor of this Note as the absolute
owner hereof for the purpose of any conversion hereof or any payment of interest
hereon, and for all other purposes, absent actual notice to the contrary from
such record Investor.
4. Registration of Transfers and Exchanges. The Company
shall register the transfer of any portion of this Note in the Note Register
upon surrender of this Note to the Company at its address for notice set forth
herein. Upon any such registration or transfer, a new Note, in substantially the
form of this Note (any such new debenture, a "New Note"), evidencing the portion
of this Note so transferred shall be issued to the transferee and a New Note
evidencing the remaining portion of this Note not so transferred, if any, shall
be issued to the transferring Investor. The acceptance of the New Note by the
transferee thereof shall be deemed the acceptance by such transferee of all of
the rights and obligations of a holder of a Note. The Company agrees that its
prior consent is not required for the transfer of any portion of this Note;
provided, however, that the Company shall be entitled to reasonable assurance,
including an opinion of counsel reasonably acceptable to Company, that such
transfer complies with applicable federal and state securities laws. This Note
is exchangeable for an equal aggregate principal amount of Notes of different
authorized denominations, as requested by the Investor surrendering the same. No
service charge or other fee will be imposed in connection with any such
registration of transfer or exchange.
5. Conversion.
(a) At the Option of the Investor. All or any portion
of the principal amount of this Note then outstanding together with any accrued
and unpaid interest hereunder shall be convertible into shares of Common Stock
at the Conversion Price (subject to limitations set forth in Section 5(b)), at
the option of the Investor, at any time and from time to time from and after the
Original Issue Date. The Investor may effect conversions under this Section
5(a), by delivering to the Company a Conversion Notice together with a schedule
in the form of Schedule 1 attached hereto (the "Conversion Schedule"). If the
Investor is converting less than all of the principal amount represented by this
Note, or if a conversion hereunder may not be effected in full due to the
application of Section 5(b), the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to the Investor a
Conversion Schedule indicating the principal amount which has not been
converted.
(b) Certain Conversion Restrictions. Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by an Investor upon each conversion of Notes (or otherwise
in respect hereof) shall be limited to the extent necessary to insure that,
following such conversion (or other issuance), the total number of shares of
Common Stock then beneficially owned by such Investor and its Affiliates and any
other Persons whose beneficial ownership of Common Stock would be aggregated
with such Investor's for purposes of Section 13(d) of the Exchange Act, does not
exceed 9.999% of the total number of issued and outstanding shares of Common
Stock (including for such purpose the shares of Common Stock issuable upon such
conversion). For such purposes, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. This provision shall not restrict the number of shares
of Common Stock which an Investor may receive or beneficially own in order to
determine the amount of securities or other consideration that such Investor may
receive in the event of a Fundamental Transaction (defined below) involving the
Company as contemplated herein. This restriction may not be waived.
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6. Mechanics of Conversion.
(a) The number of Underlying Shares issuable upon any
conversion hereunder shall equal the outstanding principal amount of this Note
to be converted, divided by the Conversion Price on the Conversion Date, plus
(if indicated in the applicable Conversion Notice) the amount of any accrued but
unpaid interest on this Note through the Conversion Date, divided by the
Conversion Price on the Conversion Date.
(b) The Company shall, by the third Trading Day
following each Conversion Date, issue or cause to be issued and cause to be
delivered to or upon the written order of the Investor and in such name or names
as the Investor may designate a certificate for the Underlying Shares issuable
upon such conversion, free of restrictive legends if at such time a Registration
Statement is then effective and available for use by the Investor. The Investor,
or any Person so designated by the Investor to receive Underlying Shares, shall
be deemed to have become holder of record of such Underlying Shares as of such
Conversion Date.
(c) The Investor shall be required to deliver the
original Note in order to effect a conversion hereunder.
(d) If by the third Trading Day after a Conversion
Date the Company fails to deliver to the Investor such Underlying Shares in such
amounts and in the manner required pursuant to Section 5, then the Investor will
have the right to rescind the Conversion Notice pertaining thereto by giving
written notice to the Company prior to such Investor's receipt of such
Underlying Shares.
(e) If by the third Trading Day after a Conversion
Date or the Company Conversion Date the Company fails to deliver to the Investor
the required number of Underlying Shares in the manner required pursuant to
Section 5, and if after such third Trading Day and prior to the receipt of such
Underlying Shares, the Investor purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Investor of the Underlying Shares which the Investor anticipated receiving upon
such conversion (a "Buy-In"), then the Company shall: (1) pay in cash to the
Investor (in addition to any other remedies available to or elected by the
Investor) the amount by which (x) the Investor's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (y) the amount obtained by multiplying (A) the number of Underlying
Shares that the Company was required to deliver to the Investor in connection
with the exercise at issue by (B) the Closing Price at the time of the
obligation giving rise to such purchase obligation and (2) at the option of the
Investor, either void the conversion at issue and reinstate the principal amount
of Notes (plus accrued interest therein) for which such conversion was not
timely honored or deliver to the Investor the number of shares of Common Stock
that would have been issued had the Company timely complied with its exercise
and delivery obligations hereunder. The Investor shall provide the Company
reasonably detailed evidence or written notice indicating the amounts payable to
the Investor in respect of the Buy-In.
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7. Events of Default.
(a) At any time or times following the occurrence and
during the continuance of an Event of Default, the Investor may elect, by notice
to the Company (an "Event Notice"), to require the Company to purchase all or
any portion of the outstanding principal amount of this Note, as indicated in
such Event Notice, at a purchase price in Dollars in cash equal to 100% of such
outstanding principal amount, plus all accrued but unpaid interest thereon and
any unpaid liquidated damages and other amounts then owing to the Investor under
the Transaction Documents, through the date of purchase. The Company shall pay
the aggregate amount due under this Section 7(a) to the Investor (free of any
claim of subordination) no later than the tenth Trading Day following the date
of delivery of the Event Notice, and upon receipt thereof the Investor shall
deliver the original Note so repurchased to the Company.
(b) Upon the occurrence of any Bankruptcy Event with
respect to the Company, all outstanding principal and accrued but unpaid
interest on this Note and any unpaid liquidated damages and other amounts then
owing under the Transaction Documents shall immediately become due and payable
in full in Dollars in cash (free of any claim of subordination), without any
action by the Investor, and the Company shall immediately be obligated to
repurchase this Note held by such Investor at the Event Price pursuant to the
preceding paragraph as if the Investor had delivered an Event Notice immediately
prior to the occurrence of such Bankruptcy Event.
(c) In connection with any Event of Default, the
Investor need not provide and the Company hereby waives any presentment, demand,
protest or other notice of any kind (other than the Event Notice), and the
Investor may immediately enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Any such
declaration may be rescinded and annulled by the Investor at any time prior to
payment hereunder. No such rescission or annulment shall affect any subsequent
Event of Default or impair any right consequent thereto.
8. Ranking. This Note ranks pari passu with all other Notes
now or hereafter issued pursuant to the Transaction Documents. This Note is
subordinated in right of payment to all existing and hereafter created unsecured
Indebtedness of the Company. Investor understands that B&B ARMR Corporation
("B&B"), a wholly owned subsidiary of the Company, has entered into (or will
enter into) a Loan Agreement with Briar Capital, L.P. ("Briar"), pursuant to
which B&B will issue to Briar a Promissory Note in the original principal amount
of $3,000,000 (the "Briar Note"). The Briar Note is secured by the assets of B&B
and the Company. This Note is subordinated in right of payment to the Briar
Note. If the Briar Note or any existing or hereafter created Indebtedness of the
Company is in default, no payments will be made under this Note until any such
default is satisfactorily cured or remedied.
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9. Charges, Taxes and Expenses. Issuance of certificates for
Underlying Shares upon conversion of (or otherwise in respect of) this Note
shall be made without charge to the Investor for any issue or transfer tax,
withholding tax, transfer agent fee or other incidental tax or expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the registration of any certificates for Underlying Shares or Notes in a name
other than that of the Investor. The Investor shall be responsible for all other
tax liability that may arise as a result of holding or transferring this Note or
receiving Underlying Shares in respect hereof.
10. Reservation of Underlying Shares. The Company covenants
that it will at all times reserve and keep available out of the aggregate of its
authorized but unissued and otherwise unreserved Common Stock, solely for the
purpose of enabling it to issue Underlying Shares as required hereunder, the
number of Underlying Shares which are then issuable and deliverable upon the
conversion of (and otherwise in respect of) this entire Note (taking into
account the adjustments of Section 11), free from preemptive rights or any other
contingent purchase rights of persons other than the Investor. The Company
covenants that all Underlying Shares so issuable and deliverable shall, upon
issuance in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
11. Certain Adjustments. The Conversion Price is subject to
adjustment from time to time as set forth in this Section 11.
(a) Stock Dividends and Splits. If the Company, at any
time while this Note is outstanding: (i) pays a stock dividend on its Common
Stock or otherwise makes a distribution on any class of capital stock that is
payable in shares of Common Stock (excluding payment of interest under the Notes
in shares of Common Stock), (ii) subdivides outstanding shares of Common Stock
into a larger number of shares, or (iii) combines outstanding shares of Common
Stock into a smaller number of shares, then in each such case the Conversion
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding immediately before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to clause
(i) of this paragraph shall become effective immediately after the record date
for the determination of shareholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this
paragraph shall become effective immediately after the effective date of such
subdivision or combination.
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(b) Pro Rata Distributions. If the Company, at any
time while this Note is outstanding, distributes to all holders of Common Stock
(i) evidences of its indebtedness, (ii) any security (other than a distribution
of Common Stock covered by the preceding paragraph), (iii) rights or warrants to
subscribe for or purchase any security, or (iv) any other asset (in each case,
"Distributed Property"), then, at the request of the Investor delivered before
the 90th day after the record date fixed for determination of shareholders
entitled to receive such distribution, the Company will deliver to the Investor,
within five Trading Days after such request (or, if later, on the effective date
of such distribution), the Distributed Property that the Investor would have
been entitled to receive in respect of the Underlying Shares for which this Note
could have been converted immediately prior to such record date. If such
Distributed Property is not delivered to the Investor pursuant to the preceding
sentence, then upon any conversion of this Note that occurs after such record
date, the Investor shall be entitled to receive, in addition to the Underlying
Shares otherwise issuable upon such conversion, the Distributed Property that
the Investor would have been entitled to receive in respect of such number of
Underlying Shares had the Investor been the record holder of such Underlying
Shares immediately prior to such record date. Notwithstanding the foregoing,
this Section 11(b) shall not apply to any distribution of rights or securities
in respect of adoption by the Company of a shareholder rights plan, which events
shall be covered by Section 11(a).
(c) Fundamental Transactions. If, at any time while
this Note is outstanding, (i) the Company effects any merger or consolidation of
the Company with or into another Person, (ii) the Company effects any sale of
all or substantially all of its assets in one or a series of related
transactions, (iii) any tender offer or exchange offer (whether by the Company
or another Person) is completed pursuant to which holders of Common Stock tender
or exchange their shares for other securities, cash or property, or (iv) the
Company effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (other than as a result of a
subdivision or combination of shares of Common Stock covered by Section 11(a)
above) (in any such case, a "Fundamental Transaction"), then upon any subsequent
conversion of this Note, the Investor shall have the right to declare an Event
of Default pursuant to clause (iii) thereunder, or receive, for each Underlying
Share that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the "Alternate Consideration"). For
purposes of any such conversion, the Company shall apportion the Conversion
Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If
holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Investor shall be
given the same choice as to the Alternate Consideration it receives upon any
conversion of this Note following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction (or, if different, the
ultimate parent of such successor or entity or the entity issuing the Alternate
Consideration) shall issue to the Investor a new debenture consistent with the
foregoing provisions and evidencing the Investor's right to convert such
debenture into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of this
paragraph (c) and insuring that this Note (or any such replacement security)
will be similarly adjusted upon any subsequent transaction analogous to a
Fundamental Transaction.
(d) Subsequent Equity Sales.
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(i) If the Company or any subsidiary thereof, as
applicable, at any time while this Note is outstanding, shall issue shares of
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock, at a price per share less than the Conversion Price (if the
holder of the Common Stock or Common Stock Equivalent so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance, be entitled
to receive shares of Common Stock at a price less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price), then, the Conversion Price shall be adjusted to mirror the conversion,
exchange or purchase price for such Common Stock or Common Stock Equivalents
(including any reset provisions thereof) at issue. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. The Company
shall notify the Investor in writing, no later than the fifth Trading Day
following the issuance of any Common Stock or Common Stock Equivalent subject to
this section, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms.
(ii) For purposes of this subsection 11(d), the
following subsections (d)(ii)(l) to (d)(ii)(6) shall also be applicable:
(1) Issuance of Rights or Options. In case at
any time the Company shall in any manner grant (directly and not by assumption
in a merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the sum (which sum shall
constitute the applicable consideration) of (x) the total amount, if any,
received or receivable by the Company as consideration for the granting of such
Options, plus (y) the aggregate amount of additional consideration payable to
the Company upon the exercise of all such Options, plus (z), in the case of such
Options which relate to Convertible Securities, the aggregate amount of
additional consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options) shall be less than the
Conversion Price in effect immediately prior to the time of the granting of such
Options, then the total number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total amount of
such Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of granting
of such Options or the issuance of such Convertible Securities and thereafter
shall be deemed to be outstanding for purposes of adjusting the Conversion
Price. Except as otherwise provided in subsection 11(d)(ii)(3), no adjustment of
the Conversion Price shall be made upon the actual issue of such Common Stock or
of such Convertible Securities upon exercise of such Options or upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities.
10
(2) Issuance of Convertible Securities. In case
the Company shall in any manner issue (directly and not by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the sum (which sum shall
constitute the applicable consideration) of (x) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus (y) the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale of
such Convertible Securities and thereafter shall be deemed to be outstanding for
purposes of adjusting the Conversion Price, provided that (a) except as
otherwise provided in subsection 11(d)(ii)(3), no adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities and (b) no further
adjustment of the Conversion Price shall be made by reason of the issue or sale
of Convertible Securities upon exercise of any Options to purchase any such
Convertible Securities for which adjustments of the Conversion Price have been
made pursuant to the other provisions of subsection 11(d).
(3) Change in Option Price or Conversion Rate.
Upon the happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subsection 11(d)(ii)(l) hereof, the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subsections 11(d)(ii)(l) or 11(d)(ii)(2),
or the rate at which Convertible Securities referred to in subsections
11(d)(ii)(l) or 11(d)(ii)(2) are convertible into or exchangeable for Common
Stock shall change at any time (including, but not limited to, changes under or
by reason of provisions designed to protect against dilution), the Conversion
Price in effect at the time of such event shall forthwith be readjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. On the termination of any Option for
which any adjustment was made pursuant to this subsection 11(d) or any right to
convert or exchange Convertible Securities for which any adjustment was made
pursuant to this subsection 11(d) (including without limitation upon the
redemption or purchase for consideration of such Convertible Securities by the
Company), the Conversion Price then in effect hereunder shall forthwith be
changed to the Conversion Price which would have been in effect at the time of
such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been issued.
(4) Stock Dividends. Subject to the provisions
of this Section 11(d), in case the Company shall declare a dividend or make any
other distribution upon any stock of the Company (other than the Common Stock)
payable in Common Stock, Options or Convertible Securities, then any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been issued or
sold without consideration.
11
(5) Consideration for Stock. In case any shares
of Common Stock, Options or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the net amount
received by the Company therefor, after deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the Company
shall be deemed to be the fair value of such consideration as determined in good
faith by the Board of Directors of the Company, after deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Company in connection therewith. In case any Options shall be issued in
connection with the issue and sale of other securities of the Company, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be deemed
to have been issued for such consideration as determined in good faith by the
Board of Directors of the Company. If Common Stock, Options or Convertible
Securities shall be issued or sold by the Company and, in connection therewith,
other Options or Convertible Securities (the "Additional Rights") are issued,
then the consideration received or deemed to be received by the Company shall be
reduced by the fair market value of the Additional Rights (as determined using
the Black-Scholes option pricing model or another method mutually agreed to by
the Company and the Investor). The Board of Directors of the Company shall
respond promptly, in writing, to an inquiry by the Investors as to the fair
market value of the Additional Rights. In the event that the Board of Directors
of the Company and the Investors are unable to agree upon the fair market value
of the Additional Rights, the Company and the Investors shall jointly select an
appraiser, who is experienced in such matters. The decision of such appraiser
shall be final and conclusive, and the cost of such appraiser shall be borne
evenly by the Company and the Investor.
(6) Record Date. In case the Company shall take
a record of the holders of its Common Stock for the purpose of entitling them
(i) to receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(iii) Notwithstanding the foregoing, no adjustment will
be made under this paragraph (d) in respect of: (1) the issuance of securities
upon the exercise or conversion of any Common Stock Equivalents issued by the
Company prior to the Original Issue Date of this Note (but will apply to any
amendments, modifications, and reissuances thereof and as a result of any
changes, resets or adjustments to a Conversion or Exchange Price thereunder
whether or not as a result of any amendment, modification or reissuance), (2)
the grant of options or warrants, or the issuance of additional securities,
under any duly authorized Company stock option, stock incentive plan, restricted
stock plan or stock purchase plan in existence on the Closing Date, or (3) the
payment of dividends in shares of Common Stock (i) on currently outstanding
shares of the Company's Series D Preferred Stock, (ii) in lieu of cash payments
for interest on currently outstanding notes payable, and (iii) as payment for
fees to the Company's Board of Directors.
12
(e) Reclassifications; Share Exchanges. In case of any
reclassification of the Common Stock, or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property
(other than compulsory share exchanges which constitute Change of Control
transactions), the Investors of the Notes then outstanding shall have the right
thereafter to convert such shares only into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the
Investors shall be entitled upon such event to receive such amount of
securities, cash or property as a holder of the number of shares of Common Stock
of the Company into which such shares of Notes could have been converted
immediately prior to such reclassification or share exchange would have been
entitled. This provision shall similarly apply to successive reclassifications
or share exchanges.
(f) Calculations. All calculations under this Section
11 shall be made to the nearest cent or the nearest 1/100th of a share, as
applicable. The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Company, and
the disposition of any such shares shall be considered an issue or sale of
Common Stock.
(g) Notice of Adjustments. Upon the occurrence of each
adjustment pursuant to this Section 11, the Company at its expense will promptly
compute such adjustment in accordance with the terms hereof and prepare a
certificate describing in reasonable detail such adjustment and the transactions
giving rise thereto, including all facts upon which such adjustment is based.
Upon written request, the Company will promptly deliver a copy of each such
certificate to the Investor.
(h) Notice of Corporate Events. If the Company (i)
declares a dividend or any other distribution of cash, securities or other
property in respect of its Common Stock, including without limitation any
granting of rights or warrants to subscribe for or purchase any capital stock of
the Company or any subsidiary, (ii) authorizes and publicly approves, or enters
into any agreement contemplating or solicits shareholder approval for any
Fundamental Transaction or (iii) publicly authorizes the voluntary dissolution,
liquidation or winding up of the affairs of the Company, then the Company shall
deliver to the Investor a notice describing the material terms and conditions of
such transaction, at least 20 calendar days prior to the applicable record or
effective date on which a Person would need to hold Common Stock in order to
participate in or vote with respect to such transaction, and the Company will
take all steps reasonably necessary in order to insure that the Investor is
given the practical opportunity to convert this Note prior to such time so as to
participate in or vote with respect to such transaction; provided, however, that
the failure to deliver such notice or any defect therein shall not affect the
validity of the corporate action required to be described in such notice.
12. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Underlying Shares on conversion of this
Note. If any fraction of an Underlying Share would, except for the provisions of
this Section, be issuable upon conversion of this Note or payment of interest
hereon, the number of Underlying Shares to be issued will be rounded up to the
nearest whole share.
13
13. Prepayment at Option of Company. Subject to the
provisions of this Section, at any time after the two year anniversary of the
Closing Date, the Company may deliver a written notice (such notice, a
"Prepayment Notice") to the Investor stating its irrevocable undertaking to
prepay at the Company Prepayment Amount all (but not less than all) of the
outstanding principal amount of all Notes held by such Investor, together with
all accrued and unpaid interest, liquidated damages and other amounts then owing
thereon through the date the Prepayment Amount is paid, provided that: (i) the
Closing Price of the Common Stock for each of 15 consecutive Trading Days prior
to the date of the Prepayment Notice is greater than $0.60 (subject to equitable
adjustment as a result of the events set forth in Section 11(a), (b) and (c)),
(ii) on each date during the entire period referenced in clause (i) above and
through the Prepayment Date (as defined below), the Equity Conditions Are
Satisfied, (iii) there shall not exist any Default, (iv) the prepayment
contemplated under this Section shall be free of all subordination rights of
other Persons, (v) the Company shall not have previously defaulted on its
obligation to pay the full Company Prepayment Amount due in respect of any prior
Prepayment Notice, and (vi) on the Prepayment Date, none of the other Notes
would remain outstanding. If the conditions for delivery of a Prepayment Notice
set forth in clauses (i)-(vi) above are satisfied during the period from the
date of the Prepayment Notice through and including the Prepayment Date, then
the Company shall deliver to the Investor the full Company Prepayment Amount in
cash on the 31st Trading Day following the date of the Prepayment Notice (the
"Prepayment Date"), subject to (i) reduction for principal and interest of the
Investor's Notes that shall have been converted between the date of the
Prepayment Notice and the Prepayment Date, (ii) the right of the Investor to
nullify such Prepayment Notice if any of such conditions shall not have been met
from the date of the Prepayment Notice through the Prepayment Date or if the
Company shall during such period fail to honor any Conversion Notice as
contemplated in the immediately following sentence, and (iii) the operation of
the automatic amendment to such Prepayment Notice in accordance with the last
sentence of this Section. The Company covenants and agrees that it will honor
all Conversion Notices tendered from the time of delivery of the Prepayment
Notice through 6:30 p.m. (New York City time) on the Trading Day prior to the
Prepayment Date. In addition, if any portion of the Company Prepayment Amount
remains unpaid after the Prepayment Date, the Investor subject to such
prepayment may elect by written notice to the Company to invalidate ab initio
the Prepayment Notice with respect to the unpaid amount, notwithstanding
anything herein contained to the contrary. If the Investor makes such an
election, this Note shall be reinstated with respect to such unpaid amount and
the Company shall no longer have any prepayment rights under this Section.
Notwithstanding the foregoing, the Company and the Investor agree that, if and
to the extent Section 5(b) of this Note would restrict the right of the Company
to issue or the right of the Investor to receive any of the Underlying Shares
otherwise issuable upon the conversion in full of the principal amount and
interest then outstanding on all of the Investor's Notes, then notwithstanding
anything to the contrary set forth in a Prepayment Notice, the Prepayment Notice
shall be deemed automatically amended to apply only to such portion of such
Investor's Notes as would permit conversion in full in compliance with Section
5(b). The Investor will promptly (and, in any event, prior to the Prepayment
Date) notify the Company in writing following receipt of a Prepayment Notice if
Section 5(b) would restrict its right to receive the full number of otherwise
issuable Underlying Shares under such circumstances.
14. Notices. Any and all notices or other communications or
deliveries hereunder (including without limitation any Conversion Notice) shall
be in writing and shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via facsimile
at the facsimile number specified in this Section prior to 6:30 p.m. (New York
City time) on a Trading Day, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day or
later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (i) if to
the Company, to 0000 Xxxxxxxxxx Xxxxx, Xxxxx 000, Xxxxxx, XX 00000, facsimile:
(000) 000-0000, attention Chief Financial Officer, (ii) if to the Investor, to
the address or facsimile number appearing on the Company's shareholder records
or such other address or facsimile number as the Investor may provide to the
Company in accordance with this Section.
14
15. Miscellaneous.
(a) This Note shall be binding on and inure to the
benefit of the parties hereto and their respective successors and assigns.
(b) Subject to Section 15(a), above, nothing in this
Note shall be construed to give to any person or corporation other than the
Company and the Investor any legal or equitable right, remedy or cause under
this Note. This Note shall inure to the sole and exclusive benefit of the
Company and the Investor.
(c) All questions concerning the construction,
validity, enforcement and interpretation of this Note shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings shall be commenced exclusively in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for any Proceeding, and hereby irrevocably
waives, and agrees not to assert in any Proceeding, any claim that it is not
personally subject to the jurisdiction of any New York Court or that a New York
Court is an inconvenient forum for such Proceeding. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Note and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal Proceeding. The prevailing party in a
Proceeding shall be reimbursed by the other party for its reasonable attorneys'
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such Proceeding.
(d) The headings herein are for convenience only, do
not constitute a part of this Note and shall not be deemed to limit or affect
any of the provisions hereof.
15
(e) In case any one or more of the provisions of this
Note shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Note shall not in
any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Note.
(f) No provision of this Note may be waived or amended
except (i) in accordance with the requirements set forth in the Loan Agreement,
and (ii) in a written instrument signed, in the case of an amendment, by the
Company and the Investor or, in the case of a waiver, by the party against whom
enforcement of any such waiver is sought. No waiver of any default with respect
to any provision, condition or requirement of this Note shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.
(g) To the extent it may lawfully do so, the Company
hereby agrees not to insist upon or plead or in any manner whatsoever claim, and
will resist any and all efforts to be compelled to take the benefit or advantage
of, usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or Proceeding that may be brought by any
Investor in order to enforce any right or remedy under the Notes.
Notwithstanding any provision to the contrary contained in the Notes, it is
expressly agreed and provided that the total liability of the Company under the
Notes for payments in the nature of interest shall not exceed the maximum lawful
rate authorized under applicable law (the "Maximum Rate"), and, without limiting
the foregoing, in no event shall any rate of interest or default interest, or
both of them, when aggregated with any other sums in the nature of interest that
the Company may be obligated to pay under the Notes exceed such Maximum Rate. It
is agreed that if the maximum contract rate of interest allowed by law and
applicable to the Notes is increased or decreased by statute or any official
governmental action subsequent to the date hereof, the new maximum contract rate
of interest allowed by law will be the Maximum Rate of interest applicable to
the Notes from the effective date forward, unless such application is precluded
by applicable law. If under any circumstances whatsoever, interest in excess of
the Maximum Rate is paid by the Company to any Investor with respect to
indebtedness evidenced by the Notes, such excess shall be applied by such
Investor to the unpaid principal balance of any such indebtedness or be refunded
to the Company, the manner of handling such excess to be at such Investor's
election.
(h) Except pursuant to Section 13 herein, the
outstanding principal amount and interest under this Note may not be prepaid
without the prior written consent of the Investor.
16
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed by a duly authorized officer as of the date first above indicated.
INTEGRATED SECURITY SYSTEMS, INC.
By: /S/ C. A. Xxxxxxx, Xx.
------------------------
Name: C. A. Xxxxxxx, Xx.
Title: Chairman
17
EXHIBIT A
CONVERSION NOTICE
(To be Executed by the Registered Investor in order to convert Notes)
The undersigned hereby elects to convert the principal amount of Note
indicated below, into shares of Common Stock of Integrated Security Systems,
Inc., as of the date written below. If shares are to be issued in the name of a
Person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee
will be charged to the Investor for any conversion, except for such transfer
taxes, if any. All terms used in this notice shall have the meanings set forth
in the Note.
Conversion calculations: _______________________________________________________
Date to Effect Conversion
_______________________________________________________
Principal amount of Note owned prior to conversion
_______________________________________________________
Principal amount of Note to be Converted
_______________________________________________________
Principal amount of Note remaining after Conversion
_______________________________________________________
DTC Account
_______________________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________________
Applicable Conversion Price
_______________________________________________________
Name of Investor
By: ___________________________________________________
Name:
Title:
18
By the delivery of this Conversion Notice the Investor represents and
warrants to the Company that its ownership of the Common Stock does not exceed
the restrictions set forth in Section 5(b) of the Note.
19
Schedule 1
Integrated Security Systems, Inc.
Subordinated 10% Convertible Notes due November 30, 2009
CONVERSION SCHEDULE
This Conversion Schedule reflects conversions made under the above
referenced Notes.
Dated:
______________________ ______________ _______________ _________________________
Date of Conversion Amount of Aggregate Applicable Conversion
Conversion Principal Price
Amount
Remaining
Subsequent to
Conversion
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
______________________ ______________ _______________ _________________________
20
