<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1997
REGISTRATION NO. 333-5023
REGISTRATION NO. 33-59870-FW
-------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------------
AMENDMENT NO. 2
TO
FORM SB-2
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------------------------------------------------
INTEGRATED SECURITY SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 3499
(State of (Primary Standard Industrial 75-2422983
incorporation or organization) Classification Code Number) (I.R.S. Employer Identification No.)
</TABLE>
-------------------------------------------------------------------
<TABLE>
<S> <C>
Gerald K. Beckmann
President & CEO
8200 Springwood Drive, Suite 230 8200 Springwood Drive, Suite 230
Irving, Texas 75063 Irving, Texas 75063
(972) 444-8280 (972) 444-8280
(Address and telephone number of principal (Name, address and telephone number
executive offices and principal place of business) of agent for service)
</TABLE>
Copies to:
DAVID H. ODEN
Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, TX 75202
(214) 651-5000
Approximate date of commencement of proposed sale to public: From time to time
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [x]
Pursuant to Rule 416, there are hereby registered such additional indeterminate
number of shares of the Registrant's Common Stock as may become issuable to
prevent dilution by reason of stock splits, stock dividends, or similar
transactions.
PURSUANT TO THE PROVISIONS OF RULE 429 PROMULGATED PURSUANT TO THE SECURITIES
ACT OF 1933, THE PROSPECTUS CONTAINED IN THIS REGISTRATION STATEMENT RELATES TO
THE REGISTRANT'S REGISTRATION STATEMENT NO. 33-59870-FW AND REGISTRATION
STATEMENT NO. 333-5023.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Amount to be Proposed maximum Proposed maximum Amount of
Title of each class of securities to be registered registered (1) offering price aggregate offering registration
per unit (1) price (1) fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 5,052,678 shares (2) $2.70 $ 13,642,231 $ 4,134
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of IPO Warrants 3,045,000 shares (3) $3.17 $ 9,652,650 $ 2,925
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock and Common Stock Purchase Warrants 304,500 shares (4) $3.00 $ 913,500 $ 277
issuable upon exercise of Underwriter's Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants issuable upon 304,500 shares (5) $3.00 $ 913,500 $ 277
exercise of Underwriter's Warrant
- ------------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee $ 7,613(5)
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Securities registered pursuant to Registration Statement No. 333-5023.
(3) 1,667,500 of these shares were previously registered pursuant to
Registration Statement No. 33-59870-FW. The additional 1,377,500
shares are deemed previously registered pursuant to Rule 416.
(4) 145,000 of these securities were previously registered pursuant to
Registration Statement No. 33-59870-FW. The additional 159,500 shares
are deemed previously registered pursuant to Rule 416.
(5) A filing fee of $8,028 was previously paid for these securities in
connection with Registration Statement No. 333-5023.
____________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 2
INTEGRATED SECURITY SYSTEMS, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2
AND PROSPECTUS
<TABLE>
<CAPTION>
Registration Statement Items and Headings Prospectus Captions
--------------------------------------------------------------- ---------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover Page of Registration Statement and
Cover Page of Prospectus . . . . . . . . . . . . . . . Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus
3. Summary Information and Risk Factors
Prospectus . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . Not Applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . . Principal and Selling Stockholders
8. Plan of Distribution . . . . . . . . . . . . . . . . . Plan of Distribution
9. Legal Proceedings . . . . . . . . . . . . . . . . . . Business - Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management - Directors, Executive Officers and
Persons . . . . . . . . . . . . . . . . . . . . . . . Key Employees
11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . Principal and Selling Stockholders
12. Description of Securities . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . Description of Securities; Part II
Management's Discussion and Analysis of
15. Organization Within Last Five Years . . . . . . . . . Financial Condition and Results of Operations
16. Description of Business . . . . . . . . . . . . . . . Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of
Operation . . . . . . . . . . . . . . . . . . . . . . Financial Condition and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . Business - Property
19. Certain Relationships and Related Transactions . . . . Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . Market for Company's Common Stock
21. Executive Compensation . . . . . . . . . . . . . . . . Management - Executive Compensation
Index to Financial Statements; Financial
22. Financial Statements . . . . . . . . . . . . . . . . . Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED MARCH 11, 1997
8,706,678 SHARES
INTEGRATED SECURITY
===========
ISSI
===========
SYSTEMS, INC.
COMMON STOCK
This Prospectus relates to the sale of 8,706,678 shares of Common Stock, $.01
par value (the "Common Stock"), of Integrated Security Systems, Inc. (the
"Company"). Of this amount, 3,045,000 shares of Common Stock may be issued by
the Company upon the exercise of certain publicly traded warrants (the "IPO
Warrants") to purchase Common Stock. The IPO Warrants were issued by the
Company in connection with the Company's initial public offering in April 1993
(the "IPO").
Each IPO Warrant currently entitles the registered holder to purchase 2.1
shares of Common Stock at an exercise price of $3.17 per share. The IPO
Warrants expire on April 20, 1998. The IPO Warrants are subject to redemption
by the Company at $.25 per warrant on 30 days' prior written notice, with the
prior written consent of H.J. Meyers, Inc. The exercise price for the IPO
Warrants is subject to adjustment under certain circumstances. See "Plan of
Distribution" and "Description of Securities."
This Prospectus also relates to the sale of 304,500 units, with each unit
consisting of one share of Common Stock and one warrant to purchase one share
of Common Stock which may be issued by the Company upon the exercise of a
warrant (the "Underwriter's Warrant") issued to H.J. Meyers, Inc. in connection
with the IPO. See "Principal and Selling Stockholders," "Plan of
Distribution," and "Description of Securities."
This Prospectus also relates to the sale of 5,052,678 shares of Common Stock by
certain selling stockholders (each a "Selling Stockholder"), who currently own
such Common Stock or who may acquire shares of Common Stock upon the exercise
or conversion of currently outstanding warrants, options, and convertible
preferred stock. See "Principal and Selling Stockholders," "Plan of
Distribution," and "Description of Securities."
Certain of the Company's officers, directors, and affiliates are Selling
Stockholders. Gerald K. Beckmann, the Company's President and CEO, proposes to
sell 673,692 shares of Common Stock hereunder, and the Company's officers,
directors, and affiliates, as a group, propose to sell a total of 1,082,347
shares of Common Stock hereunder. Such amounts constitute 5.4% and 8.7%,
respectively, of the total outstanding shares of Common Stock, assuming
exercise or conversion of outstanding warrants, options, and convertible
preferred stock.
The Common Stock may be sold directly by each Selling Stockholder or indirectly
through agents, dealers or underwriters from time to time in one or more
transactions on the Nasdaq Small Cap Market, the Boston Stock Exchange or such
exchanges on which the Common Stock is then listed, or in privately negotiated
transactions at prices related to such market prices, at negotiated prices or
at fixed prices. The Selling Stockholders will bear all discounts and
commissions paid to broker-dealers in connection with the sale of their Common
Stock. Other offering expenses will be borne by the Company. The Company will
receive proceeds from the exercise price of warrants which may be exercised by
certain Selling Stockholders. The Company will not receive any proceeds from
the sales of Common Stock by the Selling Stockholders. See "Use of Proceeds"
and "Plan of Distribution."
The Common Stock and the IPO Warrants are quoted on the Nasdaq Small Cap Market
under the symbol "IZZI" and "IZZW," respectively, and on the Boston Stock
Exchange under the symbol "ISI" and "ISIW," respectively. On March 5, 1997,
the last reported sale prices for the Common Stock and IPO Warrants as reported
on the Nasdaq Small Cap Market were $2.70 and $1.19, respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY
PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
ON PAGE 3.
24.THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
Underwriting Proceeds to
Discounts Proceeds to Selling
Price to Public and Commissions Company (1) Stockholders
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share . . . . . $___________ $___________ $___________ $___________
- -----------------------------------------------------------------------------------------------------------
Total . . . . . . . $___________ $___________ $___________ $___________
===========================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company of approximately
$63,828.
THE DATE OF THIS PROSPECTUS IS ______________, 1997.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pro Forma Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Market for Company's Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Principal and Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 11
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
SUMMARY OF THE OFFERING
<TABLE>
<S> <C>
Securities Offered: . . . . . . . . . . . . . 8,706,678 shares of Common Stock.
Common Stock Outstanding:
Prior to this Offering . . . . . . . 6,408,842 shares (1)(2)
After this Offering . . . . . . . . 12,433,371 shares (1)(2)(3)
Net Proceeds of this Offering . . . . . . . . $13,890,230 (3)(4)
Use of Proceeds . . . . . . . . . . . . . . . To be used for working capital and general corporate purposes, and
possible future acquisitions. The Company will not receive any proceeds
from the sales of Common Stock by the Selling Stockholders. See "Use of
Proceeds."
</TABLE>
<TABLE>
<CAPTION>
Boston
Nasdaq Symbols Exchange Symbols
------ ------- -------- -------
<S> <C> <C>
Common Stock IZZI ISI
IPO Warrants IZZIW ISIW
</TABLE>
- --------------------
(1) Does not include 500,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan.
(2) Of the shares of Common Stock being offered, 2,682,149 shares are currently
outstanding.
(3) Assumes the exercise of all IPO Warrants, the Underwriter's Warrant, all
other options and warrants outstanding (except for the options referred to
in note (1) above, and the conversion of all outstanding shares of the
Company's convertible preferred stock).
(4) Because of the current market price of the Common Stock, the Company
believes it is not presently likely that a substantial number of the IPO
Warrants or the Underwriter's Warrant will be exercised in the near future.
2
<PAGE> 5
RISK FACTORS
An investment in the Common Stock involves a high degree of risk and
should not be made by persons who cannot afford the loss of their entire
investment. Accordingly, prospective investors should carefully consider the
following factors, in addition to the other information concerning the Company
and its business contained in this Prospectus before purchasing the securities
offered hereby.
CONTINUING LOSSES
Certain of the Company's subsidiaries have reported net losses in
recent years which have, when combined with other profitable subsidiaries,
caused consolidated losses of $276,767 in 1996, $2,864,219 in 1995, $372,568 in
1994, $1,670,059 in 1993 and $1,352,133 in 1992. The Company did not
experience a negative cash flow in 1996 and 1993, but experienced negative cash
flow of $155,850 in 1995, $298,713 in 1994, and $50,916 in 1992. The
subsidiary which contributed the majority of losses in past years was
discontinued in 1995. However, the Company's Innovative Security Technologies,
Inc. ("IST") subsidiary continues to operate at a loss and, under existing loan
covenants, the other subsidiaries of the Company are limited in the amount of
financial support they can provide IST. Therefore, in order to continue
operations of this subsidiary, its losses will have to be reduced or eliminated
or the Company will be required to raise additional working capital that is
available to IST. If neither of these can be accomplished, the operations of
IST may have to be discontinued or sold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
FUTURE CAPITAL NEEDS
The Company believes additional working capital and term financing
will be required to fund growth plans at all of the Company's major business
units. The amount required will depend on many factors, including cash flow
from operations and the ability to market its products successfully. The
Company is currently negotiating an asset-based loan that would provide
approximately $600,000 of working capital and a line of credit of approximately
$1,200,000. There can be no assurance that the Company will be able to obtain
such asset-based loan, or to raise alternative funds, or that any financing
will be available on terms that will be acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
LACK OF MARKET ACCEPTANCE OF INTELLI-SITE
The Company's marketing strategy includes the sale of sophisticated
integrated security systems, such as the Company's Intelli-Site(R), which the
Company believes will result in higher sales and gross margins. To date, sales
of these systems have been limited and there can be no assurance that the
market will accept the Company's Intelli-Site products, or that the Company
will be able to successfully market its integrated security systems.
PAST DUE ACCOUNTS PAYABLE
As of February 28, 1997, the Company and certain of its subsidiaries
(not B&B Electromatic, Inc. or Golston Company, Inc.) had approximately
$350,000 in accounts payable that were more than 90 days past due. The Company
is currently attempting to make installment payments on such accounts payable,
and believes that all such past due accounts payable (or such lesser amounts as
may be negotiated) will be paid in full before the end of 1997.
ACQUISITION RISKS
The Company's strategy includes increasing its market penetration by
starting new, or acquiring existing, businesses to develop, manufacture or sell
products that enhance the safety and security of people and assets. There can
be no assurance that such new businesses can be acquired or operated
profitably. In addition, the Company's ability to execute this strategy will
depend on a number of factors, including its ability to hire, train and retain
an adequate number of experienced management and sales employees, and to secure
adequate financing, none of which are assured.
3
<PAGE> 6
SEASONALITY -- IMPACT ON QUARTERLY RESULTS
Because the Company sells some products which are used primarily in
outdoor construction, which is affected by weather, the Company's revenues
during the third and fourth fiscal quarters have historically represented
approximately 61% of the annual revenues of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends, to a significant extent, upon the
efforts and abilities of a number of key employees. The loss of services of
one or more of these employees, especially the Company's Chairman of the Board,
President and Chief Executive Officer, Gerald K. Beckmann, or the Company's
Chief Financial Officer, James W. Casey, could have a material adverse effect
on the business of the Company. The Company believes that its future success
will also depend in part upon its ability to attract, retain, and motivate
qualified personnel. Competition for such personnel is intense. There can be
no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."
DEPENDENCE UPON COMPLETION OF PRODUCT DEVELOPMENT
The Company's ability to compete successfully in the integrated
security systems market is dependent upon its ability to develop and produce
products that are technologically comparable to those of its competitors.
Development by others of new or improved products or technologies may make the
Company's products or proposed products obsolete or less competitive. In order
to fulfill its marketing strategy, the Company will be required to devote
substantial effort and financial resources to enhance its existing products and
to develop new products which meet a wide range of evolving user needs and
achieve market acceptance. There can be no assurance that the Company will
succeed in developing and marketing such products or that the Company will be
able to respond effectively to technological changes, emerging industry
standards, or new product introductions by others.
COMPETITION
The markets for the Company's products are extremely competitive.
Many of the Company's competitors have greater market recognition and greater
financial, technical, marketing and human resources than the Company. There
can be no assurance that the Company will be able to compete successfully
against existing companies or new entrants to the marketplace. Furthermore,
the development by competitors of new or improved products or technologies may
render the Company's products or proposed products obsolete or less
competitive. See "Business-Competition."
4
<PAGE> 7
CAPITALIZATION
The following table sets forth the capitalization of the Company on December
31, 1996.
<TABLE>
<S> <C>
Notes Payable $ 8,080
Notes Payable - Related Party 7,110
Short-Term Debt 213,975
Long Term Debt 6,784,582
-----------
Total Debt 7,013,747
Stockholders' Equity
Convertible Preferred Stock, $.01 par value, 750,000 shares
authorized; 59,168 shares issued and outstanding at December
31, 1996 591
Common Stock, $.01 par value, 18,000,000 shares authorized;
6,958,842 shares issued and outstanding at December 31, 1996 69,588
Additional Paid In Capital 10,382,215
Treasury Stock (118,750)
Accumulated Deficit (6,206,501)
-----------
Total Stockholders' Equity 4,127,143
-----------
Total Capitalization $11,140,890
===========
</TABLE>
5
<PAGE> 8
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1996, the Company acquired all the outstanding capital
stock of Golston Company, Inc. ("GCI"). The pro forma consolidated statement
of operations for the year ended December 31, 1996 is presented as if the
Company had acquired GCI on January 1, 1996, and gives effect to the related
financing. The pro forma consolidated statement of operations should be read
in conjunction with the financial statements of the Company and GCI, including
the related footnotes thereto, appearing elsewhere in this Prospectus. The pro
forma information is not necessarily indicative of the results that would have
been reported had such events actually occurred on January 1, 1996, nor is it
indicative of the Company's future results. The pro forma information also
does not reflect either the issuance of shares in connection with this Offering
and the contemplated use of proceeds therefrom, or the conversion or exercise
of any of the Company's outstanding convertible preferred stock or warrants.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company GCI Adjustments Consolidated
------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales $ 9,054 $ 4,294 $ 13,348
Cost of Sales 5,184 1,535 432(1) 7,151
------------ ------------- ----------------- --------------
Gross Margin 3,870 2,759 (432) 6,197
Operating Expenses 3,929 2,077 (890)(2) 5,116
Income (Loss) from Operations (59) 682 458 1,081
Other Expense (252) (37) (552)(3) (841)
------------- -------------- ----------------- ---------------
Income (Loss) from Continuing
Operations Before Tax (311) 645 (94) 240
Income Tax 12 (234) 234(4) 12
Discontinued Operations 23 -- -- 23
------------ ------------- ---------------- --------------
Net Income (Loss) $ (276) $ 411 $ 140 $ 275
============= ============= ================= ==============
Weighted Average Shares of Common 5,122,878 5,847,191
Stock Outstanding
Net Income (Loss) Per Share
Continued Operations $ (0.05) $ 0.05
Discontinued Operations 0.00 0.00
------------ --------------
Total $ (0.05) $ 0.05
============= ==============
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro
forma adjustments set forth above:
(1) Adjustment to depreciation of manufacturing fixed assets arising from
the GCI acquisition is based on useful lives varying from 3-7 years.
(2) Adjustment to depreciation of fixed assets arising from the GCI
acquisition is based on useful lives of 5 years and goodwill
amortization, reduced by employees terminated as of December 31, 1996
with consolidation of the businesses.
(3) Interest related to $6.1 million of indebtedness incurred by the
Company in connection with the acquisition, with interest rate of 9%
per annum.
(4) Adjustment from utilization of parent company losses to offset federal
income taxes.
6
<PAGE> 9
USE OF PROCEEDS
All proceeds from the exercise of the IPO Warrants and other warrants
and options outstanding will be used for working capital and general corporate
purposes, and possible future acquisitions. The Company will not receive any
proceeds from the sales of Common Stock by the Selling Stockholders.
Because of the current market price of the Common Stock, the Company
believes it is not presently likely that a substantial number of the IPO
Warrants or the Underwriter's Warrant will be exercised in the near future.
The principal reasons for the offering are to ensure that the issuance of
Common Stock upon exercise of the IPO Warrants complies with applicable laws
regarding the registration of securities, and to comply with contractual
obligations to register certain shares of Common Stock.
MARKET FOR COMPANY'S COMMON STOCK
The Company's Common Stock is traded on the Automated Quotation System
of the National Association of Securities Dealers, Inc. ("Nasdaq") under the
symbol "IZZI" and on the Boston Stock Exchange under the symbol "ISI." The IPO
Warrants are traded on the Nasdaq Small Cap Market under the symbol "IZZIW" and
on the Boston Stock Exchange under the symbol "ISIW." As of December 31, 1996,
there were 6,908,842 shares of Common Stock and 2,320,000 Warrants outstanding.
The shares of Common Stock are held of record by approximately 75 holders and
the Warrants are held of record by approximately 54 holders. The following
table sets forth, for the periods indicated, the high and low bid quotations
for the IPO Warrants and the Common Stock on the Nasdaq Small Cap Market.
Trading prices for the Common Stock and the IPO Warrants on the Boston Stock
Exchange are substantially similar to the prices set forth below for the Nasdaq
Small Cap Market. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions. The trading market in the Company's
securities may at times be relatively illiquid due to low volume.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------------------------- -----------------------------
$ HIGH $ LOW $ HIGH $ LOW
-------- ------------------- ----------------- ---------
<S> <C> <C> <C>
FISCAL 1996
First Quarter 2 13/16 5/8 7/8 1/16
Second Quarter 5 7/8 2 1/16 1 3/8 5/16
Third Quarter 3 1/2 1 13/16 1 11/16
Fourth Quarter 3 5/8 2 3/8 1 5/16 3/4
FISCAL 1995
First Quarter 2 1/2 1 5/8 11/16 3/8
Second Quarter 2 5/8 1 5/8 5/16
Third Quarter 3 1 7/8 7/8 9/16
Fourth Quarter 2 3/8 3/8 9/16 1/16
</TABLE>
DIVIDEND POLICY
Dividends have not been declared on the Common Stock and it is not
anticipated that dividends will be paid in the near future because any funds
available will most likely be reinvested in the Company's business and used to
repay outstanding debt.
7
<PAGE> 10
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of each class of the Company's capital stock beneficially owned as of
December 31, 1996 by (i) each director and named executive officer of the
Company, (ii) all officers and directors of the Company as a group,(iii) all
persons who are known by the Company to be beneficial owners of 5% or more of
any class of capital stock of the Company, and (iv) each Selling Stockholder.
Unless otherwise noted, each of the persons listed below has sole voting and
investment power with respect to the shares indicated as beneficially owned by
such person. With regard to shares of Common Stock, this table assumes that the
persons set forth below have fully converted all their shares of convertible
preferred stock into shares of Common Stock and fully exercised all their
warrants to purchase Common Stock. For a description of the Company's
convertible preferred stock, see "Description of Securities."
SHARES OF COMMON STOCK OWNED
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
------------------------------------------------------------------------------
NO. OF SHARES NO. OF SHARES OF NO. OF SHARES OF
OF COMMON % OF SERIES A % OF SERIES C % of
NAME OF BENEFICIAL OWNER STOCK CLASS PREFERRED STOCK CLASS PREFERRED STOCK CLASS
- --------------------------------- --------------- -------- ------------------ ------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Advisors Mktg Group, Inc. 2,779 * -- -- -- --
Andrew F. Nicoletta 14,000 * 500 1% -- --
Bathgate McColley Capital Group 326,000 2% -- -- -- --
Capital Acquisition Co., Inc. 60,000 * -- -- -- --
Caribou Bridge Fund, LLC 283,321 2% 5,668 12% 2,500 20%
Charles W. Martin 85,000 * -- -- -- --
Cherokee Trading Corp 2,222 * -- -- -- --
Comvest Partners 100,000 1% -- -- -- --
Craig A. Nichols 28,000 * 1,000 2% -- --
D&B Partners 28,000 * 1,000 2% -- --
Don Crosbie 185,953 1% -- -- -- --
Donald A. Dole 14,000 * 500 1% -- --
Doris Tinsley-Nadel 1,668 * -- -- -- --
Doug Urquhart 56,000 * 2,000 4% -- --
Dudley L. Bailey 28,000 * 1,000 2% -- --
Edward Krupa 1,668 * -- -- -- --
Elizabeth R. McChesney 14,000 * 500 1% -- --
Equity Group 80,000 * -- -- -- --
Eugene C. McColley 42,000 * 1,500 3% -- --
Frank R. Marlow(1) 60,522 * -- -- -- --
George I. Gasior 1,668 * -- -- -- --
Gerald K. Beckmann(1) 868,929 7% -- -- 5,000 40%
H. Dennison Parker 42,000 * 1,500 3% -- --
</TABLE>
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
----------------------------
SHARES OF COMMON NO. OF SHARES OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD COMMON STOCK % OF CLASS
- ---------------------------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Advisors Mktg Group, Inc. 2,779 -- --
Andrew F. Nicoletta 14,000 -- --
Bathgate McColley Capital Group 326,000 -- --
Capital Acquisition Co., Inc. 60,000 -- --
Caribou Bridge Fund, LLC 283,321 -- --
Charles W. Martin 85,000 -- --
Cherokee Trading Corp 2,222 -- --
Comvest Partners 100,000 -- --
Craig A. Nichols 28,000 -- --
D&B Partners 28,000 -- --
Don Crosbie 166,953 19,000 *
Donald A. Dole 14,000 -- --
Doris Tinsley-Nadel 1,668 -- --
Doug Urquhart 56,000 -- --
Dudley L. Bailey 28,000 -- --
Edward Krupa 1,668 -- --
Elizabeth R. McChesney 14,000 -- --
Equity Group 80,000 -- --
Eugene C. McColley 42,000 -- --
Frank R. Marlow(1) 8,463 52,059 *
George I. Gasior 1,668 -- --
Gerald K. Beckmann(1) 673,692 195,237 1%
H. Dennison Parker 42,000 -- --
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
-------------------------------------------------------------------------------
NO. OF SHARES OF NO. OF SHARES OF
NO. OF SHARES OF % OF SERIES A % OF SERIES C % OF
NAME OF BENEFICIAL OWNER COMMON STOCK CLASS PREFERRED STOCK CLASS PREFERRED STOCK CLASS
- ------------------------------------------ ---------------- -------- ------------------ ------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Hanifin Imhoff Trustee FBO K.S. Bernstein 14,000 * 500 1% -- --
Harry J. Schmidt 56,000 * 2,000 4% -- --
Henry E. McGuffee 15,000 * -- -- -- --
Holly J. Burlage 13,128 * -- -- -- --
James Edgar McDonald, Trustee 98,250 * 1,500 3% 1,250 10%
James W. Casey(1) 157,873 1% -- -- -- --
Jeffrey Markowitz 28,000 * 1,000 2% -- --
John P. Manry & Hedy White Manry 14,000 * 500 1% -- --
Joseph A. Lavigne 7,000 * 250 1% -- --
Kiawah Capital Partners 112,500 2% -- -- 2,500 20%
Larry D. Brooks 14,000 * 500 1% -- --
Lawrence E. Bathgate PBO Del Charter SEP 14,000 * 500 1% -- --
Lerter W. Erb Living Trust 14,000 * 500 1% -- --
Louis A. Davis 15,000 * -- -- -- --
Managerial Resources, Inc. 53,000 * -- -- -- --
McChesney Family LLC 21,000 * 750 2% -- --
McKee Securities, Inc. 18,000 * -- -- -- --
Michael A. Richarmond 15,000 * -- -- -- --
Michael Lang 5,555 * -- -- -- --
Nora Sherwood Parker 14,000 * 500 1% -- --
PAMB Investments 35,000 * 1,250 3% -- --
Philip J. Hempleman 224,000 2% 8,000 17% -- --
Philip R. Thomas 1,625,126 12% -- -- -- --
Quad Capital Partners 28,000 * 1,000 2% -- --
Richard F. Cooper, Jr. 28,000 * 1,000 2% -- --
Richard Friedman 28,000 * 1,000 2% -- --
Richard M.H. Thompson 14,000 * 500 1% -- --
Robert M. Galecke(1) -- -- -- -- -- --
Richard P. Shortz 41,921 * -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
-----------------------------
SHARES OF COMMON NO. OF SHARES OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD COMMON STOCK % OF CLASS
- ---------------------------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Hanifin Imhoff Trustee FBO K.S. 14,000 -- --
Bernstein
Harry J. Schmidt 56,000 -- --
Henry E. McGuffee 15,000 -- --
Holly J. Burlage 10,494 2,634 *
James Edgar McDonald, Trustee 98,250 -- --
James W. Casey(1) 107,092 50,781 *
Jeffrey Markowitz 28,000 -- --
John P. Manry & Hedy White Manry 14,000 -- --
Joseph A. Lavigne 7,000 -- --
Kiawah Capital Partners 112,500 -- --
Larry D. Brooks 14,000 -- --
Lawrence E. Bathgate PBO Del Charter SEP 14,000 -- --
Lerter W. Erb Living Trust 14,000 -- --
Louis A. Davis 15,000 -- --
Managerial Resources, Inc. 53,000 -- --
McChesney Family LLC 21,000 -- --
McKee Securities, Inc. 18,000 -- --
Michael A. Richarmond 15,000 -- --
Michael Lang 5,555 -- --
Nora Sherwood Parker 14,000 -- --
PAMB Investments 35,000 -- --
Philip J. Hempleman 224,000 -- --
Philip R. Thomas 240,008 1,385,118 10%
Quad Capital Partners 28,000 -- --
Richard F. Cooper, Jr. 28,000 -- --
Richard Friedman 28,000 -- --
Richard M.H. Thompson 14,000 -- --
Robert M. Galecke(1) -- -- --
Richard P. Shortz 31,481 10,440 *
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
NO. OF SHARES OF NO. OF SHARES OF
NO. OF SHARES OF % OF SERIES A % OF SERIES C % OF
NAME OF BENEFICIAL OWNER COMMON STOCK CLASS PREFERRED STOCK CLASS PREFERRED STOCK CLASS
<S> <C> <C> <C> <C> <C> <C>
Robert D. Goldstein 173,485 1% -- -- -- --
Robert M. Needer 28,000 * 1,000 2% -- --
Seabeach & Co. 1,120,000 8% -- -- -- --
Shanly B. Stach 14,000 * 500 1% -- --
Steffany Lea Martin 10,000 * -- -- -- --
Stephen L. Martin 10,000 * -- -- -- --
Steven M. Bathgate FBO Del Charter Keogh 56,000 * 2,000 4% -- --
Accountant
Summit Fund, LP 28,000 * 1,000 2% -- --
Teresa L. Luse 1,000 * -- -- -- --
Tony C. Lisotta 57,662 * -- -- -- --
Tracy H. Parker 7,000 * 250 1% -- --
Victor Kashner 28,000 * 1,000 2% -- --
Virginia Stevens McDonald, Trustee 98,250 * 1,500 3% 1,250 10%
Wayne Hamersly 28,000 * 1,000 2% -- --
William J. Macy 14,000 * 500 1% -- --
William S. Leftwich 22,003 * -- -- -- --
Underwriter's Warrants 609,000 5% -- -- -- --
Winter Haven Homes, Inc. 70,000 * 2,500 5% -- --
All Officers and Directors as a Group 1,200,035 6% -- -- 5,000 40%
(7 Persons)
</TABLE>
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
----------------------------
SHARES OF COMMON NO. OF SHARES OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD COMMON STOCK % OF CLASS
- ----------------------------------------- -------------------- ---------------- -----------
<S> <C> <C> <C>
Robert D. Goldstein 173,485 -- --
Robert M. Needer 28,000 -- --
Seabeach & Co. 1,120,000 -- --
Shanly B. Stach 14,000 -- --
Steffany Lea Martin 10,000 -- --
Stephen L. Martin 10,000 -- --
Steven M. Bathgate FBO Del Charter Keogh 56,000 -- --
Accountant
Summit Fund, LP 28,000 -- --
Teresa L. Luse 1,000 -- --
Tony C. Lisotta 11,117 46,545 *
Tracy H. Parker 7,000 -- --
Victor Kashner 28,000 -- --
Virginia Stevens McDonald, Trustee 98,250 -- --
Wayne Hamersly 28,000 -- --
William J. Macy 14,000 -- --
William S. Leftwich 22,003 -- --
Underwriter's Warrants 609,000 -- --
Winter Haven Homes, Inc. 70,000 -- --
All Officers and Directors as a Group 842,339 357,696 3%
(7 Persons)
</TABLE>
* Less than 1%.
(1) The address for this person is 8200 Springwood Drive, Suite 230,
Irving, Texas 75063.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Incorporated in Delaware on December 19, 1991, the Company is a
holding company that conducts its operations principally through four
wholly-owned subsidiaries: B&B Electromatic, Inc. ("B&B"), Golston Company,
Inc. ("GCI"), Innovative Security Technologies, Inc. ("IST"), and Tri-Coastal
Systems, Inc. ("TCSI").
On January 1, 1992, the Company acquired B&B from an affiliate in a
transaction which was accounted for similar to a pooling of interests. B&B
designs, manufactures, and distributes commercial and industrial security
products, and traffic control gates, barriers and lighting for the road and
bridge industry. B&B has been in operation since 1925. On March 16, 1993, the
Company organized IST, which is a retail seller of security products and
microprocessor-based systems to large customers. On August 23, 1993, the
Company announced the development of its PC-based security network,
Intelli-Site(R), that integrates multiple security functions into a centralized
management system for single and/or multiple site locations. IST is
responsible for the sales and marketing of this product. The first beta site
installations for this product were completed during the fourth quarter of 1994
and the first quarter of 1995. On September 18, 1995, the Company purchased
substantially all of the assets and liabilities of TCSI. TCSI sells and
installs security and safety systems to end users.
Effective January 1, 1992, the Company purchased all of the
outstanding stock of Automatic Access Controls, Inc. ("AAC"), an independent
distributor of commercial and industrial security products. The Company
discontinued the operations of AAC during 1995. Accordingly, AAC is reported
as a discontinued operation for all periods presented.
On December 31, 1996, the Company acquired all the outstanding stock
of GCI. GCI's primary business is the design, manufacture, and marketing of
pnuematic tube carriers for use in financial institutions and hospitals. In
addition, GCI manufactures modular buildings for financial institutions. The
purchase price was approximately $4.8 million in a combination of cash and
seller notes, and the assumption of an additional $650,000 in existing debt.
The Company funded this acquisition through the private placement to an
institutional investor of $4.6 million of convertible debentures. The
debentures have a maturity of seven years and, until converted, carry an annual
interest rate of 9%. No principal payments are due for the first three years
and the debentures may be exchanged for the Company's common stock at a
conversion price of $1.05 per share. To complete the funding, an additional
$660,000 of Common Stock was privately placed at $1.10 per share.
The Company's executive offices are located at 8200 Springwood Drive,
Suite 230, Irving, Texas 75063. The Company's telephone number is (972)
444-8280.
THE IPO AND SUBSEQUENT SECURITIES ISSUANCES
The Company completed its initial public offering (the "IPO") in April
1993. In connection with the IPO, the Company issued to the public units (the
"Units") with each Unit consisting of one share of Common Stock and one IPO
Warrant. At the time of the IPO, each IPO Warrant was exercisable for one
share of Common Stock. In connection with the IPO, the Company issued the
Underwriter's Warrant to Thomas James Associates, Inc. (which firm was
subsequently acquired by H.J. Meyers, Inc.), the lead underwriter of the IPO.
The Underwriter's Warrant was initially exercisable for an aggregate of 145,000
Units, at an exercise price of $6.30 per Unit.
The IPO Warrants and the Underwriter's Warrant provide that the
exercise price and number of shares of Common Stock purchasable upon exercise
are subject to adjustment upon the occurrence of certain events, including the
sale by the Company of shares of Common Stock (or securities exercisable for,
or convertible into, shares of Common Stock) at a price below the
then-applicable exercise price of the IPO Warrants or the Underwriter's
Warrant. As a result of the Company's issuance of warrants, options, and
convertible preferred stock after the IPO, the exercise prices for the IPO
Warrants and the Underwriter's Warrant were adjusted, effective January 15,
1997. After giving effect to the adjustments, the IPO Warrants may now be
exercised for 2.1 shares of Common Stock (for a total of 3,045,000 shares
11
<PAGE> 14
of Common Stock) at an exercise price of $3.17 per share, and the Underwriter's
Warrant may now be exercised for a total of 304,500 Units (relating to 609,000
shares of Common Stock) at an exercise price of $3.00 per Unit. Prior to such
adjustment, the exercise price of the IPO Warrants was $6.75.
During the period from 1994 through 1996, the Company (i) granted
non-qualified compensatory options to purchase Common Stock to its current and
former employees, (ii) issued Common Stock in connection with acquisitions, and
(iii) issued convertible preferred stock, Common Stock, and warrants to
purchase Common Stock in connection with financing transactions, the settlement
of litigation, and to pay for consulting services. All such securities were
issued in private placements exempt from registration under applicable
securities laws. Such securities (totaling an aggregate of 5,052,678 shares of
Common Stock, upon full exercise or conversion) are being offered for sale
pursuant to this Prospectus by the Selling Stockholders. See "Principal and
Selling Stockholders" and "Plan of Distribution."
R&D PARTNERSHIP
Effective September 1, 1996, the Company entered into an agreement
with I.S.T. Partners, Ltd., an unaffiliated limited partnership, whereby the
partnership will fund the sales, engineering, and order fulfillment expenses of
the Company's IST subsidiary. In exchange, the partnership receives, as
compensation from IST, 85% of the revenue generated from the sales of the
Company's Intelli-Site products until such time as the partnership has achieved
a return of at least 150% on its investment. The Company retains full
ownership of all other rights to the Intelli-Site product, and also retains the
responsibility for managing IST's business activities, including customer
relationships. As of December 31, 1996, the Company had received $250,000 from
the partnership, which was recorded as income in the quarter ended September
30, 1996, for the initial sale of sales leads and prospects, and the Company
also received $200,000 during the fourth quarter of 1996 as reimbursement for
development and sales costs.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales. The Company experienced a $1.4 million (19%) increase in sales
from 1995 to 1996 from $7.6 million to $9 million. This increase was primarily
attributable to the inclusion of TCSI, acquired in September 1995, for the
entire year of 1996. The Company experienced a 5% increase in road and bridge
and perimeter security sales during 1996; however, over $1 million of
anticipated fourth quarter shipments were delayed by customer requests due to
late construction projects and revised specifications. Also contributing to
the increase in sales for 1996 was the sale of the Company's Intelli-Site
software sales leads and prospects for $250,000 to a limited partnership
chartered to fund the acceleration of marketing and sales efforts.
For the year ended December 31, 1996, approximately 78% of the
Company's revenues were generated from the sale of products manufactured by the
Company compared to 94% for 1995.
Cost of Sales and Gross Profit. Gross profit as a percent of sales
decreased to 43% in 1996 from 45% in 1995. This decrease was primarily due to
a less favorable product mix compared with the prior year. During 1996, the
Company experienced higher sales of perimeter security products which have
lower gross margins compared to road and bridge products. Also during 1996, in
accordance with FAS 86, the Company began to amortize capitalized software
development costs related to Intelli-Site as the product was brought to market.
Amortization expense of $127,381 was recognized in 1996.
Selling, General and Administrative. Selling, general and
administrative expenses decreased from $4.6 million in 1995 to $3.8 million in
1996. The majority of this decrease was due to one-time expenses in 1995 of
approximately $1 million for severance obligations to a former officer and the
write-off of $511,000 in acquisition fees relating to a discontinued
acquisition candidate. The decrease was offset by a 16% increase in expenses
at B&B and the inclusion of expenses at TCSI for the entire year of 1996
compared to four months in 1995.
12
<PAGE> 15
Research and Development. Research and development expenses increased
from $46,199 in 1995 to $152,239 in 1996. This increase was due to the
inclusion of expenses at IST related to the development of Intelli-Site
partially offset by reimbursement of development costs from the limited
partnership chartered to fund the development and sales of the Intelli-Site
product. Prior to 1996, the Company capitalized software development costs
related to Intelli-Site in accordance with FAS 86.
Interest Income. Interest income in 1996 decreased to $7,748 from
$14,957 in 1995. During the first quarter of 1995, the Company earned interest
on a $350,000 certificate of deposit placed with a bank as collateral to secure
a line of credit. The certificate of deposit and accumulated interest were
released on April 11, 1995.
Interest Expense. Interest expense for 1996 decreased from $343,012
in 1995 to $260,471 in 1996. This decrease was primarily due to the repayment
of certain short-term notes.
Discontinued Operations. The discontinued operations reflect the
operations of AAC. AAC's operations were discontinued during the second
quarter of 1995. During 1996, the Company has recorded a gain on disposal of
discontinued operations in the amount of $22,789 related to the settlement of
certain liabilities.
Income Taxes. In assessing the likelihood of realization of the
deferred tax asset, the Company primarily considered the trend of the Company's
operating results toward profitability. The Company anticipates a positive
trend to continue in 1997. This positive trend will continue to be boosted by
the sales of Intelli-Site, as well as the addition of GCI. These factors,
coupled with the current growth of the security industry, were considered
positive factors in this assessment. Since the net operating loss carry
forward does not begin to expire until 2007, the Company anticipates that all
recognized carry forward benefits will be fully utilized before this expiration
date arrives. As there are no significant temporary differences in the
Company's tax calculation, realization will be primarily achieved by increased
profitability. The Company anticipates that its move to profitability in 1997
and beyond will be dependent on its success in three areas: (i) sales -
continued increases in sales at all subsidiaries plus a positive response to
the Intelli-Site product; (ii) profit margins - continued focus on increasing
margins at IST, while maintaining the current margins at B&B; and (iii) cost
control - continued cost control at all subsidiaries.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 90% of the deferred
tax asset as of December 31, 1996. Further recognition of the asset will be
dependent on the Company attaining profitability targets that have been
established. The realizability of the net deferred tax asset has been (and
will continue to be) reviewed on a quarterly basis. The income tax benefit for
1996 consists of state income taxes for the Company's subsidiary, B&B.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Sales. The Company experienced a $247,000 (3%) increase in sales from
1994 to 1995 from $7.4 million to $7.6 million, respectively. This increase is
primarily attributable to increased sales at B&B, net of the discontinuance of
the AAC operations. During the fourth quarter of 1995 sales increased to $3.5
million compared to $1.9 million for the comparable 1994 quarter. Record sales
at B&B accounted for this 84% increase over prior year.
For the period ended December 31, 1995, approximately 94% of the
Company's revenues were generated from the sale of products manufactured by the
Company compared to 82% for 1994.
Cost of Sales and Gross Profit. Gross profit as a percent of sales
decreased to 45% in 1995 from 53% in 1994. This decrease was due to a less
favorable product mix from the prior year. During 1994, the Company
experienced higher sales of road and bridge products compared to perimeter
security products which have higher gross margins. Also during 1995 obsolete
inventory totaling $125,000 was written off.
Selling, General and Administrative. Selling, general and
administrative expenses increased from $2.8 million for the 1994 12-month
period to $4.6 million for the comparable 1995 period. The majority of this
increase is due to one-time expenses of approximately $1 million for severance
obligations to a former officer and for the write-off of acquisition fees. The
remaining increase is caused by non-recurring expenses associated with employee
terminations, legal fees associated with litigation dating from 1994 and
amortization expense of origination fees for 1994 loans.
13
<PAGE> 16
During 1995, the Company received notice from a target company that
was the subject of acquisition efforts that the target company no longer wished
to continue discussions. Although the Company continues to pursue an
acquisition strategy with other candidates in similar or complementary
industries, $511,000 of costs and fees previously incurred in connection with
this acquisition target and deferred at the time of being incurred, were
charged to operations in the quarter ended September 30, 1995.
Interest Expense. Interest expense increased $192,000 for the
12-month period from $151,000 in 1994 to $343,000 in 1995. This increase is
primarily attributable to interest on bridge financing that was entered into
during the third and fourth quarters of 1994, amortization of debt discount
pertaining to the aforementioned bridge financing and higher interest costs for
the accounts receivable financing facility.
Discontinued Operations. The operations of the AAC subsidiary are
reflected as discontinued operations for all periods. During the second
quarter of 1995, the decision was made to discontinue the operations of this
subsidiary. The Company recorded a reserve of $425,000 during the second
quarter of 1995 for inventory and asset disposition, as well as office closings
and staff reductions. During the third and fourth quarters of 1995, the
Company reversed $65,000 of this accrual as actual costs became more
determinable.
Income Taxes. In assessing the likelihood of realization of the
deferred tax asset, the Company primarily considered the trend of the Company's
operating results toward profitability. The 1995 operating results, net of
non- recurring expenses, were in line with 1994. The Company anticipates a
positive trend to develop in 1996 since all non- recurring amounts have been
recognized in 1995, except for an anticipated seasonal loss in the first
quarter of 1996. This positive trend will be boosted by the sales roll-out of
Intelli-Site. These factors, coupled with the current growth of the security
industry, were considered positive factors in this assessment. Since the net
operating loss carry forward does not begin to expire until 2007, the Company
anticipates that all recognized carry forward benefits will be fully utilized
before this expiration date arrives. As there are no significant temporary
differences in the Company's tax calculation, realization will be primarily
achieved by increased profitability. The Company anticipates that its move to
profitability in 1996 and beyond will be dependent on its success in three
areas: (i) sales - continued increases in sales at all subsidiaries plus a
positive response to the Intelli-Site product; (ii) profit margins - continued
focus on increasing margins at IST, while maintaining the current margins at
B&B; and (iii) cost control - continued cost control at all subsidiaries.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 88% of the deferred
tax asset as of December 31, 1995. Further recognition of the asset will be
dependent on the Company attaining profitability targets that have been
established. The realizability of the net deferred tax asset has been (and
will continue to be) reviewed on a quarterly basis. The provision for income
taxes for 1995 consists of state income taxes for the Company's subsidiary,
B&B.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased by $888,236 during 1996. The
Company used $1,190,861 for operations during 1996 compared to $720,846
provided by operations during 1995. Discontinued operations used $184,100 of
cash during 1996 compared to providing $1,018,324 in 1995.
During 1996, the Company financed its continuing operations from
operating cash flow, short-term borrowings in the approximate amount of
$512,000, and the private placement of its securities in the approximate amount
of $687,000. During 1996, the Company used a total of approximately $1,459,000
to pay interest and principal on indebtedness. For a description of the
financing for the GCI acquisition, see the subheading "General" above.
The Company has a factoring facility with a financial institution
pursuant to which it may factor accounts receivable and receive a total of up
to $1,400,000 in credit. As of December 31, 1996, the Company had a balance of
$36,413 outstanding under this factoring facility.
On April 25, 1996, the Company obtained a $900,000 term loan facility
with a lending institution. The loan is due in eleven monthly payments of
$12,000 beginning June 1, 1996, and one final payment sufficient to pay the
balance. Interest on the loan is floating at the lending institution's base
lending rate (which was 10% at December 31, 1996) minus 1%. The loan is
secured by all real estate and equipment at B&B and is personally guaranteed by
an officer of the Company, with certain personal assets of such officer pledged
as collateral. Approximately $450,000 of the proceeds of this loan were used
to repay
14
<PAGE> 17
existing mortgages and notes payable at B&B, and the remaining was used to
repay a portion of Company notes due April 29, 1996.
Historically, GCI has generated positive cash flow from operations.
The Company anticipates this trend to continue. This positive cash flow, in
conjunction with the existing factoring facility and an asset-based loan that
the Company is currently negotiating, should position the Company to cover its
working capital needs. As the Company continues to operate, additional
financing will be necessary to fund growth plans at all of the Company's major
business units.
The information contained in the previous paragraph includes certain
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those projected by such forward-looking
statements. Important factors that could cause actual results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, the following: anticipated seasonal changes may not occur
or operations may not improve as projected.
CAPITAL EXPENDITURES
The Company has no commitments for capital expenditures during 1997.
The Company acquired approximately $96,983 and $52,416 of machinery and
equipment in 1996 and 1995, respectively, principally for its B&B manufacturing
facility.
In 1994, the Company began capitalizing software development costs in
accordance with FAS 86 "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." As of December 31, 1995, the amount
capitalized was $636,906. The Company completed its first sale of the
Intelli-Site system in March 1996 and began amortizing these costs in 1996 on a
straight-line basis over five years, the expected life of the product.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation
over the past few years has not had a significant impact on the Company's sales
or operating results.
SEASONALITY
Historically the Company has experienced seasonality in its business
due to fluctuations in the weather. The Company typically experiences a
decline in sales and operating results and expects to incur a loss during the
first quarter of the year due to winter weather conditions.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance with all applicable
environmental regulations. Compliance with these regulations has not had, and
is not anticipated to have, any material impact upon the Company's capital
expenditures, earnings or competitive position.
BUSINESS
GENERAL
The Company designs, develops, manufactures, sells and services
commercial and industrial security and traffic control products including
warning gates, crash barriers, lane changers, navigational and airport
lighting, and electronically-controlled security gates. The Company also
develops and markets "intelligent" or programmable security systems that
integrate multiple security devices and subsystems for governmental, commercial
and industrial facilities. Applications for these systems include perimeter
security for airports, access control for commercial office buildings, and
video surveillance for warehouses. By integrating different commercially
available security products such as automatic gates, access control panels,
video cameras, switchers, recorders, and badge identification systems, the
Company provides turnkey security solutions that perform automated user-defined
security functions.
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<PAGE> 18
At present, a customer with multiple security needs such as perimeter
security, access control or video surveillance typically must design, develop
and integrate each security function internally or utilize several outside
vendors. By combining multiple security functions into an integrated system or
network, the Company allows customers to reduce costs and human error while
increasing the level of security for asset protection and personnel safety.
The Company also has exclusive licenses for certain video and electronic funds
transfer ("EFT") technologies. The licensed video technology can be used in
CCTV security applications and the licensed EFT software can be used in systems
which integrate, for example, parking garages and retail operations. By
integrating EFT (credit cards, debit cards, check verification, etc.) into
security systems, the Company can provide users, such as universities, with a
single card solution to students and faculty for identification, dormitory and
parking access, cafeteria purchases and automatic teller machine withdrawals.
Because of increasing crime rates, increased emphasis on corporate
security, and end user demands for more automated security products, the
Company believes that the industry trend will continue toward more
sophisticated, outsourced systems that offer the ability to automate several
security functions simultaneously. As a result, the Company has developed a
PC-based facility management system called Intelli-Site(R) that integrates all
security functions across an entire enterprise including remote sites.
The Company distributes its products and services through direct
sales, dealer/distributor factory-direct purchasing networks, consultants and
other system integrators.
CORE BUSINESS PRODUCTS
Road and Bridge: B&B Electromatic, Inc. ("B&B")
B&B, the Company's manufacturing subsidiary in operation since 1925,
designs, manufactures, and markets warning gates, crash barriers
(anti-terrorist or traffic control), lane changers, navigational lighting,
airport lighting and perimeter security gates and operators. Road and bridge
products are usually custom-designed and are sold through B&B's direct sales
channel. Custom contracts have a wide range of value from $5,000 to over
$500,000 with contract fulfillment ranging from several months to one or more
years.
B&B plans to continue to leverage its long term reputation of high
quality designs and its broad network of architectural firms that prefer and
specify B&B products on new projects into increased revenues during the
rebuilding of the federal and state road and bridge infrastructures. In
addition, the Company will continue to incorporate B&B's road and bridge
reputation into its more recently established perimeter security core business.
Perimeter Security: B&B Electromatic, Inc. ("B&B")
B&B manufactures gate operators and aluminum gate panels which it
sells to dealers and distributors. Gate panels are movable portions of an
enclosure used for pedestrian and vehicular site access and egress. Gate
operators are automated mechanisms designed to open and close gate panels under
electronic control. B&B perimeter security products average between $1,000 and
$8,000 per order with delivery times ranging from less than a week to several
weeks depending upon whether the item is custom-built or a standard product.
Perimeter security products are also integrated into Intelli-Site systems and
resold as a subsystem by IST to its clients.
Electronic Security Systems: Tri-Coastal Systems, Inc. ("TCSI")
TCSI designs, sells, installs and services electronic security systems
primarily for commercial and industrial buildings using standard
"off-the-shelf" subsystems from various manufacturers. TCSI will often provide
the subsystem components for an IST integrated system sale. In addition, TCSI
provides maintenance services and monitoring services for both its own and
IST's end users.
Integrated Systems: Innovative Security Technologies, Inc. ("IST")
IST designs, develops and markets fully integrated turnkey facility
management systems. Since its inception in 1993, IST has been developing and
testing a proprietary hardware and software product called Intelli-Site, a
user- defined, PC-based systems integration platform. IST is developing a
direct sales channel to provide total security and other facility management
functions (i.e., HVAC, EFT payment
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<PAGE> 19
systems, parking systems, etc.) to customers not serviced by dealers or, for
various reasons including the unavailability of turnkey products and services,
choose not to use dealers. IST's strategy is to exploit industry outsourcing
trends by directly marketing and servicing its proprietary Intelli-Site
integrated turnkey system to end users and to other system integrators.
The two industry-unique features of Intelli-Site are its ability to
integrate any vendor's security devices or sub-system (vendor independency) and
its ability to have the system's automated functionality be defined by the end
user at any time, within minutes, without programming (dynamic functionality).
The Company knows of no other product with these features.
Intelli-Site is a standard product that competes against
custom-designed systems. Since Intelli-Site is a standard product, it offers a
significant price advantage over custom-developed systems by eliminating
software development costs and reducing the time to delivery. Custom-designed
systems may cost $500,000 and can run as high as $10 million or more.
Intelli-Site systems cost much less than a custom-designed system with
approximately the same level of integration. However, custom system functions
cannot be changed by the user without paying for, and waiting for, another
custom development cycle. Intelli-Site systems, depending on the configuration
and number of integrated devices, can be sold for as little as $50,000 to over
$1 million and are user definable. The Company believes that 137,000 U.S.
companies have budgeted between $50,000 and $600,000 for security purposes.
Intelli-Site, because of the price discontinuity between standard products and
custom products, can penetrate these companies with little or no competition
from custom-design system integrators.
Having completed its customer on-site testing, IST received its first
commercial sales orders in 1995 to a major Texas semiconductor facility and an
Arizona copper mining facility.
Pneumatic Carriers: Golston Company, Inc. ("GCI")
GCI manufactures and sells a variety of products, primarily to the
retail banking and health care industries and, through its plastic injection
molding operations, is a provider of carriers used in pneumatic tube systems in
both drive-up banking and hospital environments. GCI also manufactures and
markets modular buildings for financial institutions for use during new branch
construction or existing facility remodeling.
WARRANTY
The Company has two-year or five-year warranties on products it
manufactures. The Company provides for replacement of components and products
that contain manufacturing defects. When the Company uses other manufacturer's
components, the warranties of the other manufacturers are passed to the dealers
and end users. To date, the servicing and replacement of defective components
and products have not been material.
BACKLOG
The Company's backlog, calculated as the aggregate sales prices of
firm orders received from customers less revenue recognized, was approximately
$3.4 million at December 31, 1996. The Company expects that the majority of
this backlog will be filled during 1997.
INTELLECTUAL PROPERTY
The Company has applied for U.S. registration of "ISSI" as a trademark
and a service mark. The Company has also applied for U.S. registration of the
trademark "Intelli-Gate."
On March 16, 1993, the Company entered into an agreement with COMTRAC
Corporation ("CTC") that grants to the Company a non-exclusive, worldwide,
irrevocable, paid-up license to use CTC's proprietary transaction processing
systems, applications and communications software and related hardware for use
in security-related systems and systems integrating security and electronic
funds transfer functions, all of which are components of the Intelli-Site
integration platform. The license was exclusive until March 16, 1996. The
Company paid $250,000 for this license.
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<PAGE> 20
Also on March 16, 1993, the Company entered into an agreement with
DesignTech, Inc. ("DTI") that grants the Company a non-exclusive, worldwide
license to use DTI's proprietary interactive Digital Video Interface system
technology for security-related functions, which may constitute a part of the
Intelli-Site system platform. Under the agreement, for a period of five years,
the Company pays DTI a royalty of 1% of the Company's total gross revenues
derived from products using the licensed technology. The royalty declines to
0.25% for cumulative gross revenues exceeding $20,000,000. To date, no
royalties have been paid.
PRODUCT DESIGN AND DEVELOPMENT
There are currently three employees of the Company are dedicated to
research, development and product engineering. During fiscal 1996 and 1995,
the Company spent approximately $152,239 and $292,000 on research and
development.
COMPETITION
Many large system integration consultants and engineering firms
compete directly with the Company for large security contracts. Large, complex
projects usually receive bids for the design of a custom system, or multiple
side- by-side systems, to meet their requirements. System integrators bid
these design contracts not only for the design effort but also to place
themselves in a most favored position to become the prime contractor during the
implementation phase. During the design phase, system integrators survey the
market for components of the specified system and define how they can be
integrated together. Finally, if awarded the implementation phase, the system
integrator acts as a prime contractor and subcontracts the component suppliers,
and supervises the integration.
Depending on the contract, the Company will either become a
subcontractor for the majority of the systems or bid the project as a
vertically integrated system integrator and prime contractor. By combining
both the first and second phase into a proposal from a single vendor, the
Company eliminates several third party profit tiers and can reduce the time and
overall costs to the customer.
The Company faces intense competition in the security industry.
Certain of the Company's competitors are large, well-financed and established
companies that have greater name recognition and resources for research and
development, manufacturing and marketing than the Company has and, therefore,
may be better able than the Company to compete for a share of the market.
EMPLOYEES
As of December 31, 1996, the Company employed 113 people, all in
full-time positions. None of the Company's employees is subject to collective
bargaining agreements. The Company believes that relations with its employees
are good.
DESCRIPTION OF PROPERTIES
B&B owns its manufacturing and office facility in Norwood, Louisiana.
This facility consists of approximately 26,000 square feet of manufacturing and
office space on five acres of land. GCI owns its manufacturing and office
facility in Sanger, Texas. This facility consists of approximately 36,000
square feet of manufacturing and office space on 6.4 acres of land. The
Company occupies 13,038 square feet of office and warehouse space in Irving,
Texas, under a lease expiring on October 6, 1997, with monthly rent of $6,790,
plus the costs of utilities, property taxes, insurance, repair/maintenance
expenses and common area utilities. The Company also occupies 1,200 square
feet of office and warehouse space in Baltimore, Maryland, under a lease
expiring on May 31, 1997, with a monthly rent of $660 plus all utilities and
property taxes. The Company sublets a portion of the Baltimore facility to a
distributor of perimeter security products.
The Company believes that the properties, equipment, fixtures and
other assets of the Company located within the Company's facilities are
adequately insured against loss, that suitable alternative facilities are
readily available if the lease agreements described above are not renewed, and
that its existing facilities are adequate to meet current requirements.
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<PAGE> 21
LEGAL PROCEEDINGS
GCI, a wholly owned subsidiary of the Company, is a party to a lawsuit
filed in the 211th Judicial District Court of Denton County, Texas on September
13, 1996, entitled S. Webb Golston and Golston Company v. Evelyn Shaw, cause
no. 96-30642-211. In this suit, a former employee of GCI has alleged sexual
harassment, wrongful discharge and intentional infliction of emotional distress
against GCI and the former owner of GCI, requesting unspecified actual and
punitive damages. The alleged events giving rise to these claims occurred
prior to the Company's acquisition of GCI on December 31, 1996. Under the
acquisition agreement, the former owner agreed to indemnify GCI against any
damages that GCI may incur as a result of these claims. The former owner has
elected, pursuant to the terms of the acquisition agreement, to undertake the
defense of these claims and has retained counsel to defend both himself and
GCI. GCI has retained separate counsel in this matter to oversee prosecution
of the defense of the claims. The lawsuit is in the early stages of discovery.
To date, no information has become available that causes the Company to believe
there is any potential liability which is not fully covered by the
indemnification agreement with the former owner.
MANAGEMENT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
The directors, officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Gerald K. Beckmann . . . . . . . . . . . . . Director, Chairman of the Board, President and Chief Executive
Officer
James W. Casey (1) . . . . . . . . . . . . . Director, Vice President, Chief Financial Officer, Secretary and
Treasurer
Richard P. Shortz . . . . . . . . . . . . . . Vice President of IST
Tony C. Lisotta . . . . . . . . . . . . . . . Vice President of IST
Holly J. Burlage . . . . . . . . . . . . . . Controller and Assistant Secretary
Robert M. Galecke (1)(2) . . . . . . . . . . Director
Frank R. Marlow (1)(2) . . . . . . . . . . . Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
Each director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and
serve at the discretion of the Board of Directors.
Set forth below are descriptions of the backgrounds of the directors,
officers and key employees of the Company.
GERALD K. BECKMANN, 54, Director, Chairman, President and Chief
Executive Officer, has served as a director and Chief Technical Officer of the
Company since its inception in 1991 and Chairman of the Board of Directors
since February 1993. On May 1, 1995, Mr. Beckmann became President and Chief
Executive Officer of the Company. From 1991 to 1994 Mr. Beckmann was President
and Chief Operating Officer of Thomas Group Holding Company, a private
investment company. In 1985, Mr. Beckmann joined Thomas Group, Inc., a
publicly-held management consulting firm, and currently serves as a director.
Mr. Beckmann also serves as a director on the board of CTC Holdings, an
electronic funds transfer systems supplier. Mr. Beckmann is also an advisor to
the board of directors of Financial Data Systems, Inc., a banking software
developer. Mr. Beckmann is also a manager in Celerity Partners, L.L.C., the
general partner of Celerity Partners I, L.P., an acquisition limited
partnership. From 1981 to 1984 Mr. Beckmann served as Chairman and Chief
Executive Officer of Threshold Technology, Inc., a publicly-held voice
recognition company. From 1989 to 1992, Mr. Beckmann was director of PROTECH,
Inc., a publicly-held automatic test equipment supplier and a director of
DesignTech, Inc., a digital video system designer. Mr. Beckmann has also
served as past President of COMTRAC Corporation and BehaviorTech, Inc., a
computer-based training company as well as past Chairman of Integrated
Multimedia Solutions, Inc., BehaviorTech's parent company. Mr. Beckmann also
held various other management
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<PAGE> 22
positions in sales, marketing, engineering and general management at Exxon,
RCA, IBM and Honeywell. Mr. Beckmann holds a B.S.E.E. from Virginia
Polytechnic Institute and University.
HOLLY J. BURLAGE, 33, Controller and Assistant Secretary, joined the
Company in February 1994 and became Controller and Assistant Secretary in May
1995. Prior to joining the Company, Ms. Burlage was Controller of Signature
Home Care Group, Inc., a home health care company, from 1993 to 1994, and
Controller and Chief Accounting Officer of National Heritage, Inc., a
publicly-traded long-term care company, from 1989 to 1993. Ms. Burlage holds a
B.B.A. from Baylor University.
JAMES W. CASEY, 55, Director, Vice President, Secretary and Chief
Financial Officer, has served as General Manager of B&B, the Company's
manufacturing subsidiary, since April 1994, and became Director, Vice President
and Chief Financial Officer of the Company on May 1, 1995. Prior to joining
the Company, Mr. Casey was President and Chief Executive Officer of PROTECH,
Inc., a publicly-held automatic test equipment manufacturer from 1990 to 1993
and President and Chief Operating Officer of CJC Holdings, Inc., a custom
jewelry manufacturer from 1989 to 1990. Mr. Casey holds a B.B.A. from Iona
College and an M.S. from the State University of New York. He is a Certified
Public Accountant.
ROBERT M. GALECKE, 55, Director, is Vice President for Finance and
Administration for the University of Dallas. Prior to that he was a principal
in the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to
May 1996. He also served as Executive Vice President, Chief Operating Officer
and Chief Financial Officer of Southmark Corporation, a financial services
insurance and real estate holding company, from 1986 to 1992. From 1989 to
1995, Mr. Galecke served as Chairman of the Board, President and Chief
Executive Officer of National Heritage, Inc., one of the nation's largest
nursing home management companies with annual revenues exceeding $50 million.
Mr. Galecke was also Chairman of the Board, President and Chief Executive
Officer of USTrails, Inc., which owns and operates 66 campground and full
service resorts with total assets of $160 million and annual revenues exceeding
$80 million. Mr. Galecke continues to serve as a director of USTrails Inc. and
Thousand Trails Inc. Mr. Galecke received a graduate degree from the School of
Banking at the University of Wisconsin, Madison, Wisconsin, and a BS in
Economics from the University of Wisconsin Stevens Point.
TONY C. LISOTTA, 55, Vice President and General Manager of IST, a
subsidiary of the Company, joined the Company in October 1993. Mr. Lisotta has
over 14 years of sales and management experience with IBM. Mr. Lisotta
previously served as Senior Vice President for Fults Associates, Inc., a
commercial real estate firm from 1988 to 1992, and Executive Vice President for
The Consolidated Companies, a surety bond company from 1992 to 1993. Mr.
Lisotta holds a B.B.A. from Lamar University.
FRANK R. MARLOW, 57, Director, has been a director of the Company
since May 1995. Mr. Marlow served as Vice President, Sales and Marketing for
the Company from October 1993 to February 1995. Mr. Marlow has been a vice
president of Hogan Systems, a publicly-traded company, since March of 1995.
Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL Corporation and
Syntelligence Corporation in executive sales and training positions.
RICHARD P. SHORTZ, 42, Vice President, Engineering, IST, joined the
Company in May 1994 and is responsible for Intelli-Site software development.
Prior to IST, Mr. Shortz was a Software Developer for Thomas Group, Inc. from
1988 to 1994. Mr. Shortz holds a B.S.C.S. from the University of Maryland.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued
by the Company for services rendered during the fiscal years ended December 31,
1996, 1995, and 1994 to the Company's Chief Executive Officer and the four
other most highly compensated executive officers whose total cash compensation
for the fiscal year ended December 31, 1996 exceed $100,000 (the "named
executive officers").
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<PAGE> 23
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------ ----------------------------------------------
RESTRICTED
OTHER ANNUAL STOCK OPTION/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS
- ------------------------------ ------ ---------- --------- ----------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Beckmann 1996 $ 281,875 ___ ___ ___ ___
Chairman, CEO & President 1995 $ 114,583 ___ ___ $68,750(4) $ 14,473
1994 ___ ___ ___ ___ ___
James W. Casey 1996 $ 94,163 $ 6,812 ___ ___ $ 50,000
Vice President & CFO 1995 $ 115,145 $ 7,750 ___ $33,333(4) $ 23,395
1994 $ 94,125 $ 17,125 ___ ___ $ 34,333
Ferdinand A. Hauslein, 1996 $ 228,471 ___ ___ ___ ___
Jr.(1) 1995 $ 233,333 32,845(3) $ 20,000
--- ---
former CEO & President 1994 $ 154,167 $ 56,250 ___ $ 4,284(2) $ 16,271
Tony C. Lisotta 1996 $ 120,892 ___ ___ ___ ___
Vice President, IST 1995 $ 116,000 $ 2,850 ___ $ 3,550(4) $ 10,150
1994 $ 111,500 $ 16,900 ___ ___ $ 8,627
Richard P. Shortz 1996 $ 123,166 $ 8,400 ___ ___ $ 15,120
Vice President, IST 1995 $ 96,000 $ 3,000 ___ $18,600(4) $ 2,880
1994 $ 64,000 ___ ___ ___ $ 12,000
</TABLE>
____________________
(1) No longer employed by the Company.
(2) Mr. Hauslein holds 2,448 shares of restricted common stock valued at
$8,874 at December 31, 1996.
(3) Outplacement services.
(4) Convertible preferred stock issued for forgiveness of deferred salary
amounts.
No other executive officer's salary and bonus exceed $100,000 during
any of the indicated periods.
No other executive had any form of long-term incentive plan
compensation arrangement with the Company during any of the indicated periods.
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<PAGE> 24
STOCK OPTION GRANTS
The following table provides information concerning the grant of stock
options during the year ended December 31, 1996 to the named executive
officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
GRANTED(1) IN FISCAL YEAR PRICE DATE
-------------------- --------------------- ---------- ------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann -- -- -- --
James W. Casey 50,000 27% $ .81 11/3/03
Tony C. Lisotta -- -- -- --
Richard P. Shortz 15,120 8% $1.96 8/1/06
</TABLE>
____________________
(1) The options for all listed vest with respect to 25% of the shares
issuable thereunder six months after the date of grant and with
respect to cumulative increments of 25% of the shares issuable
thereunder on each anniversary of the date of grant.
OPTION EXERCISES AND HOLDINGS
The following table provides information related to the number of
shares received upon exercise of options, the aggregate dollar value realized
upon exercise, and the number and value of options held by the named executive
officers of the Company at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END AT FISCAL YEAR END
---------------------------------- ---------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ------------------ ---------------- --------------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann 177,237 -- $ 200,296 $ 9,046
James W. Casey 63,281 44,448 135,903 121,141
Ferdinand A. Hauslein, Jr. 184,212 -- 230,890 --
Tony C. Lisotta 46,545 7,232 69,509 12,626
Richard P. Shortz 10,440 19,560 $ 19,845 $ 34,383
</TABLE>
DIRECTOR COMPENSATION
Directors who have served as directors for at least six months prior
to the calculation of an award are eligible to receive grants of options under
the Stock Option Plan. Awards are made pursuant to a formula that is based on
the Company's net income per share. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with their attendance at Board
meetings.
The Company entered into a five-year employment agreement (January
1994 through October 1999) with Mr. Ferdinand A. Hauslein, Jr. that provided
him with an annual salary of $200,000. Mr. Hauslein resigned on May 1, 1995.
Mr. Hauslein's employment agreement provided that he was eligible for an annual
cash bonus of up to 50% of his base salary. Pursuant to the terms of that
employment agreement, upon the termination of his employment, the Company was
obligated to pay Mr. Hauslein $100,000, 12 months of severance pay at his
then-current salary, a $50,000 allowance for outplacement services, a
three-month consulting agreement and accelerated vesting of all outstanding
options granted to Mr. Hauslein. In addition, the Company changed the
beneficiary of the key-man life insurance from the Company to Mr. Hauslein.
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<PAGE> 25
CERTAIN TRANSACTIONS
In 1984, Mr. Philip R. Thomas, the Company's principal stockholder,
who was then sole owner of B&B, purchased the land, building, and equipment of
B&B for a $1,500,000 note payable (bearing interest at 10%) to B&B. In
December 1991, the portion of the above transaction related to the land and
building was rescinded, which decreased the note balance to $795,000. This
note became an asset of the Company upon its acquisition of B&B in 1992. The
note was being paid over a five-year period beginning in 1992. The gain on the
sale had been deferred and offset against the note receivable, which had been
classified in stockholders' equity. The net note receivable balance at
December 31, 1994 was $144,062. As a result of these transactions, B&B leased
from Mr. Thomas substantially all of the manufacturing equipment used at B&B's
facility in Norwood, Louisiana at the current rate of $6,725 per month during
1993 and 1994. On March 31, 1995, this transaction was closed with Mr. Thomas
contributing Common Stock and equipment and canceling the related equipment
lease with the Company in exchange for forgiveness of the note payable to the
Company and related interest. This resulted in an increase to stockholders'
equity of $87,000.
During the period from January 1990 to December 1992, the Company
incurred aggregate indebtedness of $786,373 to Thomas Group Holding Company
("TGHC"), Mr. Lynn R. Causey, and Mr. Ferdinand A. Hauslein, Jr. (both former
executive officers of the Company), all in separate transactions. From the
total amount of this debt, $636,531 was exchanged for 141,451 shares of Common
Stock on April 20, 1993, $40,000 was repaid out of the proceeds of the
Company's initial public offering on April 20, 1993, and the maturity date of
the remaining $109,842 in loans to the Company was extended until January 1,
1995. This amount has been paid in full.
Effective as of February 16, 1994, the Company entered into a
five-year agreement for $120,000 annually with TGHC for TGHC to provide
services including but not limited to the services of Mr. Gerald K. Beckmann to
serve as Chairman of the Board and as a Director of the Company. Pursuant to
such agreement, the Company was obligated to nominate Mr. Beckmann as a
director during the term of the agreement. This agreement was terminated May
1, 1995, the date Mr. Beckmann became the Chief Executive Officer and
President.
On January 1, 1995, Mr. Thomas and Mr. Beckmann loaned the Company
$69,088 and $90,000, respectively. On December 29, 1995 Mr. Thomas and Mr.
Beckmann converted their loans along with additional amounts owed them for
interest and miscellaneous expenses into 14,539 shares of Series B $20
Convertible Preferred Stock. During 1995, Mr. Thomas loaned the Company
$40,000 which was secured by certain receivables. On December 29, 1995, Mr.
Thomas converted this loan into 2,000 Series B $20 Convertible Preferred Stock.
Also on December 29, 1995, Mr. Beckmann, Mr. James W. Casey (a director and
executive officer of the Company), Mr. Tony C. Lisotta (Vice President of IST),
Mr. Richard P. Shortz (Vice President of IST), Ms. Holly J. Burlage (Controller
of the Company), and Mr. Frank R. Marlow (a director of the Company), converted
unpaid compensation totaling $138,451 into 6,922 Series B $20 Convertible
Preferred Stock.
During 1995 and 1996, Mr. Beckmann loaned the Company approximately
$400,000. As of December 31, 1996, no loans were outstanding. On March 11,
1996, Mr. Beckmann loaned the Company $100,000 as part of a $250,000 bridge
loan. These bridge loans were converted in June 1996 into $20 Series C
Preferred Stock convertible to 30 shares of Common Stock and Warrants to
purchase 15 shares of Common Stock at $1.00 per share. These warrants expire
five years from date of issue. During the second and third quarters of 1996,
Mr. Beckmann loaned the Company $90,000 and Mr. Casey loaned the Company
$75,000. Both of these loans have been repaid. In 1996, Mr. Beckmann
guaranteed loans to the Company in the aggregate amount of $1,050,000.
The Company believes that the terms of the foregoing transactions were
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE> 26
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, $.01 par value per share, 6,908,842 of which are
outstanding, and 750,000 shares of Convertible Preferred Stock, $.01 par value
per share, issuable in series. As of the date hereof, there are 46,668 shares
of Series A $20 Convertible Preferred Stock outstanding, and 12,500 shares of
Series C $20 Convertible Preferred Stock Outstanding. The following statements
are brief summaries of certain provisions relating to the Company's capital
stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders. There is no cumulative
voting with respect to the election of Directors, with the result that the
holders of more than 50% of the shares voted in the election of Directors can
elect all of the Directors. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors of
the Company out of funds legally available therefor. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company after payment of all
debts and liabilities and liquidation preferences of outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights.
PREFERRED STOCK
General. The Company's Board of Directors may, without further action
by the Company's stockholders, from time to time issue preferred stock in
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution, or winding-up of the Company before any payment is
made to the holders of Common Stock. In addition, under certain circumstances,
the issuance of Preferred Stock may render more difficult or tend to discourage
a merger, tender offer or proxy contest, or the removal of incumbent
management.
Series A $20 Convertible Preferred Stock. The Company currently has
outstanding 46,668 shares of its Series A $20 Convertible Preferred Stock (the
"Series A Preferred"). Holders of the Series A Preferred are not entitled to
receive any dividends, and have no voting rights, unless otherwise required
pursuant to Delaware law. Each share of the Series A Preferred may, at the
option of the Company, be converted into 20 shares of Common Stock at any time
after (i) the closing bid price of the Common Stock is at least $2.00 for at
least 20 trading days during any 30 trading day period, and (ii) the shares of
Common Stock to be received on conversion have been registered or otherwise
qualified for sale under applicable securities laws. In addition, the holders
of the Series A Preferred have the right to convert each share into 20 shares
of Common Stock at any time. The number of shares of Common Stock into which
the Series A Preferred is convertible will be proportionately adjusted in the
event of a stock dividend, stock split, or reverse stock split. Upon any
liquidation, dissolution, or winding up of the Company, the holders of the
Series A Preferred are entitled to receive $20 per share before the holders of
Common Stock are entitled to receive any distribution and the Series A
Preferred ranks pari passu with the Series C Preferred Stock.
Series C $20 Convertible Preferred Stock. The Company has issued
12,500 shares of its Series C $20 Convertible Preferred Stock (the "Series C
Preferred"). Holders of the Series C Preferred have no voting rights, unless
otherwise required by Delaware law. Each share of the Series C Preferred may,
at the option of the Company or the holder, be converted into 30 shares of
Common Stock. The Company has no right to redeem the Series C Preferred. The
Series C Preferred is also subject to the conversion adjustments, and is
entitled to receive a liquidation preference, identical to the Series A
Preferred.
24
<PAGE> 27
WARRANTS AND OPTIONS
The IPO Warrants. In connection with the Company's initial public
offering ("IPO"), the Company issued warrants which currently permit the
holders to purchase 3,045,000 shares of Common Stock (the "IPO Warrants").
Each IPO Warrant entitles the holder to purchase 2.1 shares of Common Stock at
$3.17 per share. The IPO Warrants may be exercised at any time prior to April
20, 1998. The Warrants are subject to redemption at $.25 per Warrant on 30
days' written notice with the prior written consent of the underwriter for the
IPO. The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company
of shares of its Common Stock at a price below the then-applicable exercise
price of the IPO Warrants.
Underwriter's Warrant. In connection with the IPO, the Company issued
to H.J. Meyers, Inc. (successor to Thomas James Associates Inc.) the
Underwriter's Warrant to purchase 304,500 Units, each Unit consisting of one
share of Common Stock and one Warrant. The Underwriter's Warrant is
exercisable until April 20, 1998, at an exercise price of $3.00 per Unit. The
Underwriter's Warrant contains anti-dilution provisions providing for
appropriate adjustment upon certain events, including any combination,
recapitalization, reclassification, stock dividend, stock split or sale by the
Company or shares of its Common Stock at a price below the then applicable
exercise price of the Underwriter's Warrant.
Other Warrants. The Company has issued additional warrants to
purchase 2,658,000 shares of Common Stock in connection with certain other
financings and to certain other persons who provided services to the Company.
The exercise prices of these warrants range from $.01 to $2.40.
Stock Options. The Company has issued options to employees and
consultants to purchase an aggregate of 874,000 shares of Common Stock under
the Company's 1993 Stock Option Plan and outside of such Plan.
DELAWARE LAW; CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the
removal of incumbent officers and directors. The Company's Certificate of
Incorporation contains a provision prohibiting stockholder action by less than
unanimous written consent, which would otherwise be permitted by Delaware law.
The Company's Bylaws contain a provision which requires that a stockholder may
nominate a person for election as a director only if written notice of such
stockholder's intent to make such nomination has been given to the Secretary of
the Company not later than 60 days prior to an annual meeting and not later
than ten days after the date on which notice of a special meeting was first
sent to stockholders. The notice must set forth, among other things, a
description of all arrangements or understandings between the nominating
stockholder and the nominee and such other information regarding the nominee as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee been
nominated by the Board of Directors of the Company. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to first negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
results in an improvement of their terms.
The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date
that the person became an interested stockholder unless (with certain
exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
25
<PAGE> 28
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide broadly
for indemnification of the officers and directors of the Company. In addition,
the Certificate of Incorporation provides that, to the fullest extent permitted
by Delaware law, no director shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such
director in his or her capacity as a director.
PLAN OF DISTRIBUTION
In connection with exercises of the IPO Warrants and the Underwriter's
Warrant, the Company will issue shares of Common Stock directly the registered
holders of such warrants. The Company does not intend to compensate any
underwriter or dealer in connection with such exercise and issuance. Upon such
issuances, such shares of Common Stock will be available for resale without
restriction under the Securities Act, except that shares owned by "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act,
may generally only be sold in compliance with the applicable provisions of Rule
144 or pursuant to an effective registration statement under the Securities
Act.
The Common Stock may be sold directly by each Selling Stockholder or
indirectly through agents, dealers or underwriters from time to time in one or
more transactions on the Nasdaq Small Cap Market, the Boston Stock Exchange or
such exchanges on which the Common Stock is then listed, or in privately
negotiated transactions at prices related to such market prices, at negotiated
prices or at fixed prices. The Selling Stockholders will bear all discounts
and commissions paid to broker-dealers in connection with the sale of their
Common Stock. Other offering expenses will be borne by the Company. The
Company will receive proceeds from the exercise price of warrants which may be
exercised by certain Selling Stockholders. The Company will not receive any
proceeds from the sales of Common Stock by the Selling Stockholders.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Haynes and Boone, L.L.P., Dallas, Texas.
EXPERTS
The Company's financial statements as of December 31, 1996 and 1995
and for each of the two years in the period ended December 31, 1996 included in
this Prospectus, and GCI's financial statements as of June 30, 1996 and 1995
and for each of the two years in the period ended June 30, 1996 included in
this Prospectus, have been so included in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"), Nasdaq and the
Boston Stock Exchange. The Registration Statement, the exhibits and schedules
forming a part thereof, and the reports, proxy statements, and other
information filed with the Commission in accordance with the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission at 7 World Trade
Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also may be obtained at prescribed rates from the Public Reference Section of
the Commission, 450 fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The address for Nasdaq is 1735 K Street NW., Washington, D.C.
20006-1500, and the address for the Boston Stock Exchange is One Boston Place,
Boston, Massachusetts 02108.
26
<PAGE> 29
The Company has filed with the Commission a Registration Statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as
the Registration Statement) under the Securities Act with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is
made to the Registration Statement, each such statement being qualified in all
respects by such reference. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company will provide without charge to each recipient of this
Prospectus, upon written or oral notice to Director of Investor Relations, 8200
Springwood Drive, Suite 230, Irving, Texas 75083, phone (972) 444-8280, a copy
of any of the information that is incorporated by reference in this Prospectus
as of the date of filing, and subject in each case to information contained in
this Prospectus.
27
<PAGE> 30
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL PAGES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Integrated Security Systems, Inc. Report of Independent Accountants F-2
Integrated Security Systems, Inc.
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Integrated Security Systems, Inc.
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 F-4
Integrated Security Systems, Inc. Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1996 and 1995 F-5
Integrated Security Systems, Inc.
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 F-6
Integrated Security Systems, Inc. Notes to Consolidated Financial Statements F-7 - F-20
Golston Company, Inc. Report of Independent Accountants F-21
Golston Company, Inc. Balance Sheets as of June 30, 1996 and 1995 F-22
Golston Company, Inc. Statements of Operations for the years ended June 30, 1996 and 1995 F-23
Golston Company, Inc. Statements of Stockholders' Equity for the years ended
June 30, 1996 and 1995 F-24
Golston Company, Inc. Statements of Cash Flows for the years ended June 30, 1996 and 1995 F-25
Golston Company, Inc. Notes to Financial Statements F-26 - F-31
Golston Company, Inc.
Consolidated Statements of Operations for the six months ended December 31, 1996 F-32
</TABLE>
F-1
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Integrated Security Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Integrated Security Systems, Inc., and its subsidiaries (the "Company") at
December 31, 1996 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 18, 1997
F-2
<PAGE> 32
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Current assets
Cash $1,097,891 $ 209,655
Accounts receivable, net of allowance for doubtful accounts
of $65,687 and $54,558, respectively 2,629,909 1,761,701
Inventories 1,086,985 854,888
Restricted cash 8,232 157,851
Other current assets 193,960 15,831
Net assets of discontinued operations 25,760 76,807
----------- -----------
Total current assets 5,042,737 3,076,733
Property and equipment, net 5,502,284 1,068,123
Intangible assets, net 1,598,632 136,116
Capitalized software development costs, net 591,505 787,816
Deferred income taxes 205,384 205,384
----------- -----------
Other assets 31,325 33,333
----------- -----------
Total assets $12,971,867 $ 5,307,505
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 881,221 $ 1,308,650
Accrued liabilities 691,208 1,041,567
Deferred revenue 209,296 152,948
Notes payable 8,080 950,947
Notes payable to related parties 7,110 29,437
Current portion of long-term debt 213,975 96,451
Net liabilities of discontinued operations 49,252 332,866
----------- -----------
Total current liabilities 2,060,142 3,912,866
----------- -----------
Long-term debt 6,784,582 213,899
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 750,000 shares
authorized, 59,168 and 34,166, respectively, shares issued
and outstanding 591 342
Common stock, $0.01 par value, 18,000,000 shares authorized,
6,958,842 and 3,730,738, respectively, shares issued and
6,908,842 and 3,680,738, respectively, shares outstanding 69,588 37,307
Additional paid-in-capital 10,382,215 7,191,575
Accumulated deficit (6,206,501) (5,929,734)
Treasury stock, 50,000 shares (118,750) (118,750)
----------- -----------
Total stockholders' equity 4,127,143 1,180,740
----------- -----------
Total liabilities and stockholders' equity $12,971,867 $ 5,307,505
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE> 33
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Sales $ 9,054,145 $ 7,622,219
Cost of sales 5,184,321 4,200,723
------------ ------------
Gross margin 3,869,824 3,421,496
------------ ------------
Operating expenses:
Selling, general and administrative 3,776,798 4,634,963
Research and product development 152,239 46,199
------------ ------------
3,929,037 4,681,162
------------ ------------
Loss from operations (59,213) (1,259,666)
Other income (expense):
Interest income 7,748 14,957
Interest expense (260,471) (343,012)
Other 389 209
------------ ------------
Loss from continuing operations before income taxes (311,547) (1,587,512)
Benefit (provision) for income taxes 11,991 (62,102)
------------ ------------
Loss from continuing operations (299,556) (1,649,614)
Discontinued operations:
Loss from discontinued operations -- (720,043)
Gain (loss) on disposal of discontinued operations 22,789 (494,562)
------------ ------------
Income (loss) from discontinued operations 22,789 (1,214,605)
------------ ------------
Net loss $ (276,767) $ (2,864,219)
============ ============
Weighted average common and common equivalent shares outstanding 5,122,878 4,014,108
Net loss per share:
Continuing operations $ (0.05) $ (.41)
Discontinued operations -- (.30)
------------ ------------
Total $ (0.05) $ (.71)
============ =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 34
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER
PREFERRED COMMON PAID IN ACCUMULATED RECEIVABLE, TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT NET STOCK
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 3,519,290 $35,192 $ 6,047,883 $(3,065,515) $(144,062) $ --
Preferred stock issuance 34,166 342 683,011
Shares issued to officer 2,448 25 4,259
Warrant issuance 102,557
Warrant exercise 138,000 1,380 112,808
Common stock issuance 71,000 710 179,165
Stockholder settlement 61,892 144,062 (118,750)
Net loss (2,864,219)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 34,16 $ 342 3,730,738 $37,307 $ 7,191,575 $(5,929,734) $ -- $(118,750)
Preferred stock issuance 60,168 601 1,050,169
Preferred stock conversion (35,166) (352) 1,039,919 10,399 (10,047)
Warrant issuance 82,471
Warrant exercise 599,230 5,992 513,497
Common stock issuance 1,588,955 15,890 1,554,550
Net loss (276,767)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 59,168$ 591 6,958,842 $69,588 $10,382,215 $(6,206,501) $ -- $(118,750)
==================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 35
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (276,767) $(2,864,219)
Adjustments to reconcile net loss to net cash (used) provided
by operating activities:
Depreciation 189,042 175,428
Amortization 358,295 345,533
Bad debt expense 18,976 17,096
Provision for warranty reserve 188,344 137,700
Provision for inventory reserve 4,601 17,909
Non-cash (income) expenses (173,281) 24,521
Net change in assets and liabilities from discontinued operations (184,100) 1,018,324
Changes in operating assets and liabilities,
net of effects from acquisition of Golston Company:
Accounts receivable (543,992) 459,212
Inventories 81,006 (112,328)
Restricted cash 149,619 (157,851)
Other assets (109,045) 227,939
Accounts payable (344,141) 806,872
Accrued liabilities (605,766) 471,762
Deferred revenue 56,348 152,948
----------- -----------
Net cash (used) provided by operating activities (1,190,861) 720,846
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (96,983) (52,416)
Sale of property and equipment 5,000 --
Intangible assets (71,951) --
Capitalized software costs -- (245,799)
Acquisition of Golston Company (4,851,406) --
----------- -----------
Net cash used by investing activities (5,015,340) (298,215)
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock, net 687,406 --
Issuance of common stock, net 1,863,487 143,738
Net borrowings (payments) on line of credit -- (847,317)
Payments on notes payable and long-term debt (1,459,051) (151,373)
Proceeds from notes payable and long-term debt 6,012,545 278,417
Other (9,950) (1,946)
----------- -----------
Net cash provided (used) by financing activities 7,094,437 (578,481)
----------- -----------
Increase (decrease) in cash 888,236 (155,850)
Cash at beginning of year 209,655 365,505
----------- -----------
Cash at end of year $ 1,097,891 $ 209,655
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE> 36
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed in
December 1991 to leverage highway traffic control and security core
businesses into turnkey security solutions for "middle market" commercial
and industrial businesses. The middle market is defined as commercial,
industrial and institutional companies or government agencies which
budget $50,000 to $600,000 annually to meet their security needs. The
two types of security targeted by ISSI are asset protection and personal
safety.
In order to provide turnkey security solutions to the middle market,
several key operating components and technologies have been vertically
integrated into the Company. To date, ISSI created internally, or
acquired, a gate and barrier engineering and manufacturing facility, B&B
Electromatic, Inc. ("B&B"), a developer and retail seller of PC-based
control systems which integrate discrete security devices, Innovative
Security Technologies, Inc. ("IST"), an installation and service company,
Tri-Coastal Systems, Inc. ("TCSI"), and a manufacturer of specialty
products for the financial and health care industries, Golston Company,
Inc. ("GCI"). ISSI also has a subsidiary that was a distributor of
commercial and industrial perimeter security products, Automatic Access
Controls, Inc. ("AAC"). The operations of this subsidiary were
discontinued during 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, B&B, IST, TCSI, GCI and AAC. All significant
intercompany transactions and balances have been eliminated.
CASH
Cash is comprised of highly liquid instruments with maturities of three
months or less. At December 31, 1996 and 1995, restricted cash of $8,232
and $157,851, respectively, was recorded related to a factoring
arrangement (see Note 6).
INVENTORIES
Inventories are primarily carried at the lower of cost or market using
the first-in, first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line and
accelerated methods. Estimated useful lives range from 3 to 31 years.
Depreciation expense includes amortization of assets recorded as capital
leases.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulted from the acquisitions and is amortized using the
straight-line method over a period of ten years.
Amortization expense for goodwill for the years ended December 31, 1996
and 1995, respectively, was $26,797 and $1,144.
F-7
<PAGE> 37
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is the Company's policy to periodically review the net realizable
value of its intangible assets, including goodwill, through an assessment
of the estimated future cash flows related to such assets. Each business
unit to which these intangible assets relate is reviewed to determine
whether future cash flows over the remaining estimated useful life of the
assets provide for recovery of the carrying value of the assets. If
assets are being carried at amounts in excess of estimated gross future
cash flows, then the assets are adjusted for impairment to a level
commensurate with a discounted cash flow analysis of the underlying
assets.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Under the liability method,
deferred taxes are provided for tax effects of differences in the basis
of assets and liabilities arising from differing treatments for financial
reporting and income tax purposes using currently enacted tax rates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of
customers in the traffic and security products market. No single
customer accounted for 10% or more of revenues in the years ended
December 31, 1996 or 1995.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs pursuant to Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86").
As of December 31, 1995, $636,906 in software development costs qualified
for capitalization pursuant to FAS 86. The Company began amortizing its
capitalized software costs in 1996 using the straight-line method over a
period of five years. $127,381 in amortization expense was recorded in
1996.
During 1993, the Company entered into a license and distribution
agreement for certain proprietary technology. In connection with this
agreement (see Note 9), the Company paid $250,000 to an affiliate
controlled by the Company's former parent for the right to use the
technology, which is being amortized over a period of five years from the
acquisition date. For the years ended December 31, 1996 and 1995,
$68,930 and $57,426, respectively, was recorded as amortization expense.
Accumulated amortization at December 31, 1996 and 1995 was $168,020 and
$99,090, respectively.
The Company expenses all other research and product development costs as
they are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, note payable and other debt instruments
approximate the fair values of such financial instruments.
NET LOSS PER SHARE
Net loss per common share for each year is computed using the weighted
average number of common and common equivalent shares outstanding during
the respective years.
F-8
<PAGE> 38
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest expense $ 153,428 $295,469
Cash paid for income taxes $ 51,866 $ 63,615
</TABLE>
During 1995, accounts payable to unrelated parties of $139,141 and notes
and accrued liabilities to related parties of $469,212 were converted by
the Company's creditors into convertible preferred stock. During 1996,
notes to unrelated parties of $304,051 and related parties of $100,000
were converted by the Company's creditors into convertible preferred
stock and common stock.
RECLASSIFICATION
Certain reclassifications of prior year amounts have been made to conform
to the fiscal 1996 presentation.
3. I.S.T. PARTNERS, LTD.
Effective September 1, 1996, the Company entered into an agreement with
I.S.T. Partners, Ltd., an unaffiliated limited partnership, whereby the
partnership will fund the sales, engineering and order fulfillment
expenses of IST. In exchange, the partnership receives, as compensation
from IST, 85% of the revenue generated from Intelli-Site sales until a
specified investor return has been achieved. The Company retains full
ownership of Intelli-Site during the agreement period and retains
responsibility for managing IST's business activities, including customer
relationships. As of December 31, 1996, $250,000 had been received by
the Company and recorded as income in the quarter ended September 30,
1996 for the initial sale of the sales leads and prospects.
F-9
<PAGE> 39
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS
On December 31, 1996, the Company acquired GCI with approximate revenues
of $3.9 million, a vertically integrated manufacturer of specialty
products for the financial and health care industries. This acquisition
has been accounted for as a purchase. ISSI purchased 100% of GCI stock
for approximately $4.8 million of combined cash and seller notes and
assumed approximately $650,000 in debt. The real estate and facilities
occupied by GCI were also acquired for an additional $1.5 million in
cash. To fund the transactions, $4.6 million of convertible debentures
were placed. The debentures have a maturity of seven years, and, until
converted, carry an annual interest rate of nine percent. No principal
payments are due on the debentures during the first three years. The
debentures may be exchanged for ISSI Common Stock at a conversion price
of $1.05 per share. To complete the funding, an additional $660,000 of
ISSI Common Stock was privately placed on December 31, 1996 at $1.10 per
share. The excess of the purchase price over the fair value of the
assets acquired of $1,319,628 has been recorded as goodwill. If the
acquisition of GCI had been effective as of January 1, 1996, pro forma
net sales would have amounted to approximately $13.3 million and pro
forma net income from continuing operations would have been approximately
$252,000.
In September 1995, the Company acquired substantially all of the assets
and liabilities of TCSI, an unrelated company, in exchange for the
Company's common stock valued at $156,375. The excess of the purchase
price over the fair value of the assets acquired of $296,945 was recorded
as goodwill. If the acquisition of TCSI had been effective as of January
1, 1995, pro forma net sales would have amounted to approximately $8.6
million and pro forma net loss from continuing operations would have been
approximately $1.6 million.
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Inventories:
Raw materials $ 714,106 $ 586,237
Work-in-process 267,015 223,052
Finished goods 105,864 45,599
---------- ----------
$1,086,985 $ 854,888
---------- ----------
Property and Equipment:
Land $ 905,264 $ 5,264
Building 1,177,168 577,168
Rental Units 2,311,033 --
Leasehold improvements 48,769 48,769
Office furniture and equipment 855,002 575,257
Manufacturing equipment 2,952,930 533,167
Vehicles 48,503 68,304
Construction 153,425 153,425
---------- ----------
8,452,094 1,961,354
Less: accumulated depreciation (2,949,810) (893,231)
---------- ----------
$5,502,284 $1,068,123
========== ==========
</TABLE>
F-10
<PAGE> 40
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE AND LONG-TERM DEBT
On April 11, 1995, the Company entered into a Business Manager factoring
facility with a bank to factor accounts receivable with recourse. This
factoring facility expires April 15, 1997, has an adjustable factoring
fee which ranged from 3.13% to 3% during 1996, and a maximum borrowing
amount of $1,400,000. As of December 31, 1996 and 1995, $36,413 and
$1,103,275 was utilized, $8,232 and $157,851 of restricted cash was held,
and $36,413 and $1,103,275 of factored accounts receivable were subject
to recourse.
Notes Payable
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Bridge loans payable to unrelated individual
investors; interest at 16%; due April 30, 1996, net of
debt discount of $0 and $46,766, respectively -- $ 736,285
Note payable due in monthly principal installments of
various amounts until paid in full by June 1996, net
of debt discount of $0 and $6,000, respectively; no
interest; personally guaranteed by an officer -- 57,646
Note payable, interest at 3.3%, due on April 1, 1996 -- 7,016
Note payable to a bank due on June 24, 1996; interest
at 11%; secured by second mortgage on real estate -- 150,000
Note payable to unrelated individual investor; no
interest; due in one lump sum payment in January 1997 $ 8,080 --
----------- -----------
$ 8,080 $ 950,947
=========== ===========
</TABLE>
F-11
<PAGE> 41
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Term note payable to a bank; due in monthly principal
and interest installments of $3,720 through August
2002; interest at the lender's prime plus .5% (10.75%
at December 31, 1995 and 10.25% at December 31,
1994); guaranteed by principal stockholder -- $ 234,365
Note payable to a bank due in monthly principal and
interest installments of $4,060 through March 1997
when the balance is due; interest at 9.75% secured by
equipment and accounts receivable -- 53,265
Note payable due in monthly principal and interest
installments of $576 through May 1997 when the balance
is due; interest at 8.75%; secured by equipment -- 9,188
Note payable due in monthly principal and interest
installments of $366 through August 1997 when the
balance is due; interest at 11%; secured by equipment -- 6,243
Note payable due in monthly principal and interest
installments of $477 through May 1997 when the balance
is due; interest at 11%; secured by equipment -- 7,289
Term note payable to a bank; due in monthly principal
and interest installments of $793 through May 2001;
interest at 10.2503%; secured by equipment 33,692 --
Term note payable to a bank; due in monthly principal
and interest installments of $12,000 through April
1998 and one balloon payment in May 1998; interest at
the lender's primeless 1% (10% at December 31, 1996);
secured by first mortgage on real estate, equipment
and certain personal assets of an officer; personally 864,865 --
guaranteed by an officer
Term note payable to an unrelated third party due in
monthly principal and interest installments of $24,134
through January 2004; interest at 9%; secured by 1,500,000 --
equipment
Convertible note payable to an unrelated fund;
interest at 9% due in monthly installments of $34,500
through December 2003; no principal installments due
until December 1999; secured by equity, assets and
future contracts; guaranteed by all subsidiaries of --
ISSI 4,600,000
----------- -----------
6,998,557 310,350
Less current portion (213,975) (96,451)
----------- -----------
Long-term portion $ 6,784,582 $ 213,899
=========== ===========
</TABLE>
F-12
<PAGE> 42
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES PAYABLE TO RELATED PARTIES
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Notes payable to executive officers and members of
Board of Directors; non-interest bearing; due on
demand $ -- $ 4,000
Note payable to an employee; due in monthly principal
and interest installments of $2,412 through March
1997; interest at 10.53% 7,110 25,437
-------- ---------
(7,110) $ 29,437
Less: current portion (7,110) (29,437)
-------- ---------
Long-term portion $ -- $ --
======== =========
</TABLE>
Payments required under all notes payable and long-term debt outstanding
at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 229,124
1998 986,433
1999 245,154
2000 769,943
2001 784,806
Thereafter 3,998,286
$ 7,013,746
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $ -- $ --
State (11,991) 62,102
-------- --------
(11,991) $ 62,102
Deferred:
Federal $ -- $ --
State -- --
-------- --------
-- --
-------- --------
Tax expense (benefit) $(11,991) $ 62,102
======== ========
</TABLE>
F-13
<PAGE> 43
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory benefit rate to loss before income taxes
is as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Federal statutory benefit rate (34%) (34%)
State income tax (benefit) provision,
net of federal tax benefit (4%) 4%
Installment sale gain -- 2%
Net operating loss not benefited 24% 31%
Non-deductible expenses and other 10% 1%
--- ---
(4%) 4%
=== ===
</TABLE>
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities)
are comprised of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Amortization $ (213,196) $ (39,915)
Depreciation (964) --
----------- ----------
Gross deferred tax liability
(214,160) (39,915)
----------- ----------
Litigation reserve 6,047 57,120
Depreciation -- 3,343
Warranty reserve 31,609 24,733
Bad debt reserve 43,855 49,970
Net operating loss carryforward 2,205,531 1,895,091
---------- ----------
Gross deferred tax asset 2,287,042 2,030,257
---------- ----------
Net deferred tax asset 2,073,846 1,990,342
Valuation allowance (1,868,462) (1,784,958)
---------- ----------
Net deferred tax asset $ 205,384 $ 205,384
========== ==========
</TABLE>
Should a cumulative change in ownership of more than 50% occur within a
three year period, there could be an annual limitation on the use of the
net operating loss carryforward. The Company has unused net operating
loss carryforwards of $6.5 million and $5.6 million at December 31, 1996
and 1995, respectively, that begin to expire in the year 2007. The
Company increased the valuation allowance because it does not expect to
realize the benefit of net operating losses, except to the extent of the
$205,384 deferred tax asset, in the foreseeable future.
F-14
<PAGE> 44
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under leases accounted for as
operating leases. The Company currently does not have any capital
leases. Future minimum payments for years subsequent to December 31,
1996 under capital and non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------
<S> <C>
1997 $ 115,340
1998 5,256
1999 5,256
2000 --
2001 --
----------
Total minimum payments $ 125,852
==========
</TABLE>
Rent expense for operating leases was $103,253 and $85,836 for the years
ended December 31, 1996 and 1995, RESPECTIVELY.
CONTINGENCIES
The Company is subject to certain legal actions and claims arising in the
ordinary course of business. Management recognizes the uncertainties of
litigation; however, based upon the nature of and management's
understanding of the facts and circumstances which give rise to such
actions and claims, management believes that such litigation and claims
will be resolved without material effect on the Company's financial
position or results of operations.
9. RELATED PARTY TRANSACTIONS
SOFTWARE LICENSE
During 1993, the Company entered into a license and distribution
agreement for certain proprietary technology to be utilized as the basis
for the Intelli-Site products. This license was purchased for $250,000
from COMTRAC, a company controlled at that time by ISSI's largest
stockholder. This license is being amortized over five years from the
acquisition date.
10. DISCONTINUED OPERATIONS
During the second quarter of 1995, the Company adopted a plan to
discontinue the operations of the wholesale distribution subsidiary,
Automatic Access Controls, Inc. ("AAC"). The operations of this
subsidiary were discontinued during July 1995. Provisions totaling
$560,000 were recorded for estimated losses during the phase- out period,
and for writedown of assets to net realizable value. During the fourth
quarter of 1995, this provision was decreased by $65,000 due to better
receipts than anticipated on certain assets. Current assets and current
liabilities related to this action totaled $25,760 and $76,807,
respectively, at December 31, 1996 and $76,807 and $49,252, respectively,
at December 31, 1995. These assets and liabilities consist of accounts
receivable and a note payable.
F-15
<PAGE> 45
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Where appropriate, the financial statements reflect the operating results
and balance sheet items of the discontinued operations separately from
continuing operations. Prior years have been restated. Operating
results for the discontinued operations were:
<TABLE>
<CAPTION>
For the Period Ended
December 31,
-----------------------
1996 1995
-----------------------
($ in thousands)
<S> <C> <C>
Operating Revenue -- $ 1,389
Loss from Operations -- $ (720)
Loss Per Share -- $ (.30)
</TABLE>
11. BENEFIT PLANS
The Company has established a 401(k) savings and profit sharing plan.
Participants include all employees who have completed six months of
service and are at least 21 years of age. Employees can contribute up to
15% of compensation. Vesting on the Company's contribution occurs over a
five-year period. The Company made no contributions in 1996 and 1995.
12. STOCK OPTIONS AND WARRANTS
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" was implemented in January 1996. As permitted
by the Standard, ISSI retained its prior method of accounting for stock
compensation. As required by the Standard, the following information
represents pro forma net income (loss) and earnings (loss) per share as
if the Company had accounted for its employee stock options under the
fair value method prescribed by the Standard.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively; no
dividend yield, expected volatility of approximately 80% and 55%,
risk-free interest rates of approximately 6.5% and 7%, and expected lives
of ten years each.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
pro forma information for the Company follows in thousands (except per
share amounts):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------
As As
reported Pro forma reported Pro forma
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Income (Loss) $(276) $(307) $(2,864) $(2,874)
Income (Loss) per Common Share $(.05) $(.05) $ (.71) $ (.71)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as SFAS No. 123 does not apply to awards
prior to 1995 and additional awards are anticipated in future years.
F-16
<PAGE> 46
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
In February 1993, the Company established a stock option plan whereby
options to purchase up to 250,000 shares of common stock may be granted
(the "1993 Stock Option Plan"). In December 1994, the shareholders of
the Company increased the number of shares of common stock which may be
granted under this plan to 500,000. The plan is administered by the
Company's Board of Directors which has the authority to establish the
terms of each option grant. Under the plan, incentive stock options must
be granted with an exercise price not less than the fair market value on
the date of grant.
A summary of stock option transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------- ------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 738 $2.21 687 $2.20
Granted 188 1.22 115 2.07
Forfeited (52) 1.95 (64) 1.90
--- ---
Outstanding at end of year 874 $2.01 738 $2.21
=== ===== === =====
Exercisable at end of year 663 $2.18 556 $2.26
Weighted-average fair value of
options granted during the year $1.06 $1.40
</TABLE>
The following table summarizes information about the fixed-price stock
options outstanding at December 31, 1996 (share amounts in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -------------------------------
Range of Shares Weighted-Average Weighted- Shares Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.687-1.50 159 8.7 years $1.02 50 $1.09
$1.563-2.50 705 7.5 years 2.22 609 2.26
$2.719-3.53 10 9.1 years 2.77 4 2.72
--- ---
874 2.01 663 2.18
=== ===
</TABLE>
F-17
<PAGE> 47
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
On April 20, 1993, in connection with the Company's initial public
offering, the Company issued 1,450,000 Redeemable Common Stock Purchase
Warrants. Each warrant entitles the holder to purchase one share of
common stock at a price of $5.40 per share during the first 30 months,
and $6.75 per share during the second 30 months. The warrants are
subject to redemption by the Company at $0.25 per warrant upon 30 days
prior written notice with the consent of the underwriters, Thomas James
Associates, Inc. ("Underwriters"). As of December 31, 1996, all warrants
issued remain outstanding. The warrants expire on April 20, 1998.
Management believes that the exercise price of the warrants at the date
of grant approximated market value. On June 17, 1996, the Company
repriced these warrants to $4.15 due to obligations under the original
warrant agreement. The holder is also now entitled to purchase 1.6
shares of common stock. Again, on January 15, 1997, these warrants were
repriced to $3.17 under the same obligation and the holder is now
entitled to purchase 2.1 shares of common stock
Also, in connection with the initial public offering, the Company issued
a warrant to the Underwriters for the purchase of up to 145,000 units at
a price of $6.30 per unit. A unit consists of a share of common stock
and a warrant to purchase an additional share of common stock. This
warrant is exercisable over a period of four years commencing April 20,
1994. Management believes that the exercise price of the warrant at the
date of grant approximated market value. On June 17, 1996, the Company
repriced these warrants to $3.51 due to obligations under the original
warrant agreement. The holder is also now entitled to purchase 1.6
units. Again, on January 15, 1997, these warrants were repriced to $3.17
under the same obligation. The holder is now entitled to purchase 2.1
units.
In connection with bridge financing obtained in 1993, the Company issued
warrants to purchase 246,000 shares of common stock at an exercise price
of $1.00 per share and warrants to purchase 18,000 shares of common stock
at an exercise price of $2.40. As of December 31, 1996, 51,000 warrants
issued remain outstanding. The warrants expire in 1998. No value has
been assigned to warrants as management believed such value to be
insignificant at the time of issuance.
The Company issued warrants to purchase 211,800 shares of common stock at
exercise prices of $1.06, in connection with the bridge financing
obtained in 1994. As of December 31, 1996, 154,800 warrants remain
outstanding and have expiration dates in 1999. Value was assigned to
these warrants totaling $90,000 at December 31, 1994. Such value was
amortized over the one year term of the bridge loans. During 1995 and
1996, the Company issued an additional 50,376 and 37,301 warrants,
respectively, in exchange for an additional extension of the bridge
loans' due date to April 30, 1996. Value was assigned to these warrants
totaling $87,677. Such value was amortized over the five- month
extension term of the bridge loans.
During 1995, in connection with a payable to a former director, the
Company issued warrants to purchase 10,000 shares of common stock at an
exercise price of $.75 per share. Value assigned to these warants of
$7,500 was amortized over the 5-month term of the note. In connection
with the convertible preferred stock sale completed in December 1995, the
Company issued 136,677 warrants in 1996. These warrants are exercisable
at $.67 per share and expire in 2000. The value of the warrants was
recorded as part of the convertible preferred stock offering.
During 1996, the Company issued warrants to purchase 13,201 shares of
common stock at an exercise price of $1.18. Value assigned to these
warrants totaling $13,210 was recorded during 1996.
During 1996, the Company issued 832,844 warrants in connection with the
convertible Series A and Series C preferred stock sales. These warrants
are exercisable at $1.00 per share and expire in 2001. The value of the
warrants was recorded as part of the convertible preferred stock
offering.
F-18
<PAGE> 48
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company issued 500,000 warrants in connection with the
sale of common stock to unrelated investors. The value of the warrants
was recorded as part of the equity sale. As of December 31, 1996,
116,000 of these warrants remain outstanding.
The Company issued warrants to purchase 70,000 shares of common stock to
investors in I.S.T. Partners, Ltd. These warrants are exercisable at
$2.40 per share and expire in 2001. Value was assigned to these warrants
totaling $40,000 and was expensed in 1996.
A summary of warrant transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,218 $3.38 2,296 $3.32
Granted 1,590 1.05 60 .13
Exercised (599) .87 (138) 1.01
Repriced 1,044 4.04 -- --
----- ----- ----- -----
Outstanding at end of year 4,253 $3.03 2,218 $3.38
===== ===== ===== =====
Exercisable at end of year 4,199 $3.03 2,218 $3.38
Weighted-average fair value of
options granted during the year $1.57 $ .76
</TABLE>
The following table summarizes information about the warrants outstanding
at December 31, 1996 (share amounts in thousands):
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
-------------------------------------- --------------------------------
Range of Shares Weighted-Average Weighted- Shares Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .01-1.00 1,129 3.7 years $ .94 1,129 $.94
$1.06-2.00 268 3.4 years 1.42 268 1.42
$2.40-4.15 2,856 2.4 years 4.00 2,802 4.03
----- -----
4,253 3.03 4,199 3.03
===== =====
</TABLE>
F-19
<PAGE> 49
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CONVERTIBLE PREFERRED STOCK
The Company's outstanding convertible preferred stock consists of 750,000
authorized shares of $.01 par value convertible preferred stock.
Series A $20 Convertible Preferred Stock. The Company currently has
outstanding 46,668 shares of its Series A $20 Convertible Preferred Stock
(the "Series A Preferred"). Holders of the Series A Preferred are not
entitled to receive any dividends, and have no voting rights, unless
otherwise required pursuant to Delaware law. Each share of the Series A
Preferred may, at the option of the Company, be converted into 20 shares
of Common Stock at any time after (i) the closing bid price of the Common
Stock is at least $2.00 for at least 20 trading days during any 30
trading day period, and (ii) the shares of Common Stock to be received on
conversion have been registered or otherwise qualified for sale under
applicable securities laws. In addition, the holders of the Series A
Preferred have the right to convert each share into 20 shares of Common
Stock at any time. The number of shares of Common Stock into which the
Series A Preferred is convertible will be proportionately adjusted in the
event of a stock dividend, stock split, or reverse stock split. Upon any
liquidation, dissolution, or winding up of the Company, the holders of
the Series A Preferred are entitled to receive $20 per share before the
holders of Common Stock are entitled to receive any distribution and the
Series A Preferred ranks pari passu with Series B and Series C Preferred
except with respect to the security interest granted to Series B
Preferred (see Series B description below).
Series B $20 Convertible Preferred Stock. The Company has issued 34,168
shares of its Series B $20 Convertible Preferred Stock (the "Series B
Preferred"). Holders of the 34,166 Series B Preferred are entitled to
receive dividends equal to $2.00 per share per annum, payable in equal
semi-annual payments. Holders of the Series B Preferred have no voting
rights, unless otherwise required by Delaware law. Each share of the
Series B Preferred may, at the option of the Company or the holder, be
converted into 29.85 shares of Common Stock, together with accrued but
unpaid dividends. The Company has the right to redeem the Series B
Preferred at any time at $22 per share, together with accrued but unpaid
dividends. The number of shares of Common Stock into which the Series B
Preferred is convertible will be proportionately adjusted in the event of
a stock dividend, stock split, or reverse stock split. Upon any
liquidation, dissolution, or winding up of the Company, the holders of
the Series B Preferred are entitled to receive $20 per share together
with accrued but unpaid dividends before the holders of any shares of
Common Stock and on a pari passu basis with Series A and C Preferreds. A
security interest in 6.8% of the Common Stock of B&B Electromatic, Inc.
has been granted to secure payment of any liquidation proceeds or
dividends to which the Series B becomes entitled. All Series B was
converted to Common Stock in June 1996.
Series C $20 Convertible Preferred Stock. The Company has issued 12,500
shares of its Series C $20 Convertible Preferred Stock (the "Series C
Preferred"). Holders of the Series C Preferred have no voting rights,
unless otherwise required by Delaware law. Each share of the Series C
Preferred may, at the option of the Company or the holder, be converted
into 30 shares of Common Stock. The Company has no right to redeem the
Series C Preferred. The Series C Preferred is also subject to the
conversion adjustments, and is entitled to receive a liquidation
preference, identical to the Series A Preferred.
F-20
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Golston Company, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Golston Company, Inc. at June 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
September 30, 1996
F-21
<PAGE> 51
GOLSTON COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1995
--------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 124,901 $ 255,302
Accounts receivable 481,045 357,070
Interest receivable from related party 42,329 --
Inventories 409,839 508,724
Other current assets 61,216 36,306
------------ ------------
Total current assets 1,119,330 1,157,402
Property and equipment, net 2,048,720 1,836,652
Intangible assets, net 3,833 4,500
Note receivable from related party 671,824 --
Other assets 150 1,560
------------ ------------
Total assets $ 3,843,857 $ 3,000,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,090 $ 8,908
Accrued liabilities 169,576 208,630
Deferred revenue 135,515 144,267
Current portion of long-term debt 170,624 120,084
------------ ------------
Total current liabilities 520,805 481,889
------------ ------------
Long term liabilities:
Deferred tax liability 148,504 112,923
Long-term debt 594,857 464,965
------------ ------------
Total long term liabilities 743,361 577,888
------------ ------------
Stockholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Retained earnings 2,578,691 1,939,337
------------ ------------
Total stockholders' equity 2,579,691 1,940,337
------------ ------------
Total liabilities and stockholders' equity $ 3,843,857 $ 3,000,114
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 52
GOLSTON COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales and revenues:
Product sales $ 2,203,029 $ 2,074,110
Service revenues 1,688,313 1,492,776
----------- -----------
3,891,342 3,566,886
----------- -----------
Cost of sales and revenues:
Product sales 879,572 793,752
Service revenues 666,618 559,161
1,546,190 1,352,913
----------- -----------
Gross margin 2,345,152 2,213,973
----------- -----------
Operating expenses:
Selling, general and administrative 1,290,244 1,254,421
----------- -----------
1,290,244 1,254,421
Income from operations 1,054,908 959,552
Other income (expense):
Interest income from related party 42,329 --
Interest income 1,997 1,506
Interest expense (86,922) (79,635)
Other (23,765) (46,559)
----------- -----------
Income before income taxes 988,547 834,864
Provision for income taxes (349,193) (298,120)
----------- -----------
Net income $ 639,354 $ 536,744
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 53
GOLSTON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 1,000 $ 1,000 $1,402,593 $ 1,403,593
Net income 536,744 536,744
-------------------------------------------------
Balances at June 30, 1995 1,000 $ 1,000 $1,939,337 $ 1,940,337
Net income 639,354 639,354
-------------------------------------------------
Balances at June 30, 1996 1,000 $ 1,000 $2,578,691 $ 2,579,691
=================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 54
GOLSTON COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 639,354 $ 536,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 214,047 175,130
Amortization 667 667
Deferred income taxes 35,581 7,445
Changes in operating assets and liabilities:
Accounts receivable (123,975) (32,638)
Inventories 98,885 (45,470)
Other assets (23,500) (3,855)
Accounts payable 36,182 (54,687)
Accrued liabilities (39,054) (86,651)
Deferred revenue (8,752) 37,430
----------- -----------
Net cash provided by operating activities 829,435 534,115
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (426,115) (206,941)
Loan to related party (671,824) --
Interest receivable from related party (42,329) --
----------- -----------
Net cash used by investing activities (1,140,268) (206,941)
----------- -----------
Cash flows from financing activities:
Payments on notes payable and long-term debt (169,608) --
Proceeds from notes payable and long-term debt 350,040 (201,423)
----------- -----------
Net cash provided (used) by financing activities 180,432 (201,423)
----------- -----------
Increase (decrease) in cash and cash equivalents (130,401) 125,751
Cash and cash equivalents at beginning of year 255,302 129,551
----------- -----------
Cash and cash equivalents at end of year $ 124,901 $ 255,302
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 55
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Golston Company, Inc. ("Golston" or the "Company") was founded in 1976
and incorporated as a Texas corporation in 1979. Its primary business
has been to design, manufacture, and supply pneumatic tube carriers to
the financial industry for use in the retail drive-up banking centers for
commercial banks, savings and loans, and credit unions. More recently,
the Company has expanded its pneumatic tube carrier business to the
medical services industry, supplying a proprietary line of carriers to
hospitals and other medical facilities. The Company distributes its
products through sales to original equipment manufacturers of pneumatic
carrier systems, to dealers and distributors, and, through telemarketing,
directly to end-users.
The Company's sales are primarily to the banking and hospital industries.
Sales are dependent on customer orders and requests.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of highly liquid instruments with
maturities of three months or less.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of
customers in the financial and medical services industries. Based on
management's analysis of accounts receivable, including consideration of
the Company's historical collection experience, no allowance for doubtful
accounts is necessary at June 30, 1996 or 1995. During 1996 and 1995,
respectively, a single customer accounted for greater than 10% of the
Company's revenues ($600,000 and $650,000).
The Company records deferred revenue related to a service to provide the
use of temporary facilities in the event of a disaster by the retail
banking industry. Revenues related to these services is recognized
ratably over the term of the agreement.
INVENTORIES
Inventories consist of the costs of raw materials, work-in-process and
finished goods and are carried at the lower of cost using the first-in,
first-out method or market. Labor and overhead costs are allocated to
work-in-process and finished goods inventories based on total labor and
overhead costs divided by the number of units produced.
OTHER ASSETS
Other assets consist of certain prepaid expenses and the cash value of a
life insurance policy for an officer of the Company. The cash value of
the policy was $35,822 and $32,618 at June 30, 1996 and 1995,
RESPECTIVELY.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method. Estimated useful lives range from 3 to 20 years.
F-26
<PAGE> 56
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulting from the acquisition of MPA Systems ("MPA") in 1987 is
amortized using the straight-line method over a period of fifteen years.
Goodwill amortization for the years ended June 30, 1996 and 1995, was
$667 and $667, respectively. Accumulated amortization at June 30, 1996
and 1995 was $6,167 and $5,500, RESPECTIVELY.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, and long-term debt approximate the fair
values of such financial instruments.
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest expense $ 86,922 $ 70,728
Cash paid for income taxes $ 391,013 $ 311,904
</TABLE>
F-27
<PAGE> 57
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at June
30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Inventories:
Raw materials $ 40,046 $ 94,686
Work-in-process 250,491 253,156
Finished goods 119,302 160,882
----------- -----------
$ 409,839 $ 508,724
=========== ===========
Property and Equipment:
Building and leasehold $ 509,273 $ 509,273
Automotive 5,477 14,060
Machinery and equipment 1,198,166 1,166,459
Office equipment 112,060 109,676
MPA Equipment and fixtures 62,686 48,823
MPA Units 1,320,275 917,067
MPA Unit in construction -- 16,590
Molds in progress 3,769 3,642
----------- -----------
3,211,706 2,785,590
Less: accumulated depreciation (1,162,986) (948,938)
----------- -----------
$ 2,048,720 $ 1,836,652
=========== ===========
Accrued liabilities:
Federal income taxes payable $ 91,218 $ 154,407
Accrued compensation 42,342 12,185
Customer damage deposits 23,060 24,145
Other 12,956 17,893
----------- -----------
$ 169,576 $ 208,630
=========== ===========
</TABLE>
F-28
<PAGE> 58
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Term note payable to a bank; due in monthly principal and
interest installments of $7,397 through February 2000;
interest at 10.24% at June 30, 1996 and 1995; secured by
equipment; guaranteed by principal stockholder $ 207,364 $ 269,429
Term note payable to a bank; due in monthly principal and
interest installments of $1,945 through April 1999;
interest at 11.31% at June 30, 1996 and 1995; secured by
equipment; guaranteed by principal stockholder 58,301 74,066
Term note payable to a bank; due in monthly principal and
interest installments of $1,673 through October 2002;
interest at the lender's prime rate plus 1% (10.25% at
June 30, 1996); secured by buildings; guaranteed by
principal stockholder 93,259 --
Term note payable to a bank; due in monthly principal and
interest installments of $1,673 through October 2002;
interest at the lender's prime rate plus 1% (10.25% at
June 30, 1996); secured by buildings; guaranteed by
principal stockholder 93,259 --
Term note payable to a bank; due in monthly principal and
interest installments of $1,669 through November 2002;
interest at the lender's prime rate plus 1% (10.25% at
June 30, 1996); secured by buildings and accounts
receivables; guaranteed by principal stockholder 92,843 --
Term note payable to a bank; due in monthly principal and
interest installments of $7,448 through July 1998;
interest at the lender's prime rate plus .5% (10.5% at
June 30, 1996 and 9.87% at June 30, 1995); secured by
buildings; guaranteed by principal stockholder 171,204 241,554
Term note payable to a bank; due in monthly principal and
interest installments of $825 through April 2003; interest
at the lender's prime rate plus 1% (10.25% at June 30,
1996);secured by buildings; guaranteed by principal 49,251 --
stockholder -------------- --------------
765,481 589,049
Less current portion (170,624) (120,084)
-------------- --------------
Long-term portion $ 594,857 $ 464,965
============== ==============
</TABLE>
F-29
<PAGE> 59
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Payments required under all long-term debt outstanding at June 30, 1996
are as follows:
<TABLE>
<CAPTION>
Fiscal years ended June 30:
<S> <C>
1997 $ 170,624
1998 209,206
1999 141,279
2000 101,213
2001 57,478
Thereafter 85,681
---------
$ 765,481
=========
</TABLE>
5. INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $295,218 $290,675
State 18,394 --
-------- --------
$313,612 $290,675
-------- --------
Deferred:
Federal $ 35,581 $ 7,445
State -- --
-------- --------
35,581 7,445
-------- --------
Tax expense $349,193 $298,120
======== ========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory tax rate to income before income taxes is
as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Tax expense at federal statutory rate $ 345,991 $ 292,202
State income tax provision, net of federal tax benefit 12,140 --
Permanent differences 4,037 1,380
Other (12,975) 4,538
--------- ---------
$ 349,193 $ 298,120
========= =========
</TABLE>
F-30
<PAGE> 60
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities)
are comprised of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Gross deferred tax liability - Depreciation $ (226,472) $ (173,166)
------------ -----------
Inventory 21,693 11,193
Deferred income 46,075 49,050
Bonus Accrual 10,200 --
Gross deferred tax asset 77,968 60,243
----------- -----------
Valuation allowance -- --
----------- -----------
Net deferred tax liability $ (148,504) $ (112,923)
=========== ===========
</TABLE>
6. CONTINGENCIES
An officer of the Company has alleged that the Company has breached an
oral agreement to sell the Company to the officer and has asserted a
claim for emotional distress. The Company is disputing these claims.
Management believes that the maximum loss contingency is immaterial.
7. RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 1996, a note receivable in the
amount of $671,824 resulted from a transaction between the Company and
Golston Family Partners Ltd. for the purpose of Golston Family Partners
Ltd. purchasing the MPA Modular, L.L.C. manufacturing business. The
Company's shareholder and President owns an interest in Golston Family
Partners Ltd. and MPA Modular, L.L.C. Accrued interest receivable of
$42,329 is recorded at June 30, 1996. The note bears interest at 10.25%
and is scheduled for repayment, including accrued interest, upon the sale
of Golston. The note is unsecured.
8. PENDING SALE OF COMPANY
The Company's Board of Directors has approved the sale of the Company to
Integrated Security Systems, Inc. ("ISSI") effective October 24, 1996.
ISSI is purchasing all of the stock of the Company and the real estate
and property currently leased by the Company from Golston Family Partners
Ltd.. These financial statements do not reflect any adjustments arising
from this pending acquisition.
F-31
<PAGE> 61
GOLSTON COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Sales $2,084
Cost of Sales 902
-------
Gross margin 1,181
Operating expenses:
Selling, general and administrative 726
-------
Income from operations 455
Other income (expense) (2)
-------
Income before income taxes 453
-------
Income tax provision (150)
-------
Net income $ 303
=======
</TABLE>
Note: These financial statements have been prepared on a consistent basis
with the June 30, 1996 and June 30, 1995 financial statements.
F-32
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
authorizes indemnification of certain officers, directors, employees and agents
of the Company; allows the advancement of costs of defending against
litigation; and permits companies incorporated in Delaware to purchase
insurance on behalf of directors, officers, employees and agents against
liabilities whether or not in the circumstances such companies would have the
power to indemnify against such liabilities under the provisions of the
statute.
The Company's Amended and Restated Certificate of Incorporation and
its By-Laws provide for indemnification of its officers and directors to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware.
The Company's Amended and Restated Certificate of Incorporation
eliminates, to the fullest extent permitted by Delaware law, liability of a
director to the Company or its stockholders for monetary damages for a breach
of such director's fiduciary duty of care except for liability where a director
(a) breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or a stock
repurchase or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be borne by
the Company in connection with the registration, issuance and distribution of
the securities being registered hereby. None of the estimated expenses will be
borne by the Selling Stockholders.
<TABLE>
<S> <C>
SEC Registration Fees . . . . . . . . . . . . . . . . . . . . . $ 8,028
Nasdaq Exchange Listing Fee . . . . . . . . . . . . . . . . . . 14,200
The Boston Stock Exchange Listing Fee . . . . . . . . . . . . . 2,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . 30,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . 7,500
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . 2,000
Printing and Engraving Expenses . . . . . . . . . . . . . . . . 100
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 63,828*
========
</TABLE>
__________
* Estimated
II-1
<PAGE> 63
Item 26. Recent Sales of Unregistered Securities
The following table specifies securities sold by the Registrant within
the past three years and not registered under the Securities Act of 1933. All
such sales were carried out in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933. In relying on such
exemption, the Registrant relied upon written representations of the persons
acquiring the Registrant's shares that they were acquiring the shares for
investment purposes only and not for resale, and that they had received
adequate opportunity to obtain information, and had reviewed such information,
regarding the Registrant. Certificates representing the shares issued to these
persons contained a legend restricting transfer thereof absent registration
under the Securities Act or the availability of an exemption therefrom.
<TABLE>
<CAPTION>
TITLE AND AMOUNT OF CONSIDERATION UNDERWRITING
DATE SOLD SECURITIES PURCHASER RECEIVED DISCOUNTS OR
- --------------- --------------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
October 1993 The Equity Group, Inc. Investor relation
Warrants to purchase 80,000 services
shares of Common Stock
September- Accredited bridge An aggregate of
November 1994 Promissory Notes and financial investors $1,059,000
warrants to purchase 211,800
October 1995- A group of 9 investors Extension of loan
March 1996 Warrants to purchase 105,677 terms
shares of Common Stock
December 1995 Managerial Resources, Financial advisory
45,000 shares of Common Inc. and Steffany Lea services
Stock and warrants to
January 1996 A group of 11 accredited Conversion of an
34,168 Series B Convertible investors primarily aggregate of
Preferred Stock and warrants
January 1996 Philip R. Thomas Consulting
Warrants to purchase 13,201 services
shares of Common Stock
March 1996 Bathgate McColley Investment banking
Warrants to purchase 326,000 Capital Group LLC fees
shares of Common Stock
March 1996 ComVest Partners Placement Agent
Warrant to purchase 100,000 fee
shares of Common Stock
March 1996 Louis A. Davis Shares of Tri-
15,000 shares of Common Coastal Systems,
Stock
March 1996 15,000 shares of Common Henry E. McGuffee Shares of Tri-
Stock Coastal Systems,
March 1996 Michael A. Richmond Shares of Tri-
15,000 shares of Common Coastal Systems,
Stock
March 1996 Seabeach & Co. $800,000 $40,000
800,000 Shares of Common
Stock and warrants to
March-May 1996 A group of 38 accredited $640,000 $78,000
47,968 Series A Convertible investors
Preferred Stock and warrants
June 1996 A group of 5 investors $250,000
12,500 Series C Convertible including an officer and
Preferred Stock and warrants
July-September I.S.T. Partners,Ltd. R&D Partnership
1996 Warrant to purchase 70,000
shares of Common Stock
December 31, Renaissance Capital Fund $4,600,000
1996 Convertible Debentures (9%)
December 31, ProFutures Special $600,000 $60,000
1996 600,000 shares of Common Equity Fund
Stock
</TABLE>
II-2
<PAGE> 64
Item 27. Exhibits
(a) Exhibits.
Unless otherwise indicated, all exhibits are incorporated by
reference from comparable exhibits to Amendment No. 2 to the
Company's registration statement on Form SB-2 No. 33-59870-FW,
filed April 16, 1993.
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.11 Amendment to Restated Certificate of Incorporation of the
Company (incorporated by reference to exhibit 3.11 to the
Company's Form 10-KSB for the year ended December 31, 1994).
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen certificate for common stock of the Company.
4.2 Specimen certificate for Redeemable Common Stock Purchase
Warrant.
4.3 Warrant Agreement among the Company, American Stock Transfer &
Trust Company, and Thomas James Associates, Inc.
4.4 Underwriter's Warrant.
4.5 Certificate of Designation for Series A $20 Convertible
Preferred Stock.
4.6 Certificate of Designation for Series B $20 Convertible
Preferred Stock.
4.7 Certificate of Designation for Series C $20 Convertible
Preferred Stock.
*5.1 Opinion of Haynes and Boone, L.L.P.
9.1 Exhibit 10.28 hereof contains a voting agreement in Section
2.2 thereof.
10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan dated
September 7, 1993, as amended on December 30, 1994.
10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock
Option Agreement.
10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified
Stock Option Agreement.
10.13 Form of Indemnification Agreement by and between the Company
and the Company's officers and directors.
10.14 Commercial Lease dated August 6, 1984, by and among Philip R.
Thomas, Wayne L. Thomas and Thomas Group Service Company,
predecessor to B&B, for land, building and equipment.
10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and
among the Company, Trammell Crow Company No. 90 and Petula
Associates Limited for property located in Dallas, Texas.
10.23 Lease Agreement commencing June 1, 1992 by and between Kelso
Joint Venture and AAC, for property located in Baltimore,
Maryland.
10.37 License and Distribution Agreement dated March 16, 1993, by
and among COMTRAC Corporation, Thomas Group Holding Company
and the Company relating to analog technology for transaction
processing systems.
II-3
<PAGE> 65
10.38 License and Distribution Agreement dated March 16, 1993, by
and between DesignTech Incorporated and the Company relating
to interactive digital video interface system technology.
10.49 Amendment to Integrated Security System, Inc. 1993 Stock
Option Plan.
10.51 Note relating to the $900,000 Bridge Financing (incorporated
by reference from similarly numbered exhibits filed with the
Company's Form 10-KSB for the year ended December 31, 1995).
10.52 Standard Form of Common Stock Purchase Warrant (incorporated
by reference from the similarly numbered exhibit filed with
the Company's Form 10-KSB for the year ended December 31,
1995).
10.53 Subscription Agreement dated December 28, 1995 (incorporated
by reference from the similarly numbered exhibit filed with
the Company's Form 10-KSB for the year ended December 31,
1995).
10.54 Factoring Agreement from Sunburst Bank for B&B receivables
(incorporated by reference from the similarly numbered exhibit
filed with the Company's Form 10-KSB for the year ended
December 31, 1995).
10.55 Corporate Consulting Agreement, dated March 3, 1986, by and
between the Company and Bathgate McColley Capital Group LLC
for consulting services (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.56 Form of Promissory Notes dated March 11, 1996 (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-QSB for the quarter ended March 31, 1996).
10.57 Engagement letter dated March 26, 1996, from Bathgate McColley
Capital Group LLC to the Company proposing private placement
offering (incorporated by reference from the similarly
numbered exhibit filed with the Company's Form 10-QSB for the
quarter ended March 31, 1996).
10.58 Form of Subscription Agreement for Series A Convertible
Preferred Stock executed on March 27, 1996 (incorporated by
reference from the similarly numbered exhibit filed with the
Company's Form 10-QSB for the quarter ended March 31, 1996).
10.59 Subscription Agreement for Common Stock executed March 28,
1996 (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-QSB for the quarter
ended March 31, 1996).
10.60 Form of Warrant Agreement for purchase of common stock
executed March 29, 1996 (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.61 Placement Agent Agreement dated April 16, 1996, by and between
the Company and Bathgate McColley Capital Group LLC confirming
private placement offering (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form
10-QSB for the quarter ended March 31, 1996).
10.62 Form of Amendment to Promissory Notes dated April 22, 1996
(incorporated by reference from the similarly numbered exhibit
filed with the Company's Form 10-QSB for the quarter ended
March 31, 1996).
*10.63 Stock Purchase Agreement, dated November 7, 1996, between the
Company and S. Webb Golston.
II-4
<PAGE> 66
*10.64 Subscription Agreement, dated December 31, 1996, between the
Company and ProFutures Special Equity Fund, L.P.
*10.65 Convertible Loan Agreement, dated December 31, 1996, between
the Company (and its subsidiaries) and Renaissance Capital
Growth & Income Fund III, Inc. and Renaissance US Growth &
Income Trust PLC.
*10.66 Management Agreement, dated August 29, 1996, between the
Company and I.S.T. Partners, Ltd.
*10.67 Marketing and Development Agreement, dated July 29, 1996,
between the Company, IST, and I.S.T. Partners, Ltd.
*10.68 Employment Agreement, dated January 2, 1997, between Gerald K.
Beckmann and the Company.
*10.69 Employment Agreement, dated January 2, 1997, between James W.
Casey and the Company.
*10.70 Real Estate Purchase Agreement, dated September 5, 1996,
between the Company and Golston Family Partners, Ltd.
21.1 Subsidiaries of the Company (incorporated by reference from
the similarly numbered exhibit filed with the Company's Form
10-KSB for the year ended December 31, 1995).
*23.1 Consent of Price Waterhouse LLP.
*23.2 Consent of Haynes and Boone, L.L.P. (included in their opinion
filed as Exhibit 5.1).
*24.1 Power of Attorney (included on the signature page hereto).
___________________
* Filed herewith.
(b) Reports filed on Form 8-K.
Form 8-K, filed January 10, 1997, reporting the acquisition of
GCI.
Item 28. Undertakings
The Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-5
<PAGE> 67
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act (Sections 230.424(b)(1), (4) or 230.497(h)) as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-6
<PAGE> 68
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irving, State of Texas, on March 10, 1996.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
----------------------------------------
Gerald K. Beckmann
President and Chief Executive Officer
II-7
<PAGE> 69
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Officers
and Directors of Integrated Security Systems, Inc. (the "Company") hereby
constitutes and appoints Gerald K. Beckmann (with full power to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute, and file any and all documents relating to this
Registration Statement, including any and all amendments, exhibits and
supplements thereto, with any regulatory authority, granting unto said attorney
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he himself might or
could do if personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on March 10, 1996.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
---------------------------------------
Gerald K. Beckmann
Director, Chairman of the Board,
Chief Executive Officer and President
By: /s/ JAMES W. CASEY
---------------------------------------
James W. Casey
Director, Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
By: /s/ ROBERT M. GALECKE
---------------------------------------
Robert M. Galecke
Director
By: /s/ FRANK R. MARLOW
---------------------------------------
Frank R. Marlow
Director
II-9
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Page
- ------- ------ ----
<S> <C> <C>
5.1 Opinion of Haynes and Boone, L.L.P.
10.63 Stock Purchase Agreement, dated November 7, 1996, between the
Company and S. Webb Golston.
10.64 Subscription Agreement, dated December 31, 1996, between the
Company and ProFutures Special Equity Fund, L.P.
10.65 Convertible Loan Agreement, dated December 31, 1996, between
the Company (and its subsidiaries) and Renaissance Capital
Growth & Income Fund III, Inc. and Renaissance US Growth & Income
Trust PLC.
10.66 Management Agreement, dated August 29, 1996, between the Company
and I.S.T. Partners, Ltd.
10.67 Marketing and Development Agreement, dated July 29, 1996, between
the Company, IST, and I.S.T. Partners, Ltd.
10.68 Employment Agreement, dated January 2, 1997, between Gerald K.
Beckmann and the Company.
10.69 Employment Agreement, dated January 2, 1997, between James W.
Casey and the Company.
10.70 Real Estate Purchase Agreement, dated September 5, 1996, between
the Company and Golston Family Partners, Ltd.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Haynes and Boone, L.L.P. (included in their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (included on the signature page hereto).
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[HAYNES AND BOONE, LLP LETTERHEAD]
March 10, 1997
Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230
Irving, Texas 75063
Gentlemen:
We have acted as counsel to Integrated Security Systems, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of (i)
Amendment No. 2 to the Registration Statement on Form SB-2, registration number
333-5023 ("Amendment No. 2"), and (ii) and Post-Effective Amendment No. 2 to
the Registration Statement on Form SB-2, registration number 33-59870-FW
("Post-Effective Amendment No. 2"), to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Such
registration statements are collectively referred to as the "Registration
Statements."
Amendment No. 2 relates to the registration of 5,052,678 shares of Common
Stock, par value $.01 per share (the "Common Stock") of the Company, and
Post-Effective Amendment No. 2 relates to the registration of 3,654,000 shares
of Common Stock. All such shares of Common Stock are collectively referred to
as the "Shares."
As described in the Amendment No. 2 and Post-Effective Amendment No. 2, certain
of the Shares are currently outstanding, other Shares will be issued upon the
exercise of outstanding warrants and options to purchase Common Stock, and
other Shares will be issued upon the conversion of outstanding shares of the
Company's convertible preferred stock.
For the purposes of the opinions below, we have assumed that the Shares to be
issued upon exercise of the warrants and options referred to in the
Registration Statements, and the Shares to be issued upon conversion of the
convertible preferred stock referred to in the Registration Statements, will be
issued in accordance with the terms of such warrants, options, and preferred
stock.
In connection with the preparation of the Registration Statements, we have
examined (i) the Certificate of Incorporation and the Bylaws of the Company;
(ii) minutes and records of the corporate proceedings of the Company with
respect to issuance of the Shares; (iii) the Registration Statements and any
and all exhibits thereto; and (iv) such other documents as we have deemed
necessary for the expression of the opinions contained herein.
<PAGE> 2
Integrated Security Systems, Inc.
March 10, 1997
Page 2
In making the foregoing examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies. As to questions of fact material to this
opinion, where such facts have not been independently established, and as to
the content and form of the Certificate of Incorporation, Bylaws, minutes and
resolutions and other documents we have relied, to the extent we deemed
reasonably appropriate, upon representations or certificates of officers and
directors of the Company, and certificates of governmental officials, without
independent check or verification of their accuracy.
Based upon the foregoing, and having due regard for such legal considerations
as we deem relevant, we are of the opinion that (i) the currently outstanding
Shares are duly authorized, fully paid and nonassessable, and (ii) upon the
issuance of the Shares which will be issued upon exercise of the warrants and
options referred to in the Registration Statements, and the conversion of the
convertible preferred stock referred to in the Registration Statements, such
Shares will be duly authorized, fully paid, and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statements and to the
reference to our firm under the caption "Legal Opinion" in the Prospectus
forming part of such Registration Statements, and any amendment thereto.
Very truly yours,
/s/ HAYNES AND BOONE L.L.P
-----------------------------
HAYNES AND BOONE, L.L.P.
<PAGE> 1
EXHIBIT 10.63
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is entered into November 7, 1996 (the
"Agreement") between Integrated Security Systems, Inc. a Delaware corporation
(the "Buyer") and S. Webb Golston, residing in Denton, Texas (the "Seller").
WHEREAS, Seller is the owner of 1000 shares of common stock of Golston
Company, a Texas corporation ("Golston"), par value $1.00 per share, such 1000
shares being all of the issued and outstanding stock of Golston (such shares
being referred to as the "Stock"), and
WHEREAS, Buyer desires to purchase and Seller desires to sell the Stock;
WHEREAS, this Agreement shall supercede and replace the Stock Purchase
Agreement entered into on September 5, 1996 between Buyer and Seller, as
subsequently amended pursuant to an Amendment to Stock Purchase Agreement dated
October 21, 1996 between Buyer and Seller;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth in this Agreement, and intending to be legally bound, the parties agree
as follows:
1. Sale of Stock.
1.1 The Sale. Upon the terms and subject to the conditions of this
Agreement, at the Closing (as hereinafter defined), Seller agrees to sell the
Stock to Buyer, free and clear of all liens, claims and encumbrance of every
kind, and Buyer agrees to purchase the Stock from Seller.
1.2 Purchase Price and Payment.
1.2.1 Purchase Price. The total purchase price to be paid to the
Seller for the Stock shall be equal to Five Million Eight Hundred and Ten
Thousand Dollars ($5,810,000.00).
1.2.2 Adjustments to Purchase Price.
(a) Reduction. The Purchase Price shall be reduced by the sum
of paragraphs 1.2.2 (a) (1) and 1.2.2 (a) (2):
(1) the sums of the following principal amounts owed by
Golston (excluding any prepayment penalties and interest) on the day prior to
the Closing Date:
(i) Notes Payable - Current;
(ii) Note Payable - USL Capital;
(iii) Note Payable - USL Capital #2;
(iv) Note Payable - GNB;
(v) Note Payable - GNB #2;
(vi) Note Payable - Pilot Point; and
(vii) any other amounts owed for borrowed funds as
may exist on the day prior to the Closing Date; and
(2) Five Hundred Thousand Dollars ($500,000.00) of the
amounts due under the Consulting Agreement and Covenant Not to Compete between
Golston and Seller in the form attached hereto, the Consulting Agreement and
Covenant Not to Compete between Golston and Roxane Golston Sandefur
("Sandefur") in the form attached hereto, and the Covenant Not to Compete
between Golston and MPA Modular, L.L.C., Texas limited liability company ("MPA
Modular") in the form attached hereto. The three agreements mentioned in the
preceding sentence are referred to in this Agreement as the (the "Noncompete
Agreements").
STOCK PURCHASE AGREEMENT - Page 1
<PAGE> 2
(b) Increase. The Purchase Price shall be increased by the
greater of the following:
(1) $50,000.00; and
(2) $2,500.00 multiplied by the number of days from and
including October 24, 1996 through and including the Closing Date.
1.2.3 Payment of Purchase Price. Payment of the Purchase Price
determined under paragraphs 1.2.1 and 1.2.2 above shall be paid at the Closing,
on the Closing Date as follows:
(a) One Million Five Hundred Thousand Dollars ($1,500,000.00)
of the Purchase Price shall be satisfied by Buyer's execution, delivery to
Seller at Closing, and payment of a Secured Promissory Note (the "Note") in the
original principal amount of One Million Five Hundred Thousand Dollars
($1,500,000.00). The Note shall be in the form attached hereto and the Note
shall be dated as of the Closing Date; and
(b) The balance of the Purchase Price shall be paid by a bank
cashier's check, wire transfer or other immediately available funds acceptable
to Seller.
1.2.4 Security. Payment of the Note shall be secured by the
following:
(a) a Vendor's Lien retained in the deed to be executed and
delivered by Golston Family Partners, Ltd. (the "Partnership") to Buyer at the
closing of the transaction contemplated by the Real Estate Purchase Agreement
(herein so called) which is incorporated herein by reference;
(b) a Deed of Trust (herein so called) to be executed and
delivered by Golston at Closing, such Deed of Trust to be in the form attached
hereto;
(c) a Security Agreement (herein so called) to be executed and
delivered by Golston, as debtor, and Seller, as secured party, such Security
Agreement to be in the form attached hereto.
2. Closing.
2.1 Initial Closing Date. The purchase and sale of the stock shall take
place at a closing (the "Closing") to be held at the offices of Spackman & Co.,
Dallas, Texas, at 10:00 A.M., local time, on such date as the parties may
mutually agree upon but in any event not later than December 16, 1996. The date
on which the Closing shall take place, as it may be extended pursuant to
paragraph 2.2, is referred to in this Agreement as the "Closing Date."
2.2 Extended Closing Date. Buyer shall have the right to extend the Closing
Date as provided in this paragraph 2.2.
(a) First Extension. Buyer shall have the right to extend the
Closing Date up to January 15, 1997 by giving Seller written notice of its
intention to do on or before December 16, 1996 (and time is of the essence).
The written notice must be accompanied by a bank cashier's check payable to
Seller in the amount of $82,500.00. If Seller fails to receive the written
notice and the $82,500 bank cashier's check on or before December 16, 1996,
this Agreement shall automatically terminate.
STOCK PURCHASE AGREEMENT - Page 2
<PAGE> 3
(b) Second Extension. Only if Buyer has extended the Closing
Date to January 15, 1997 in the manner described in paragraph 2.2 (a), Buyer
shall have the right to extend the Closing Date up to February 15, 1997 by
giving Seller written notice of its intention to do on or before January 15,
1997 (and time is of the essence). The written notice must be accompanied by a
bank cashier's check payable to Seller in the amount of $77,500.00. If Seller
fails to receive the written notice and the $77,500 bank cashier's check on or
before January 15, 1997, this Agreement shall automatically terminate.
2.3 Earnest Money. On or before 5 p.m. (local time) on November 15, 1996
(and time is of the essence), Buyer agrees to deliver to Seller the sum of
Fifty Thousand Dollars ($50,000.00) in the form of a bank cashier's check (the
"Earnest Money") to be retained by Seller in accordance with the terms of this
paragraph. If Buyer fails to deliver the Earnest Money as provided, this
Agreement shall automatically terminate. The $82,500 referred to in paragraph
2.2 (a) and the $77,500 referred to in paragraph 2.2 (b) shall be considered
additional "Earnest Money". If the purchase and sale contemplated by this
Agreement is consummated, then all Earnest Money paid to Seller shall be
applied to the cash portion of the Purchase Price at the Closing. In all other
events, the Earnest Money is not refundable under any circumstances and shall
retained by Seller as liquidated damages and not as a penalty.
3. Representation and Warranties of Seller.
Seller hereby represents and warrants to Buyer as follows:
3.1 Power and Authorization. Seller has full power and lawful authority to
execute and deliver this Agreement and to consummate and perform the
transactions contemplated hereby. The execution and delivery of this Agreement
and the Related Documents by Seller constitutes the valid obligation of Seller,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium and other laws affecting the rights of creditors
generally and to the availability of equitable remedies. As used in this
Agreement, "Related Documents" means the Real Estate Purchase Agreement, the
Note, the Deed of Trust, the Security Agreement, the Noncompete Agreements, the
Guarantys, the Right of First Refusal Agreement (as defined), and the Offset
Agreement (as defined). At Closing, Seller shall deliver to Buyer documents
evidencing the authorization required by this paragraph, said documents to be
certified as true and correct by Seller.
3.2 Compliance. No approval or consent of any federal, state, county, local
or other governmental agency or body is required in connection with the
execution, delivery, consummation and performance of this Agreement by Seller.
The execution, delivery, consummation and performance of this Agreement by
Seller will not conflict with or result in the breach or violation of any term
or provision of, or constitute a default under, or cause the acceleration of
any payments pursuant to, any indenture, mortgage, deed of trust, note
agreement or other agreement or instrument to which Seller is a party or any
order, statute, writ, injunction, decree, rule by regulation of any court or
any governmental agency or body.
3.3 Ownership of Stock. Seller is beneficial and record owner of all of the
Stock, there exists no voting agreement, voting trust, or proxy with respect to
any shares of the Stock; and the Stock is owned by Seller free and clear of any
liens, claims or encumbrances. There are no actions, suits, or proceedings at
law or in equity pending, threatened against or affecting, Seller's ownership
of the Stock. The Stock is validly issued, fully paid and nonassessable. The
Stock represents all of the issued and outstanding shares of Golston.
3.4 Good Title. The sale by Seller of the Stock and the delivery to Buyer
of the certificate evidencing ownership of the Stock pursuant hereto will
transfer to Buyer good and valid title to the Stock free and clear of all
liens, claims and encumbrances.
STOCK PURCHASE AGREEMENT - Page 3
<PAGE> 4
3.5 Golston Ownership of Assets. All of the assets, tangible and
intangible, which are used at the time of the execution of this Agreement by
Golston in the normal conduct of its business will be owned by Golston at
Closing, except for (a) the improved real estate which is the subject of the
Real Estate Purchase Agreement; and (b) assets which are consumed or sold in
the normal course of its business. Additionally, at Closing Seller will
transfer to Golston the assets listed on Leased Assets Schedule attached hereto
in exchange for Golston's transfer to Seller at Closing of the items listed on
Exchanged Personal Assets Schedule attached hereto.
3.6 Exclusivity to Buy and Access to Information. From the Effective Date
until the sooner to occur of the Closing or the earlier termination of this
Agreement, Seller shall not enter into any agreements or understandings with
other parties concerning the sale of all or part of the stock or assets of
Golston and will not discuss or negotiate with, or disclose any information
regarding Golston, or this Agreement, to any parties except as may be
reasonably necessary in Seller's opinion in the ordinary conduct of Golston's
business or as may be reasonably necessary in Seller's opinion to consummate
the Closing as defined in this Agreement.
3.7 Organization and Good Standing. Seller represents that the Golston is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas.
3.8 Financial Statements. Seller has delivered to Buyer copies of the June
30, 1996 financial statements of Golston and (except for vacation and warranty
expense accounting) such financial statements fairly represent the financial
condition and results of operations of Golston as of such date and have been
prepared in accordance with federal income tax accounting principals applied on
a basis consistent with that of prior periods, except as changed to conform
with Internal Revenue Service requirements, and as of the date hereof, there
are no obligations, liabilities or indebtedness (including contingent and
indirect liabilities and obligations) of Golston which are (separately or in
the aggregate) material and not reflected in such financial statements or
otherwise disclosed therein.
3.9 Full Disclosure. To the best of Seller's knowledge, there is no
material fact that Seller has not disclosed to Buyer which could have a
material adverse effect on the properties, business prospects or condition
(financial or otherwise) of Golston. Seller has not omitted to state any
material fact necessary to keep the statements contained herein from being
misleading.
3.10 No Litigation. To the best of Seller's knowledge, there are no
actions, suits, investigations, arbitrations or administrative proceedings
pending or threatened, except for possible claims by Evelyn Shaw.
3.11 Disclosure. No representation or warranty made by Seller to Buyer, nor
any statement or information furnished to Buyer relating to this Agreement and
the Related Documents contained or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact necessary to make
the statements contained in this Agreement and the Related Documents or the
information furnished to Buyer not misleading.
3.12 No Other Representations or Warranties. Except for the representations
and warranties expressly stated in this Agreement, Seller makes no other
representations or warranties, express or implied. Buyer acknowledges it has
not relied on any representation or warranty, express or implied, except
Seller's representations and warranties expressly stated in this Agreement.
Accordingly, Buyer releases Seller from all claims, damages, costs or expenses
based on any representation or warranty, express or implied, except for
Seller's representations and warranties expressly stated in this Agreement.
Buyer agrees never to assert any claims against Seller (or Golston's officers
and directors) based on use of corporate funds, except only (a) claims of use
of corporate funds for illegal acts or moral turpitude, if any, and (b) claims
based on the representation contained in paragraph 3.8 of this Agreement.
4. Representations and Warranties of Buyer.
Buyer hereby represents and warrants to Seller as follows:
4.1 Organization and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
STOCK PURCHASE AGREEMENT - Page 4
<PAGE> 5
4.2 Corporate Power and Authorization. Buyer has full power and lawful
authority to execute and deliver this Agreement and Related Documents, and to
consummate and perform the transactions contemplated thereby. The execution and
delivery of this Agreement and the Related Documents by Buyer and the
consummation and performance of the transactions contemplated thereby have been
duly and validly authorized by all necessary corporate and other proceedings,
and this Agreement and the Related Documents constitute (or, upon execution,
will constitute) valid obligations of Buyer, enforceable in accordance with
their respective terms, subject to applicable bankruptcy, insolvency,
moratorium and other laws affecting the rights of creditors generally and to
the availability of equitable remedies. At Closing, Buyer shall deliver to
Seller documents evidencing the authorization required by this paragraph, said
documents to be certified as true and correct by Buyer's Secretary.
4.3 Compliance. No approval or consent of any federal, state, county, local
or other governmental agency or body is required in connection with the
execution, delivery, consummation and performance of this Agreement and Related
Documents by Buyer. The execution, delivery, consummation and performance of
this Agreement and the Related Documents by Buyer, will not conflict with or
result in the breach or violation of any term or provision of, or constitute a
default under, or cause the acceleration of any payments pursuant to, the
articles of incorporation or bylaws of Buyer or any indenture, mortgage, deed
of trust, note agreement or other agreement or instrument to which Buyer or the
Company in a party or any statute, order, writ, injunction, decree, rule or
regulation of any court or any governmental agency or body.
4.4 Disclosure. No representation or warranty made by Buyer to Seller, nor
any statement or information furnished to Seller relating to this Agreement and
the Related Documents contained or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact necessary to make
the statements contained in this Agreement and the Related Documents or the
information furnished to Seller not misleading.
4.5 No Other Representations or Warranties. Except for the representations
and warranties expressly stated in this Agreement, Buyer makes no other
representations or warranties, express or implied. Seller acknowledges it has
not relied on any representation or warranty, express or implied, except
Buyer's representations and warranties expressly stated in this Agreement.
Accordingly, Seller releases Buyer from all claims, damages, costs or expenses
based on any representation or warranty, express or implied, except for Buyer's
representations and warranties expressly stated in this Agreement.
5. Seller's Conditions Precedent. The obligation of Seller to consummate the
transactions contemplated hereby shall be subject to and conditioned upon the
satisfaction, on or before the Closing, of all of the following conditions, any
one or more of which may be waived by Seller:
5.1 Correctness of Warranties. All of the representations and warranties of
Buyer set forth in this Agreement shall be true on and as of the Closing Date
as though such representations and warranties were made on and as of the
Closing Date.
5.2 Performance of Obligations. Buyer shall have performed and complied
with all the obligations, covenants and conditions required to be performed or
complied with by Buyer at or prior to the Closing.
5.3 Officer's Certificate. Seller shall have received a certificate of
Buyer, dated the Closing Date, duly executed by its President, in a form
reasonably acceptable to Seller, to the effect that all representations and
warranties of Buyer set forth in this Agreement and the Related Documents shall
be true and correct as of the Closing Date as if made on the Closing Date.
STOCK PURCHASE AGREEMENT - Page 5
<PAGE> 6
5.4 Opinion of Counsel. Seller shall have received from Thomas J. Spackman,
Jr., Esq., counsel to Buyer, an opinion addressed to Seller, dated the Closing
Date, in a form reasonably acceptable to Seller.
5.5 Payment and Delivery. Buyer shall have paid or caused to be paid to
Seller the Purchase Price as determined in paragraph 1.2 hereof. Buyer shall
have delivered or caused to be delivered to Seller all documents required to be
delivered pursuant to this Agreement, including, without limitation, the Note,
the Deed of Trust, the Security Agreement, the Noncompete Agreements and the
Guarantys (as defined).
5.6 No Actions. No action, suit or proceeding shall have been instituted
before a court or governmental body, or instituted or threatened by any
governmental body or agency, to restrain or prevent the carrying out of the
transactions contemplated hereby.
5.7 Releases. Seller shall have received unconditional final written
releases (in a form satisfactory to Seller) of all Golston obligations for
which Seller is personally liable. If any such releases are not received prior
to or at Closing, then Buyer shall have given Seller unconditional written
indemnifications by Buyer (in a form satisfactory to Seller) for all Golston
obligations for which Seller is personally liable.
5.8 Real Estate Purchase Agreement. The obligation of Seller to consummate
the transaction contemplated by this Agreement (and the Related Documents) is
expressly subject to the simultaneous closing of the transaction contemplated
by the Real Estate Purchase Agreement.
6. Buyer's Conditions Precedent.
The obligation of Buyer to consummate the transactions contemplated hereby
shall be subject to and conditioned upon the satisfaction, on or before the
Closing, of all of the following conditions, any one or more of which may be
waived by Buyer:
6.1 Correctness of Warranties. All of the representations and warranties of
Seller set forth in the Agreement shall be true on and as of the Closing Date
as though such representations and warranties were made on and as of the
Closing Date.
6.2 Performance of Obligations. Seller shall have performed and complied
with all of the obligations, covenants and conditions required to be performed
or complied with by them at or prior to the Closing.
6.3 Certificate. Buyer shall have received a certificate of Seller, dated
the Closing Date duly executed in a form reasonably acceptable to Buyer, to the
effect that all representations and warranties of Seller set forth in this
Agreement are true and correct as of the Closing Date as if made on the Closing
Date and that the business of Golston prior to Closing has been conducted in
accordance with paragraph 10 hereof.
6.4 Opinion of Counsel. Buyer shall have received from Laurence Sanger,
counsel to Seller, an opinion addressed to Buyer, dated the Closing Date, in a
form reasonably acceptable to Buyer.
6.5 Delivery of Stock Certificate. Seller shall have presented certificate
or certificates representing the Stock endorsed in blank or accompanied by
executed stock powers in favor of Buyer.
STOCK PURCHASE AGREEMENT - Page 6
<PAGE> 7
6.6 No Actions. No action, suit or proceeding shall have been instituted
before a court or governmental body, or instituted or threatened by any
governmental body or agency, to restrain or prevent the carrying out of the
transactions contemplated hereby.
6.7 Condition on Closing Date. The assets, liabilities and operations of
Golston on the Closing date shall be consistent with the June 30, 1996
unaudited financial statements of Golston previously furnished to Buyer, which
were prepared from the books and records of the Company in accordance with
generally accepted federal income tax accounting principles, except for the
following:
(a) Changes that have occurred as a result of operations conducted
in accordance with paragraph 10 hereof;
(b) Changes that have occurred as a result of adjustments
necessary to conform the financial statements to generally accepted accounting
principles as determined by Price Waterhouse LLP or another independent
accountant acceptable to Buyer; and
(c) All amounts due under the Promissory Note in the original
principal amount of $735,849.38 and dated October 24, 1996 executed by the
Partnership and payable to the order of Golston have been paid in full.
6.8 Noncompete Agreement. Seller, Sandefur, and MPA Modular, shall each
have executed the Noncompete Agreements. Buyer agrees that each of the
Noncompete Agreements will be guaranteed by Buyer by its execution and delivery
to Seller, Sandefur and MPA Modular at Closing of the three Guaranty Agreements
(the "Guarantys") in the forms attached hereto.
6.9 Real Estate Purchase Agreement. The obligation of Buyer to consummate
the transaction contemplated by this Agreement (and the Related Documents) is
expressly subject to the simultaneous closing of the transaction contemplated
by the Real Estate Purchase Agreement.
6.10 Release of Claims by Certain Employees. Seller shall deliver releases
acceptable to Buyer from employees who have, to Seller's knowledge, prior to
the Closing Date, threatened Golston with actions, suits, litigation or
administrative proceedings against Golston, its officers or directors;
provided, however, if for any reason Seller does not deliver an acceptable
release from Evelyn Shaw with respect to claims asserted by her, Buyer agrees
to waive the requirement of such a release in consideration of Seller's
agreement to indemnify Buyer from such claims as provided in paragraph 7.1 (b)
of this Agreement.
6.11 Resignations. All directors and officers of Golston shall each have
resigned, effective as of the time of, but subject to, Closing.
6.12 Audit. An audit of Golston's financial statements by Price Waterhouse
LLP or another independent accountant acceptable to Buyer shall have been
completed and the results of said audit are satisfactory to Buyer. Buyer, in
its sole judgment, shall determine if this condition precedent is fulfilled.
6.13 Funds Available. Buyer shall have funds available in an amount
sufficient to pay the Purchase Price at the Closing of this Agreement. Buyer
shall, in its sole discretion, determine whether or not this condition
precedent has been fulfilled.
6.14 Right of First Refusal Agreement. Seller, the Partnership and MPA
Modular shall have executed the Right of First Refusal Agreement (herein so
called) substantially in the form
STOCK PURCHASE AGREEMENT - Page 7
<PAGE> 8
attached hereto granting to Buyer the subordinate right of first refusal to
purchase the assets or ownership units of MPA Modular.
6.15 Offset Agreement. Seller, Buyer and Golston shall have executed the
Offset Agreement (herein so called) substantially in the form attached hereto.
6.16 Insurance Purchase. Seller shall have purchased from Golston all
right, title and interest of Golston in the Life Insurance Policy insuring
Seller's life for a total consideration equal to the cash surrender value of
the policy at the date of Closing.
7. Indemnification.
7.1 Indemnification by Seller.
(a) General. Subject to subparagraph 7.3 and paragraph 11.1 below,
Seller shall protect, defend, indemnify and hold harmless Buyer and its
officers, directors and stockholders against any claims, causes of action,
losses, damages, liabilities and expenses whatsoever (including reasonable
counsel fees, costs and expenses incurred in defending against the assertion of
claims or liabilities) which may be sustained, suffered, or incurred by any of
them arising out of or in connection with the breach of any representation,
warranty, covenants, or other obligation of Seller contained in this Agreement
and the Related Documents.
(b) Evelyn Shaw Claims. If for any reason Seller does not deliver
an acceptable release from Evelyn Shaw pursuant to paragraph 6.10 of this
Agreement with respect to claims asserted by her, then subject to subparagraph
7.3 and paragraph 11.1 below, Seller agrees to protect, defend, indemnify and
hold Buyer and its officers, directors and stockholders against any claims,
causes of action, losses, damages, liabilities and expenses whatsoever
(including reasonable counsel fees, costs and expenses incurred in defending
against the assertion of such claims or liabilities) which may be sustained,
suffered or incurred by any of them arising out of or in connection with claims
asserted by Evelyn Shaw against Golston based on facts and events which
occurred prior to Closing.
7.2 Indemnification by Buyer. Subject to subparagraph 7.3 and paragraph
11.1 below, Buyer shall protect, defend, indemnify and hold harmless Seller,
his heirs and personal representatives against any claims, causes of action,
losses, damages, liabilities and expenses whatsoever (including reasonable
counsel fees, costs and expenses incurred in defending against the assertion of
claims or liabilities) which may be sustained, suffered, or incurred by any of
them arising out of or in connection with the breach of any representation,
warranty, covenant, or other obligation of Buyer contained in this Agreement
and the Related Documents.
7.3 Notice and Participation.
(a) If a claim by third party is made against a party entitled to
indemnification pursuant to paragraph 7 (an "Indemnitee"), and if such
Indemnitee intends to seek indemnity with respect thereto under this paragraph
7, the Indemnitee shall promptly, and in any event within 60 days after the
assertion of any claim or the discovery of any fact upon which Indemnitee
intends to base a claim for indemnification under this Agreement (a "Claim"),
notify the party from whom indemnification is sought (an "Indemnitor") of such
Claim. In the event of any Claim, Indemnitor, at its option, may assume (with
legal counsel reasonably acceptable to the Indemnitee) the defense of any
claim, demand, lawsuit or other proceeding in connection with the Indemnitee's
Claim, and may assert any defense of Indemnitee or Indemnitor; provided, that
Indemnitee shall have the right at its own expense to participate jointly with
Indemnitor in the defense of any claim, demand, lawsuit or other proceeding in
connection with the Indemnitee's Claim and provided further that failure to
give such notice shall not preclude Indemnitee making any Claim thereon if the
failure or delay in giving such notice did not prejudice Indemnitee. If
Indemnitor elects to undertake the defense of any Claim hereunder, Indemnitee
shall cooperate with Indemnitor to the fullest extent possible in regard to all
matters relating to the Claim (including, without limitation, corrective
actions required by applicable law, assertion of defenses and the
determination, mitigation, negotiation and settlement of all amounts, costs,
actions, penalties, damages and the like related thereto) so as to permit
Indemnitor's management of same with regard to the amount of damages payable by
the Indemnitor hereunder. Neither Seller not Buyer shall be entitled to settle
any Claim without the prior written consent of the other, which consent shall
not unreasonably be withheld.
STOCK PURCHASE AGREEMENT - Page 8
<PAGE> 9
(b) If the Indemnitor undertakes, conducts or controls the defense or
settlement of any Claim and it is later determined that such Claim was not a
Claim for which the Indemnitor is required to Indemnify the Indemnitee under
this paragraph 7, the Indemnitee shall reimburse the Indemnitor for all its
costs and expenses with respect to such settlement or defense, including
reasonable attorneys' fees and disbursements. 8. Legal Fees.
In any action, suit or proceeding brought by any party to this Agreement
against any other party or parties hereto to enforce its rights hereunder, the
court or other body before which such action, suit or proceeding is brought may
award reasonable attorneys' fees to the prevailing party.
9. Termination.
In the event that the Closing has not taken place on or before the Closing
Date (as it may be extended), either party hereto may, by written notice given
to the other, terminate this Agreement. Upon any termination of this Agreement
pursuant to this paragraph 9, this Agreement shall cease to have any further
force or effect and no party hereto shall have any liability to the other
hereunder of any nature whatsoever except as stated in paragraph 11.13 of this
Agreement.
10. Conduct of Business Prior to Closing.
Except with the consent in writing of Buyer, which will not be unreasonably
withheld or delayed and except as may be required to effect the transactions
contemplated by this Agreement, Seller covenants, between the date of this
Agreement and the Closing Date, that he will use best efforts to cause Golston
to conduct its business in the ordinary course and, except as may otherwise be
provided in this Agreement: (a) preserve the good standing of Golston in all
jurisdictions in which it is engaged in business; (b) preserve the organization
of Golston and use best efforts to preserve the goodwill of customers,
suppliers and others having business relations with it; (c) keep in force at no
less than their present limits all existing bonds and policies of insurance
insuring Golston and its properties; (d) not permit Golston to enter into any
contract, commitment, arrangement or transaction expected to affect revenue,
expense, assets or liabilities by more than $25,000 (unless such contract,
commitment or arrangement is substantially a continuation of a prior contract,
commitment or arrangement, or is in the ordinary course of its business); (e)
not make or permit any change in the Articles of Incorporation or By-laws of
Golston or in the authorized, issued or outstanding securities; (f) not permit
Golston to grant any stock options or rights to purchase any security of
Golston; (g) not permit Golston to purchase, any of its securities or to pay
any dividends; (h) not permit Golston to make any payments to officers,
director or employees not in the ordinary and established course of business;
(i) not without reasonable cause initiate any management changes; or (j) not
agree to pay any previously disputed or unrecorded federal or state tax or
agree to a change in the established methods of calculating such taxes.
11. Miscellaneous.
11.1 Survival. The representations and warranties made in this Agreement
shall survive the Closing and expire twenty four (24) months after Closing,
except for (a) representations and warranties relating to federal tax matters,
which shall survive the Closing and expire three (3) years from the date of
filing of the return on which the tax matter is based, and (b) representations
and warranties relating to pre-Closing expense and revenue items which become
known after Closing, which shall survive the Closing and expire six (6) months
after Closing.
11.2 Specific Performance. The parties hereto agree that the failure of any
party to comply with any of its obligations contained in this Agreement would
cause the other parties hereto permanent and irreparable harm for which there
would be no adequate remedy at law.
STOCK PURCHASE AGREEMENT - Page 9
<PAGE> 10
Therefore, it is agreed that each party hereto may enforce the obligations of
each of the other parties by specific performance upon application to any court
of equity having jurisdiction hereover, and such remedy shall be cumulative and
in addition to any other remedies any party may have.
11.3 Successors and Assigns. This Agreement shall not be assignable or
transferable by any party hereto except by the written consent of the other
party hereto.
11.4 Entire Agreement. This Agreement and the Related Documents (a)
integrate all the terms and conditions mentioned in or incidental to this
Agreement; (b) supersede all oral negotiations and prior writing with respect
to its subject matter; and (c) are intended by the parties as the final
expression of the agreement with respect to the terms and conditions set forth
in those documents and as the complete and exclusive statement of the terms and
conditions agreed to by the parties. No representation, understanding, promise,
warranty, agreement, or arrangement, oral or written, express or implied, shall
be enforceable against either party unless it is contained in this Agreement or
the Related Documents, and no evidence thereof shall be admissible in any
action relating hereto.
11.5 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or deposit with the United States Post Office, by
registered or certified mail, return receipt requested, postage prepaid
(provided that mailed notices shall not be deemed effectively given until
received), addressed as follows:
<TABLE>
<S> <C>
If to Buyer: Integrated Security Systems, Inc.
Attention: Gerald K. Beckmann, President
8200 Springwood Drive, Suite 230
Irving, TX 75063
with a copy to: Spackman & Co.
Attention: Thomas J. Spackman
2525 McKinney Avenue, Suite B
Dallas, TX 75201
If to Seller prior to Closing: Mr. S. Webb Golston
Golston Company
P. O. Box 856
Sanger, TX 76266
If to Seller after Closing: Mr. S. Webb Golston
1913 Marshall Road
Denton, TX 76207
with a copy to: Laurence S. Sanger, Esq.
Fischer & Sanger
5956 Sherry Lane, Suite 1204
Dallas, TX 75225
and
Mr. Orbie K Rivers
Carter-Tigart, Inc.
P. O. Box 54296
Hurst, TX 76054
</TABLE>
STOCK PURCHASE AGREEMENT - Page 10
<PAGE> 11
or to such other address as such party shall specify in writing.
11.6 Expenses and Fees. Whether or not the transactions contemplated hereby
are consummated, each party hereto shall bear its own expenses in connection
herewith, including its own attorneys' fees.
11.7 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
11.9 Waiver and Amendment. Any term or provision of this Agreement may be
waived at any time by the party which is entitled to the benefits thereof only
in writing and signed by the party making such waiver, and any term or
provision of this Agreement may be amended or supplemented at any time only by
the written agreement of the parties.
11.10 Governing Law. This Agreement and the rights and obligations of the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Texas.
11.11 Choice of Forum; Consent to Jurisdiction. Any suit, action or
proceeding arising with respect to the validity, construction, enforcement or
interpretation of this Agreement, and all issues relating in any manner
thereto, shall be brought in the courts located in the State of Texas, County
of Dallas. Each of the parties hereto hereby submits and consents to the
exclusive jurisdiction of such court for the purpose of any such suit, action
or proceeding.
11.12 Time of Essence . Time is of the essence in the performance of all
obligations under this Agreement and the Related Documents.
11.13 Nondisclosure. Upon termination of this Agreement for any reason,
Buyer agrees (a) to promptly deliver to Seller all originals and copies of all
documents, work papers and other material (whether tangible or intangible)
containing information concerning Golston, regardless of who prepared same (the
"Confidential Information"); (b) not to use any such Confidential Information
in any manner; and (c) not to disclose any such Confidential Information to any
party. The provisions of this paragraph 11.13 shall survive the termination of
this Agreement.
11.14 Brokers. Seller agrees to provide Buyer at Closing with evidence
satisfactory to Buyer that all fees and expenses owed by Seller to
Carter-Tigart, Inc. have been paid prior to or at Closing. Each party
represents and warrants to the other party that (except for Seller's contract
with Carter-Tigart, Inc., and Buyer's contracts with Robert Finch & Associates
and Bathgate McColley Capital Group, LLC), it has not contacted or entered into
any agreement with any real estate broker, agent, finder, or any other party in
connection with this transaction, and has not taken any action which would
result in any real estate broker's, finder's or other fees or commissions being
due or payable to any other party with respect to the transaction contemplated
hereby. Each party hereby indemnifies and agrees to hold the other party
harmless from any loss, liability, damage, cost, or expense (including, but not
limited to, reasonable attorneys' fees) resulting to the other party by reason
of a party's failure to pay a commission to its contracted agent. The
indemnities set forth in this paragraph 11.14 shall survive Closing or the
earlier termination of this Agreement.
11.15 Third Party Rights. The provisions of this Agreement shall not
entitle any party not a signatory of this Agreement to any rights as a third
party beneficiary, or otherwise, it being the specific intention of the parties
hereto to preclude all non-signatory parties from any third party beneficiary
rights, or any other rights whatsoever.
STOCK PURCHASE AGREEMENT - Page 11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as of
the date first set forth above.
INTEGRATED SECURITY SYSTEMS, INC.,
a Delaware corporation
By:
---------------------------------
Title:
------------------------------
------------------------------------
S. WEBB GOLSTON
ACKNOWLEDGMENT
By her signature below, Diana Golston, wife of S. Webb Golston,
acknowledges that although she is not a party to the above Agreement, she
consents to the sale of stock under the Agreement.
[S]
------------------------------------
Diana M. Golston
November , 1996
------
STOCK PURCHASE AGREEMENT - Page 12
<PAGE> 1
EXHIBIT 10.64
SUBSCRIPTION AGREEMENT
This is a limited offering by Integrated Security Systems, Inc., a Delaware
corporation (the "COMPANY") of up to 600,000 shares of its common stock, par
value $.01 per share (hereinafter referred to as the "SECURITIES") at a price
of $1.10 per share. The maximum number of Securities that will be sold in this
Offering is 600,000 representing gross proceeds, before selling expenses and
agent fees, of $660,000.
No subscription will be funded, however, unless all of the following events
have occurred either previous to or simultaneous with acceptance of the
subscription:
a) The Company has borrowed up to $4.6 million from investment
funds managed by Renaissance Capital Group, Inc. ("RENAISSANCE"), under terms
substantially in accordance with the Convertible Loan Agreement attached as an
Exhibit hereto;
b) The convertible loan agreement with Renaissance shall provide,
among other things, the agreement of Renaissance that the issuance of shares of
Common Stock of the Company pursuant to the exercise of the Warrants described
in Addendum A hereof will not cause any adjustment in the Conversion Price as
that term is defined in the 9% Convertible Debenture issued in connection with
the Convertible Loan Agreement; and
c) The Company has consummated the acquisition of the outstanding
capital stock described in a certain Stock Purchase Agreement and a Real Estate
Purchase Agreement attached as Exhibits hereto.
Funds received from Investors prior to completion of both of the above events
will be held in the trust account of Goins, Underkofler, Crawford & Langdon,
L.L.P. until such events occur. If both transactions have not occurred by
January 15, 1997, any funds held in Escrow will be returned to the Investors.
THIS IS A SPECULATIVE INVESTMENT. SECURITIES SHOULD NOT BE PURCHASED BY ANYONE
WHO CANNOT AFFORD THE LOSS OF THE ENTIRE AMOUNT INVESTED.
It is understood that this Agreement is not binding until the Company accepts
it in writing, and that it then becomes binding on the Company and Investor in
accordance with the terms of this Agreement. The Funds received from the
Investors will not be distributed to the Company until the Company accepts this
Agreement. In connection with the Investors' proposed purchase of the
Securities, the undersigned Investors represents as follows:
A. INFORMATION AND RISKS CONCERNING THE COMPANY AND THE OFFERING
1. RECEIPT AND REVIEW OF DOCUMENTS. All information set forth
herein is given as of December 20, 1996, the Commencement Date of the Offering.
The following documents, which are exhibits to this Agreement (the "EXHIBITS")
have been delivered to and reviewed by the Investors: (a) the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995 (the "FORM
10-KSB") which
<PAGE> 2
includes audited consolidated financial statements of the Company as of
December 31, 1995 and 1994, (b) the Company's Quarterly Report on Form 10-QSB
for each of the periods ended March 31, 1996, June 30, 1996 and September 30,
1996 (the "FORM 10-QSB"), and (c) a proposed convertible loan agreement between
the Company and Renaissance Capital Growth & Income Fund III, Inc. et. al. (the
"LOAN AGREEMENT"), a Stock Purchase Agreement between the Company and S. Webb
Golston, and a Real Estate Purchase Agreement between the Company and Golston
Family Partners, LLP (collectively, the "ACQUISITION AGREEMENTS").
Information concerning the Company, its business, management, principal
shareholders and financial condition is set forth in the Exhibits, which are
incorporated by reference in this Agreement and in other information provided
by the Company to the Investors. In addition, the Company represents that it
has delivered all other documents which the Company deemed necessary to provide
the Investor. All of the Exhibits have been reviewed by the undersigned and,
to the extent deemed appropriate by the undersigned, by its financial and legal
advisors. Updated information in this Agreement and information in documents
delivered by the Company may modify or supersede information contained in the
Form 10-KSB and Form 10-QSB, all of which information shall be deemed modified
to the extent necessary to conform to the later dated information in this
Agreement.
2. USE OF PROCEEDS; ADDITIONAL CAPITAL REQUIRED. The net
proceeds of this Offering will be used to accomplish the closings of the Loan
Agreement and Acquisition Agreement as therein described and for general
working capital. After deduction of the Placement Agent's commission of 10% of
the Offering proceeds, and legal and other expenses in connection with this
Offering, the net proceeds of this Offering are estimated to total $594,000 if
the entire Offering is sold. There is no minimum number of Securities which
must be sold for the Company to close this offering and retain the proceeds,
and there is no assurance that funds from this Offering will satisfy the
Company's anticipated working capital requirements over the short term.
Management may seek additional sources of capital; however, there can be no
assurance that such financing will ultimately be available. The Company's
failure to obtain sufficient additional capital, to the extent required, could
seriously affect the Company's ability to fund the business opportunities
available and materially and adversely affect the Company's current and future
operations.
3. DESCRIPTION OF CAPITAL STOCK.
(a) COMMON STOCK. The Company has never paid a dividend
on its Common Stock. Investors who require dividend income should not purchase
the securities offered hereby. As of the date of this Subscription Agreement
and Investment Letter, there are 6,308,842 shares of Common Stock outstanding.
If all of the Securities offered hereby are sold, subscribers in this Offering
will own 600,000 shares, or 8.68% of the then outstanding shares. Also see
"Terms of the Offering," below.
(b) REGISTRATION RIGHTS. See Addendum A attached hereto
and incorporated herein and made a part hereof.
<PAGE> 3
(c) PREFERRED STOCK. The Company is authorized to issue
750,000 shares of Preferred Stock with designations, rights and preferences
determined from time to time by its Board of Directors. The Company's Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method discouraging, delaying or preventing a
change in control of the Company. The Company may utilize Preferred Stock as a
portion of consideration issued in future acquisitions.
4. CAPITALIZATION OF THE COMPANY; SUBSTANTIAL MARKET OVERHANG.
The undersigned Investor has reviewed the information concerning the Company's
capitalization as set forth in the Exhibits hereto, including the Financial
Statements included therein. The Investor has been advised that the Company
has outstanding a substantial number of "restricted" shares of Common Stock for
which registration rights have been granted, and has reserved a substantial
number of additional shares for issuance at prices below the current market
price upon exercise of outstanding warrants, options and convertible
securities. The Company has filed a registration statement (the Current
Registration Statement) registering most of these restricted shares and the
shares underlying the outstanding warrants, options and convertible securities.
The existence of these outstanding securities could interfere with the
Company's ability to raise capital through sale of securities at market prices.
Moreover, the sale into the public market of any of the outstanding securities
could be expected to have a depressive effect upon the market price of the
Company's Common Stock. Although the Company's Common Stock is traded on the
Nasdaq SmallCap Market and Boston Stock Exchange, the market for the Common
Stock is not well established and trading of the Common Stock is subject to
significant fluctuation. There can be no assurance that Investors will be able
to sell the Securities issued in connection with this Offering at any price.
5. FINANCIAL CONDITION; WORKING CAPITAL NEEDS. Although the
Company has reported improved results of operations and raised $2.7 million
through additional equity sales and debt through September 30, 1996, and has
improved its consolidated working capital position during that time, there is
continuing concern regarding the Company's ability to meet all of its cash
obligations as they become due. This concern arises primarily from limitations
on the Company's ability to transfer cash surpluses from one subsidiary to
cover cash needs of another as a result of agreements with subsidiary lenders
and the uncertainty of the level and timing of sales of the Company's
Intelli-Site(R) product.
<PAGE> 4
Therefore, the Company believes that additional funding,
through sales of debt securities, will likely be necessary. These sales,
together with a continuation of improving results of operations and the
renegotiation of existing lender limitations on cash transfers between
subsidiaries, would reduce these concerns. The successful completion of the
acquisition of the company discussed below and a related funding would also
contribute to the mitigation of these concerns.
6. ACQUISITION AGREEMENT. The Company has entered into a Stock
Purchase Agreement to acquire a company which develops, manufactures and
markets products primarily to the banking and hospital industries which Stock
Purchase Agreement is set forth as an Exhibit to this Agreement. The
consummation of such acquisition is contingent upon successful negotiation of
definitive funding contracts with an investment fund which has made a proposal
to provide such funding. Upon consummation of the acquisition the Company will
issue additional debt and securities totaling approximately $6.5 million, the
terms of which may cause dilution to existing shareholders. The Company is
unable to determine at this time to what extent dilution may occur.
7. DEPENDENCE ON MANAGEMENT. The Company's prospects for success
currently are greatly dependent upon the efforts and active participation of
its management team, including its current President, Gerald K. Beckmann, and
upper level management of the subsidiary companies. The Company has no
employment contract with Mr. Beckmann.
B. TERMS OF THE OFFERING
1. AGREEMENTS WITH PLACEMENT AGENT.
(a) Bathgate McColley Capital Group LLC (the "PLACEMENT
AGENT"), a registered broker-dealer, has agreed to act as the Company's agent
to offer the Securities on a "best-efforts" basis. There is no minimum number
of Securities which must be sold for this Offering to be completed. The
Offering will terminate on January 15, 1997 unless the Company decides, in its
sold discretion, to extend the Offering beyond such date. The Placement Agent
will be paid a commission equal to ten percent of the gross proceedings of this
Offering.
(b) Pursuant to a Corporate Consulting Agreement, since
March 3, 1996, the Company has engaged Bathgate McColley Capital Group LLC
("BMCG") to render investment banking and financial advisory services to the
Company. Pursuant to this agreement, BMCG provides advice to, and consults
with, the Company concerning business and financial planning, corporate
organization and structure, the Company's relations with its security holders,
private and public debt and equity financing and financial matters. As
compensation, BMCG has received warrants exercisable to purchase shares of
Common Stock and the right to have the shares underlying those warrants
included in certain registration statements otherwise filed by the Company.
The agreement also provides that BMCG will be paid according to the "Lehman
Formula" for assistance with negotiating, structuring and evaluating
acquisitions undertaken by the Company. BMCG is paid a fee of $8,000 per month
as a retainer in addition to any Lehman Formula fees that may become payable.
<PAGE> 5
2. INVESTOR QUALIFICATIONS. The Offering is being conducted in
reliance upon the non-public offering exemptions from registration provided in
Section 4(2) of the Act and Regulation D promulgated under the Act. No
registration statement or other filing has been made with the Commission. The
conditions of these exemptions include, but are not limited to, satisfaction of
certain requirements pertaining to the purchasers of the securities sold. The
securities offered hereby may only be sold to persons who are "accredited
investors" as defined under the federal securities laws. In addition, certain
states improve additional criteria which must be met by subscribers residing in
those states. Subscribers may be asked to furnish information and
representations sufficient for the Company to confirm the subscriber's status
in order for the Company to comply with its obligations to demonstrate
compliance with federal and with state securities laws.
In order to assure the offering and sale of the Securities is
made in compliance with the applicable federal and state securities laws, and
only to persons for whom an investment in the Securities is suitable, the
Securities will be sold only to investors who represent in writing that they
satisfy the requirements set forth in one of the categories set forth in
Section E.7 below.
3. LIMITATIONS ON RESALE OF SECURITIES ACQUIRED IN THIS OFFERING.
The Securities will be "restricted securities" as that term is defined in Rule
144 of the General Rules and Regulations under the Securities Act of 1933, as
amended (the "ACT"), and may in the future be sold only in a registered
offering or in compliance with Rule 144 or other exemption from registration
under the Act, the availability of which must be established to the
satisfaction of the Company, unless the Securities are covered by an effective
registration statement under the Act. Rule 144 provides, in essence, that a
holder of restricted securities may, after two years from the date of purchase,
every three months, sell to a market maker or in brokerage transactions an
amount equal to the greater of one percent of the Company's outstanding Common
Stock or the average weekly trading volume during the four calendar weeks
preceding the sale. Rule 144 also permits sales by a person who is not an
affiliate of the Company and who has satisfied a three-year holding period
without any quantity limitation. No assurance can be given that Rule 144 or
any other exemption will be available for the resale of the Securities.
Legends will be placed on the certificates stating that the Securities have not
been registered under the Act and setting forth the restrictions on
transferability and sale of the Securities. In addition, stop transfer
instructions regarding the Securities will be issued to the transfer agent of
the Company.
4. ARBITRARY DETERMINATION OF OFFERING PRICE. The price at which
the Securities are being offered hereby has been determined arbitrarily by the
Company and the Placement Agent, based upon their subjective assessment of the
Company and negotiations with prospective purchasers. There is no relationship
between the offering price and the Company's assets, book value, net worth,
market price or any other economic or recognized criteria of value, and in no
event should the Offering price be regarded as in indication of any future
market price of the Securities.
<PAGE> 6
C. REPRESENTATIONS OF THE SUBSCRIBER
1. RECEIPT AND REVIEW OF INFORMATION. The undersigned has
received and reviewed the Exhibits listed under item A.1 above, and has been
given the opportunity to discuss the business, properties, financial condition
and affairs of the Company with its management. The undersigned has reviewed
this information and his/her contemplated investment with his/her legal,
investment, financial and tax and accounting advisors to the extent the
undersigned deems such review necessary. As a result to the extent this
information is current, complete and true and correct and remains unchanged,
the undersigned is cognizant of the financial condition, capitalization and
proposed operations and financing of the Company, and the undersigned has
available information concerning its affairs and has been able to evaluate the
merits and risks of the investment in the Securities. Further, the Subscriber
represents that all of his or her questions have been answered and that all
information requested has been provided.
2. INVESTOR HAS NOT RELIED ON OTHER INFORMATION. The undersigned
acknowledges and understands that the Company has not authorized any person
(other than officers, directors, attorneys and accountants of the Company) to
make any statements on its behalf which would in any way contradict any of the
information which the Company has provided to the undersigned in writing,
including the information set forth in this Agreement. The undersigned further
represents to the Company that the undersigned has not relied upon the
representations of any unauthorized representative regarding the Company, its
business or financial condition, or this transaction in making any decision to
purchase the Securities.
3. SUITABILITY OF INVESTMENT, INVESTMENT INTENT. The undersigned
acknowledges that an investment in the Securities is a speculative investment
and is suitable only for sophisticated investors who can withstand the risk of
loss of their entire investment. The undersigned further acknowledges that he
or she will make an investment in the Securities only after having completed
his or her own due diligence investigation and after consulting with his or her
own legal, financial and investment advisors to the extent the undersigned
deems appropriate. The undersigned's present financial condition is such that
it is unlikely that it would be necessary for the undersigned to dispose of the
Securities in the foreseeable future. The undersigned is purchasing the
Securities for investment, and not with a view toward resale or distribution of
the Securities.
<PAGE> 7
D. METHOD OF SUBSCRIPTION
1. Each potential investor desiring to subscribe for the
Securities must complete and execute this Agreement and deliver it to the
Placement Agent for this Offering.
2. The minimum subscription per Investor is $27,500 (25,000
shares). The purchase (subscription) price of the Securities is payable in
full upon (a) consummation of this Offering, (b) the Company's acceptance of
this Agreement in writing and (c) the occurrence of the events which are a
condition precedent to funding. Subscription funds may not be accepted by the
Placement Agent and are to be held by the Escrow Agent. Subscriptions may not
be withdrawn by an Investor after delivery of the executed Agreement. Upon
execution of this Agreement, the subscription price will be wire transferred to
Goins, Underkofler, Crawford & Langdon, L.L.P. as Escrow Agents. Said Escrow
Agent will hold the funds until the conditions precedent have occurred at which
time the Escrow Agent will deliver the purchase price to the Company at the
following accounts:
Integrated Security Systems, Inc.
Account No. 18221149066
BankOne Texas
Dallas, Texas
ABA Routing No. 111000614
and
Compass Bank
Dallas, Texas
Attention: Colleen Harris/Golston closing
ABA Routing No. 113010547
For Credit to Integrated Security Systems, Inc.
3. Upon receipt of the funds, the subscription price will become
the property of the Company subject to being used as described above, and
certificates representing the Securities will be issued in the name of those
Subscribers whose subscriptions have been accepted. The full amount of
subscription funds, with interest and without deduction, will be promptly
returned by the Escrow Agent to subscribers whose subscriptions are rejected.
4. The Company reserves the right to reject any subscription in
whole or in part for any reason whatsoever and subscriptions shall not be
binding upon the Company until accepted by a duly authorized officer. A
subscription which is not documented by a properly completed and executed
Agreement. Until accepted and executed by the Company, the Agreement shall
constitute an offer to purchase securities. By completing and executing this
Agreement each Investor agrees to the restrictions on transfer of the
Securities set forth in this Agreement. Prospective investors should not
execute this agreement unless any and all questions they may have regarding the
Company and their prospective investments have been satisfactorily answered.
<PAGE> 8
E. REPRESENTATIONS OF THE COMPANY
See Addendum B attached hereto and incorporated herein and made a part
hereof.
F. ADDITIONAL MATTERS
1. This Agreement may be amended or modified only in writing
signed by the parties hereto. No evidence shall be admissible in any court
concerning any alleged oral amendment hereof. This Agreement fully integrates
all prior agreements and understandings between the parties concerning its
subject matter.
2. This Agreement binds and inures to the benefit of the
representatives, successors and permitted assigns of the respective parties
hereto.
3. The terms and representations and warranties of this Agreement
shall survive the issuance of the Securities.
4. The Company acknowledges a prior obligation to pay ProFutures
Bridge Capital Fund, L.P. the sum of $10,000 arising out of a loan commitment
which the Company elected not to consummate. The Company agrees that
ProFutures Bridge Capital Fund may withhold $10,000 from its Subscription Price
in satisfaction of this obligation.
5. Each party hereto agrees for itself, its successors and
permitted assigns to execute any and all instruments necessary for the
fulfillment on the terms of this Agreement.
6. This Agreement is made under, shall be construed in accordance
with and shall be governed by the laws of the State of Texas.
7. Any controversy, claim, dispute and matters of difference with
respect to this Agreement and the transactions contemplated hereby shall be
resolved through submission to arbitration in Dallas, Texas according to the
rules and practices of the American Arbitration Association from time to time
in force.
8. By the undersigned's execution below, it is acknowledged and
understood that the Company is relying upon the accuracy and completeness
hereof in complying with certain obligations under applicable securities laws.
The undersigned recognizes that the sale of the Securities by the Company will
be based upon his/her representations and warranties set forth herein and the
statements made by the undersigned herein. Each Subscriber is, likewise,
relying upon the accuracy and completeness of this Agreement and the Company's
representations and warranties contained herein.
9. The undersigned subscriber represents that he or she is an
accredited investor under the criteria marked below:
___ (a) Any natural person whose individual net worth
(including residence valued at cost plus the
cost of improvements, or
<PAGE> 9
by an appraisal obtained in connection with a
bank making a loan), or joint net worth with
the subscriber's spouse exceeds $1,000,000;
___ (b) Any natural person who had a gross income of
at least $200,000 or a combined gross income
of $300,000 with such person's spouse during
each of the past two years, and reasonably
expects to have such income during the
current year;
___ (c) Any private business development company as
defined in section 202(a)(22) of the
Investment Advisors Act of 1940;
___ (d) Any organization described in Section
501(c)(3) of the Internal Revenue Code,
corporation, Massachusetts or similar
business trust, or partnership, not formed
for the specific purpose of acquiring the
securities offered, with total assets in
excess of $5,000,000;
___ (e) Any director or executive officer of the
Company;
___ (f) Any trust, with total assets in excess of
$5,000,000, not formed for the specific
purpose of acquiring the securities offered
with total assets in excess of $5,000,000;
___ (g) An entity in which all of the equity owners
are accredited investors. (If relying on
this category alone, each equity owner must
complete and sign a separate copy of this
Agreement.)
<PAGE> 10
IN WITNESS WHEREOF, subject to acceptance by the Company, the undersigned has
completed this Agreement to evidence the undersigned's subscription to purchase
the Securities as set forth above.
Subscriber: ProFutures Bridge Capital Fund, L.P.,
a Delaware limited partnership
By: Bridge Capital Partners, Inc.,
General Partner
By:
---------------------------------------
James H. Perry, President
Amount of Subscription: $522,500
Number of Shares Purchased: 475,000
Address: 1720 S. Bellaire Street, Suite 500
Denver, Colorado 80222
Date: December 27, 1996
Subscriber: ProFutures Special Equities Fund, L.P.
By: GoldenEye Asset Management, Inc.,
General Partner
By:
---------------------------------------
Marte W. Anderson, President
Amount of Subscription: $137,500
Number of Shares Purchased: 125,000
Address: 1310 Highway 620 South, Suite 200
Austin, Texas 78730
Date: December 27, 1996
<PAGE> 11
ACCEPTANCE AND AGREEMENT
This Agreement is hereby accepted as of the 24th day of December 1996
and the undersigned confirms its obligations and representations and warranties
hereunder.
INTEGRATED SECURITY SYSTEMS, INC.
By:
---------------------------------
Title:
------------------------------
<PAGE> 12
ADDENDUM A TO SUBSCRIPTION AGREEMENT
AND INVESTMENT LETTER
I. Registration Rights.
(a) As used in this Addendum A, the following terms mean as
follows:
Act means the Securities Act of 1933 or any similar federal
statute, and the rules and regulations of the Commission issued under the Act,
as they each may, from time to time, be in effect.
Commission means the Securities and Exchange Commission, or
any other federal agency at the time administering the Act.
Exchange Act means the Securities Exchange Act of 1934 or any
similar federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
Registration Expenses means all expenses incurred by the
Company in complying with this Addendum A, including without limitation, all
registration and filing fees, exchange listing fees, printing expenses, the
fees and disbursements of counsel for the Company and the fees and
disbursements of one counsel selected by all of the Selling Holders, the fees
and disbursements of the Company's accountants, state Blue Sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration, but excluding underwriting discounts, selling commissions
and the fees and expenses of the Selling Holders' own counsel (other than the
counsel selected to represent all of the Selling Holders).
Registration Statement means a registration statement filed by
the Company with the Commission for a public offering and sale of securities of
the Company (other than a registration statement on Form S-8 or Form S-4, or
their successors).
Registrable Shares means (i) the Securities and, if
applicable, the shares of Common Stock issuable or issued upon exercise of the
Warrants and (ii) any other shares of Common Stock of the Company issued in
respect of the Securities (because of stock splits, stock dividends,
reclassifications, recapitalizations, anti-dilution provisions, or similar
events).
Selling Holders means the holders of Registrable Shares that
are registered by the Company pursuant to this Addendum A.
<PAGE> 13
(b) (i) At any time after June 30, 1997, upon the written
request of one or more persons holding 70% or more of the Registrable Shares
(the "Initiating Holders") that the Company effect the registration under the
Act of the offer and sale of all or part of such Initiating Holders'
Registrable Shares, the Company promptly will give written notice of such
requested registration to all of the other holders of Registrable Shares, and
thereupon the Company will effect, at the earliest possible date, the
registration under the Act of (i) the Registrable Shares which the Company has
been so requested to register by such Initiating Holders, and (ii) all other
Registrable Shares which the Company has been requested to register by the
other holders of the Registrable Shares by written request given to the Company
within thirty days after the giving of such written notice by the Company, all
to the extent requisite to permit the public disposition of the Registrable
Shares so to be registered. The Company shall be required to effect only one
registration pursuant to this subparagraph I(b) of Addendum A.
(ii) Whenever the Company effects a registration pursuant
to this subparagraph I(b) of Addendum A, no securities other than Registrable
Shares shall be included among the securities covered by such registration
unless Selling Holders of greater than 50% of the Registrable Shares to be
included in such registration have consented in writing to the inclusion of
such other securities.
(iii) Registrations under this subparagraph I(b) of
Addendum A shall be on such appropriate registration form of the Commission as
shall be reasonably selected by the Company, subject, however, to the
restriction set forth in the definition of Registration Statement.
(iv) At the election of Selling Holders of greater than
70% of the Registrable Shares, the offering of Registrable Shares pursuant to
this subparagraph I(b) of Addendum A shall be in the form of an underwritten
offering. The underwriter or underwriters of each underwritten offering of the
Registrable Shares so to be registered shall be selected by the Selling Holders
of at least 70% of the Registrable Shares to be included in such registration
and shall be reasonably acceptable to the Company.
(v) The Company may postpone for up to 90 days the filing
or effectiveness of a Registration Statement for a registration under this
subparagraph I(b) of Addendum A if the Company reasonably believes that such
registration will have a material adverse effect on the Company or any
transaction contemplated by it. The Company may postpone such filing or
effectiveness only once after any request for registration pursuant to this
subparagraph I(b).
(c) The Company will use its best efforts to effect, at the
earliest possible date hereafter, the registration under the Act of the
Registrable Shares. No registration effected under this subparagraph I(c)
shall relieve the Company of its
<PAGE> 14
obligation to effect a registration upon request under subparagraph I(b) of
this Addendum.
(d) Whenever the Company proposes to file a Registration Statement
at any time and from time to time (but not including the Registration Statement
currently on file), it will, prior to such filing, give written notice to the
holder of the Registrable Shares of its intention to do so and, upon the
written request of the holder given within thirty days after the Company
provides such notice, the Company shall cause all Registrable Shares which the
Company has been requested by the holder to register to be registered under the
Act to the extent necessary to permit their sale or other disposition in
accordance with the intended method of distribution proposed in such
registration; provided that the Company shall have the right to postpone or
withdraw any registration effected pursuant to this paragraph without
obligation to the holder. No registration effected under this subparagraph
I(d) shall relieve the Company of its obligation to effect a registration upon
request under subparagraphs I(b) or I(c).
(e) (i) No Selling Holder may participate in any Registration
Statement filed pursuant to subparagraphs I(c) or I(d) unless such person (A)
agrees to sell such person's Registrable Shares on the basis provided in any
underwriting arrangements approved by the Company (provided the Selling Holder
shall have no obligation to reduce the number of Registrable Shares to be
offered), and (B) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements, and other documents reasonably
required under the terms of such underwriting arrangements; provided, however,
that no such person shall be required to make any representations or warranties
in connection with any such registration other than representations and
warranties as to (x) such person's ownership of the person's Registrable Shares
to be sold or transferred free and clear of all liens, claims and
encumbrances, (y) such person's power and authority to effect such transfer,
and (z) such matters pertaining to compliance with securities laws as may be
reasonably requested; provided further, however, that the obligation of such
person to indemnify pursuant to any such underwriting arrangements shall be
several, not joint and several, among such persons selling Registrable Shares,
and the liability of each such person will be in proportion to and limited to
the net amount received by such person from the sale of the person's
Registrable Shares pursuant to such registration; and provided, further, that
no Selling Holder shall be required to agree to any lock-up period in excess of
120 days.
(ii) Unless the managing underwriter otherwise agrees,
each Selling Holder, the Company and the Company's affiliates shall agree in
connection with any underwritten registration not to effect any public sale or
private offer or distribution of any Common Stock or Common Stock equivalent
during the ten business days prior to the effectiveness under the Act of any
underwritten registration and during such time period after the effectiveness
<PAGE> 15
under the Act of any underwritten registration (not to exceed 120 days)
(except, if applicable, as part of such underwritten registration) as the
Company and the managing underwriter may agree.
(f) If and whenever the Company is required by the provisions of
this Addendum A to effect the registration of any of the Registrable Shares
under the Act, the Company shall:
(i) File with the Commission a Registration Statement
with respect to such Registrable Shares and cause that Registration Statement
to become and remain effective;
(ii) As soon as reasonably practicable prepare and file
with the Commission any amendments and supplements to the Registration
Statement and the prospectus included in the Registration Statement as may be
necessary to keep the Registration Statement effective until 180 days from the
effective date;
(iii) As soon as reasonably practicable furnish to each
Selling Holder such reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Act, and
such other documents as the Selling Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the Selling Holders;
(iv) As soon as reasonably practicable register or qualify
the Registrable Shares covered by the Registration Statement under the
securities or Blue Sky laws of such states as any Selling Holder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Selling Holder to consummate the public
sale or other disposition in such states of the Registrable Shares; and
(v) Obtain a comfort letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by comfort letters and an opinion from the
Company's counsel in customary form and covering such matters of the type
customarily covered in public issuances of securities, in each case addressed
to the Selling Holders.
If the Company has delivered a preliminary or final prospectus to the Selling
Holders and after having done so the prospectus is amended to comply with the
requirements of the Act, the Company shall promptly notify the Selling Holders
and, if requested, the Selling Holders shall immediately cease making offers of
Registrable Shares and return all prospectuses to the Company. The Company
shall promptly provide the Selling Holders revised prospectuses and, following
receipt of the revised prospectuses, the Selling Holders shall be free to
resume making offers of the Registrable Shares.
<PAGE> 16
(g) The Company will pay all Registration Expenses of all
registrations under this Addendum A.
(h) In the event of any registration of any of the Registrable
Shares under the Act, the Company will indemnify and hold harmless each of the
Selling Holders, each of its directors, officers or partners and each other
person, if any, who controls such seller within the meaning of the Act or the
Exchange Act, against any losses, claims, damages or liabilities, joint or
several, to which such seller or controlling person may become subject under
the Act, the Exchange Act, Blue Sky laws or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such Registrable
Shares were registered under the Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any amendment or
supplement to such Registration Statement, or arise out of or are based upon
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; and the Company will
reimburse such seller and each such controlling person for any legal or any
other expenses reasonably incurred by such seller or controlling person in
connection with investigating or defending any such loss, claim, damage or
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of a Selling Holder or
controlling person specifically for use in the preparation thereof.
(i) The Selling Holders shall furnish to the Company such
information regarding the Selling Holders and the distribution proposed by the
Selling Holders as the Company may reasonably request in writing and as shall
be reasonably required in connection with any registration, qualification or
compliance referred to in this Addendum A.
(j) Each Selling Holder agrees that, upon receive of any notice (a
"Suspension Notice") from the Company of the happening of any event which makes
any statement made in a registration statement or related prospectus untrue or
which requires the making of any changes in such registration statement,
prospectus or documents so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and, such Selling
Holder will forthwith discontinue disposition of Registrable Shares until such
Selling Holder's receipt of the copies of the supplemented or amended
<PAGE> 17
prospectus, or until it is advised in writing (the "Advice") by the Company
that the use of the prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
prospectus, and, if so directed by the Company, such Selling Holder will
deliver to the Company all copies, other than permanent file copies then in
such Holder's possession, of the prospectus covering such Registrable Shares
current at the time of receipt of such notice. The Company shall use its
commercially reasonable efforts and take such actions as are reasonably
necessary to remedy the Advice as promptly as practicable.
II. Adjustment for Non-Registration.
(a) Pursuant to paragraph I(c) above, the Company has agreed to
effect the registration of the Registrable Shares on a best efforts basis as
expeditiously as possible.
(b) If the Registration Statement described in subparagraph I(c)
(or subparagraph I(b) if such registration has been requested by August 1,
1997) covering the Registrable Shares is not filed and effective by September
30, 1997 for any reason, then for each thirty (30) day period or portion
thereof between October 1, 1997 and the date a Registration Statement is
effective for the Registrable Shares, the Company shall issue (on the first day
of the month beginning October 1, 1997 and ending on the first day of the month
in which a Registration Statement is effective) to the holders of the
Registrable Shares Warrants to purchase 18,750 shares of the Common Stock of
the Company for an exercise price of $0.25 per share. Notwithstanding anything
contained herein to the contrary, the obligation to issue Warrants shall
terminate when Warrants to purchase an aggregate of 100,000 shares of Common
Stock have been issued.
(c) The Warrants to be issued pursuant to paragraph II(b) above
shall be in the form of the Stock Purchase Warrant attached as Exhibit X.
(d) The right to receive Warrants described above shall be in
addition to any other rights and remedies, at law or in equity, available to
the holders of the Registrable Shares for the Company's default under
subparagraphs I(b) or I(c) above.
<PAGE> 18
ADDENDUM B
I. (a) Authorization. All corporate action on the part of the
Company, its officers and directors necessary (i) for the authorization,
execution, delivery and performance of all obligations of the Company under
this Agreement, (ii) for the issuance and delivery of the Securities, (iii) for
the issuance and delivery, if required of the Warrants and shares issuable upon
exercise of such Warrants has been taken. This Agreement, when executed and
delivered, will constitute the valid and legally binding obligation of the
Company.
(b) Compliance With Other Instruments. The execution, delivery
and performance of this Agreement and the delivery and performance of this
Agreement and the delivery of the Securities will not result in any violation
or be in conflict with or constitute a default under any provision of any
agreement, lease, mortgage, contract or instrument to which the Company is a
party.
(c) Changes. Except as disclosed in writing to Investor, there
have been no material adverse changes in the condition (financial or otherwise)
in the Company's assets, liabilities, commitments, business or property since
the disclosure contained in the Exhibits.
(d) Reference. The representations and warranties of the Company
contained in the Loan Agreement are incorporated herein by reference as if each
and every provision were set forth herein in their entirety with the Investors'
name substituted for the Lender in the provisions from the Loan Agreement.
<PAGE> 19
NOTE
THE EXHIBITS WHICH WERE ATTACHED TO THIS SUBSCRIPTION AGREEMENT HAVE
BEEN DELETED AND INSTEAD HAVE BEEN INDEXED IN ITEM 2.
THIS PAGE IS NOT PART OF THE SUBSCRIPTION AGREEMENT AND HAS BEEN
ADDED.
<PAGE> 1
EXHIBIT 10.65
Convertible Loan Agreement
BY AND BETWEEN
INTEGRATED SECURITY SYSTEMS, INC.
AS BORROWER
ALONG WITH BORROWER'S WHOLLY OWNED SUBSIDIARIES:
B&B ELECTROMATIC, INC.
ISSI ACQUISITION CORP. II
DBA TRI-COASTAL SYSTEMS
INNOVATIVE SECURITY TECHNOLOGIES, INC.
AS GUARANTORS
AND
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
AND
RENAISSANCE US GROWTH & INCOME TRUST PLC
AS LENDERS
This Convertible Loan Agreement (the "Agreement") is entered into as of
DECEMBER 31, 1996, by and between INTEGRATED SECURITY SYSTEMS, INC. (a Delaware
corporation) as borrower (hereinafter referred to as "BORROWER") together with
its wholly owned subsidiaries B&B ELECTROMATIC, INC. (a Louisiana corporation),
ISSI ACQUISITION CORP. II (a Delaware corporation) and INNOVATIVE SECURITY
TECHNOLOGIES, INC. (a Texas corporation) as guarantors (hereinafter
collectively referred to as "Guarantor") from RENAISSANCE CAPITAL GROWTH &
INCOME FUND III, INC. (a Texas corporation) and RENAISSANCE US GROWTH & INCOME
TRUST PLC (a public limited company registered in England and Wales)
(individually referred to as Renaissance III and Renaissance PLC, respectively,
together with any assignees or successors in interest individually and
collectively referred to as "LENDER").
WITNESSETH:
WHEREAS, Borrower seeks to obtain up to FOUR MILLION SIX HUNDRED THOUSAND
DOLLARS ($4,600,000) in financing through issuance of Convertible Debentures in
the amount of FOUR MILLION SIX HUNDRED THOUSAND DOLLARS ($4, 600,000), such
funds to be used for the purpose of acquisition of all of
<PAGE> 2
Agreement (continued)
the stock ownership of Golston Company, Inc., (a Texas corporation) and the
payment of expenses incurred in regard to such purposes; and
WHEREAS, Borrower has requested that Lender provide such as herein provided,
and Lender is willing to furnish such to Borrower upon the terms and subject to
the conditions and for the considerations hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein contained and
for other valuable consideration, receipt and sufficiency of which is
acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
SECTION 1.01. DEFINITIONS.
(a) For the purposes of this Agreement, unless the context otherwise
requires, the following terms shall have the respective meanings assigned to
them in this Article I or in the section or recital referred to below:
"Affiliate" with respect to any Person shall mean (i) any person directly or
indirectly owning, controlling or holding power to vote 10% or more of the
outstanding voting securities of any Person; (ii) any person, 10% or more of
whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by any Person; (iii) any person
directly or indirectly controlling, controlled by or under common control
with any Person; (iv) any officer, director or partner of any Person; and
(v) if a Person is an officer, director or partner, any company for which
any Person acts in such capacity. For purposes of this Agreement, any
partnership of which any Person is a general partner, or any joint venture
in which any Person is a joint venturer, is an Affiliate of each Person.
"Capital Expenditure" shall mean an expenditure for assets that will be used in
years subsequent to the year in which the purchase is made and which asset
is properly classifiable in financial statements as equipment, real property
or improvements, or similar type of capitalized asset.
"Capital Lease" shall mean any lease of property, real or personal, which is in
substance a financing lease and which would be capitalized on a balance
sheet of the lessee, including without limitation, any lease under which (i)
such lessee will have an obligation to purchase the property for a fixed
sum, (ii) an option to purchase the property at an amount less than a
reasonable estimate of the fair market value of such property as of the date
such lease is executed, or (iii) the term of the lease approximates or
exceeds the expected useful life of the property leased thereunder.
"Consolidated Subsidiaries" shall mean those corporations of which 50% or more
of the voting stock is owned by Borrower and their financial statements are
consolidated with those of the Borrower.
"Conversion " or "Conversion Rights" shall mean exchange of, or the rights to
exchange, the Principal Amount of the loan, or any part thereof, for
Borrower's fully paid and non assessable common stock on the terms and
conditions as provided in the Debenture.
"Common Stock" shall mean Integrated Security Systems, Inc. common stock, $0.01
par value.
"Debentures" shall mean the Debentures executed by Borrower and delivered
pursuant to the terms of this Agreement, together with any renewals,
extensions or modifications thereof.
"Debtor Laws" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization or similar laws from time to time in effect affecting the
rights of creditors generally.
"Default" shall mean any of the events specified in Article VIII.
"Dividends", in respect of any corporation, shall mean (i) cash distributions
or any other distributions on, or in respect of, any class of capital stock
of such corporation, except for distributions made solely
2
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Agreement (continued)
in shares of stock of the same class, and (ii) any and all funds, cash and
other payments made in respect of the redemption, repurchase or acquisition
of such stock, unless such stock shall be redeemed or acquired through the
exchange of such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act, as amended,
together with all regulations issued pursuant thereto.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis, set forth in the Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants, or their
successors, which are applicable in the circumstances as of the date in
question. The requisite that such principles be applied on a consistent
basis shall mean that the accounting principles observed in a current period
are comparable in all material respects to those applied in a preceding
period.
"Governmental Authority" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or
any of its or their businesses, operations or properties.
"Guaranty" of any Person shall mean any contract, agreement or understanding of
such Person pursuant to which such Person in effect guarantees the payment
of any Indebtedness of any other Person (the "Primary Obligor") in any
manner, whether directly or indirectly, including without limitation
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose
of assuring the holder of such Indebtedness of the ability of the Primary
Obligor to make payment; or (iii) otherwise to assure the holder of the
Indebtedness of the Primary Obligor against loss in respect thereof, except
that "Guaranty" shall not include the endorsement by Borrower or a
Subsidiary in the ordinary course of business of negotiable instruments or
documents for deposit or collection.
"Holder" shall mean the owner of Registrable Securities.
"Indebtedness" shall mean, with respect to any Person, the following
indebtedness, obligations and liabilities of such Person: (i) all
"liabilities" that would be reflected on a balance sheet of such Person;
(ii) all obligations of such Person in respect of any Guaranty; (iii) all
obligations of such Person in respect of any Capital Lease, (iv) all
obligations, indebtedness and liabilities secured by any lien or any
security interest on any property or assets of such Person; and (v) all
preferred stock of such Person which is subject to a mandatory redemption
requirement, valued at the greater of its involuntary redemption price or
liquidation preference plus accrued and unpaid dividends.
"Investment" in any Person shall mean any investment, whether by means of share
purchase, loan, advance, extension of credit, capital contribution or
otherwise, in or to such Person, the Guaranty of any Indebtedness of such
Person, or the subordination of any claim against such Person to other
Indebtedness of such Person; provided however, that "Investment" shall not
include (i) any demand deposits in a duly chartered state or national bank
or other cash equivalent investments (ii) any loans permitted by Section
6.12, or (iii) any acquisitions of equity in any other Person.
"IRS Code" shall mean the Internal Revenue Code of 1986, as amended, together
with all regulations issued thereunder.
"Lien" shall mean any lien, mortgage, security interest, tax lien, pledge,
encumbrance, conditional sale or title retention arrangement, or any other
interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"Loan" shall mean the money lent to Borrower pursuant to this Agreement, along
with any accrued interest thereon.
"Loan Closing" or "Loan Closing Date" shall mean the initial disbursement of
Loan funds which shall occur on a date 30 days from the date hereof or such
earlier date on which Borrower requests, and
3
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Agreement (continued)
Lender approves, as the date at which the initial advance of the Loan funds
shall be consummated, provided that such date may be mutually extended
beyond 30 days, but only by written agreement of the parties hereto.
"Loan Documents" shall mean this Agreement, the Debentures (including any
renewals, extensions and refundings thereof), and any other agreements or
documents (and with respect to this Agreement, and such other agreements and
documents, any amendments or supplements thereto or modifications thereof)
executed or delivered pursuant to the terms of this Agreement.
"Material Adverse Effect" or "Material Adverse Change" shall mean any change,
factor or event that shall (i) have a material adverse effect upon the
validity, performance or enforceability of any Loan Documents, (ii) have a
material adverse effect upon the financial condition or business operations
of Borrower or any Subsidiaries, (iii) have a material adverse effect upon
the ability of the Borrower to fulfill its obligations under the Loan
Documents, or (iv) any event that causes an Event of Default or which, with
notice or lapse of time or both, could become an Event of Default.
"Material Indebtedness" shall mean any debt incurred by Borrower that shall (i)
have a material adverse effect upon the ability of Borrower to fulfill its
obligations under the Loan Documents, (ii) have a material adverse effect
upon the financial conditions or business operations of Borrower or any
Subsidiary, or (iii) cause an Event of Default or which, with notice or
lapse of time or both, could become an Event of Default.
"Obligation" shall mean: (i) all present and future indebtedness, obligations
and liabilities of Borrower to Lender arising pursuant to this Agreement,
regardless of whether such indebtedness, obligations and liabilities are
direct, indirect, fixed, contingent, joint, several, or joint and several;
(ii) all present and future indebtedness, obligations and liabilities of
Borrower to Lender arising pursuant to or represented by the Debentures and
all interest accruing thereon, and reasonable attorneys' fees incurred in
the enforcement or collection thereof; (iii) all present and future
indebtedness, obligations and liabilities of Borrower and any Subsidiary
evidenced by or arising pursuant to any of the Loan Documents; (iv) all
costs incurred by Lender, including but not limited to reasonable attorneys'
fees and legal expenses related to this transaction; and (v) all renewals,
extensions and modifications of the indebtedness referred to in the
foregoing clauses, or any part thereof.
Permitted Liens" shall mean: (i) Liens (if any) granted Agent for the benefit
of the Lenders to secure the Obligation; (ii) pledges or deposits made to
secure payment of worker's compensation insurance (or to participate in any
fund in connection with worker's compensation insurance), unemployment
insurance, pensions or social security programs; (iii) Liens imposed by
mandatory provisions of law such as for landlord's, materialmen's,
mechanics', warehousemen's and other like Liens arising in the ordinary
course of business, securing Indebtedness whose payment is not yet due; (iv)
Liens for taxes, assessments and governmental charges or levies imposed upon
a Person or upon such Person's income or profits or property, if the same
are not yet due and payable or if the same are being contested in good faith
and as to which adequate cash reserves have been provided or if an extension
is obtained with respect thereto; (v) Liens arising from good faith deposits
in connection with tenders, leases, real estate bids or contracts (other
than contracts involving the borrowing of money), pledges or deposits to
secure public or statutory obligations and deposits to secure (or in lieu
of) surety, stay, appeal or customs bonds and deposits to secure the payment
of taxes, assessments, customs duties or other similar charges; (vi)
encumbrances consisting of zoning restrictions, easements, or other
restrictions on the use of real property, provided that such items do not
materially impair the use of such property for the purposes intended, and
none of which is violated by existing or proposed structures or land use;
(vii) mortgages, financing statements, equipment leases or other
encumbrances incurred in connection with the acquisition of property or
equipment or the replacement of existing property or equipment, provided
that such liens shall be limited to the property or equipment then
4
<PAGE> 5
Agreement (continued)
being acquired; and (viii) Liens the Senior Lenders pursuant to the Senior
Documents to secure Senior Obligations.
"Permitted Indebtedness" shall mean (i) Senior Obligations (ii) current
liabilities, and (iii) indebtedness incurred in the purchase of capital
equipment not to exceed $400,000 per year, and (iv) debt associated with
Permitted Liens.
"Person" shall include an individual, a corporation, a joint venture, a general
or limited partnership, a trust, an unincorporated organization or a
government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan or other plan maintained by Borrower
for employees of Borrower and/or any Subsidiaries and covered by Title IV of
ERISA, or subject to the minimum funding standards under Section 412 of the
Internal Revenue Code of 1986, as amended.
"Principal Amount" shall mean, as of any time, the then aggregate outstanding
face amount of the Debentures after any conversions or redemptions and after
giving effect to any installment payments received by Lender.
"Registrable Securities" shall mean (i) the Common Stock issued upon Conversion
of the Debentures, or (ii) any Common Stock issued upon Conversion of the
Debentures or exercise of any warrant, right or other security which is
issued with respect to the Common Stock referred to in clause (i) and (ii)
above by way of stock dividend; any other distribution with respect to or in
exchange for, or in replacement of Common Stock; stock split; or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization; excluding in all cases, however, any
Registrable Security that is not a Restricted Security and any Registrable
Securities sold or transferred by a person in a transaction in which the
rights under this Agreement are not assigned.
"Registrable Securities Then Outstanding" shall mean an amount equal to the
number of Registrable Securities outstanding which have been issued pursuant
to the Conversion of the Debentures.
"Rentals" of any Person shall mean, as of any date, the aggregate amount of the
obligations and liabilities (including future obligations and liabilities
not yet due and payable) of such Person to make payments under all leases,
subleases and similar arrangements for the use of real, personal or mixed
property, other than leases which are Capital Leases.
"Restricted Security" shall mean a security that has not been (i) registered
under the 1933 Act or (ii) distributed to the public pursuant to Rule 144
(or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission.
"1933 Act" shall refer to the Securities Act of 1933, as amended.
"1934 Act" shall refer to the Securities Exchange Act of 1934, as amended.
Senior Documents" means the loan documents and related security agreement
evidencing the Senior Lenders loans and all amendments thereto, together
with all other documents, instruments, agreements executed in connection
therewith, as each may be amended, modified, supplemented, renewed, extended
or replaced from time to time.
"Senior Lenders" means Bank of Jackson, Union Planters Bank, Webb Golston and
the asset based lender selected to finance Golston Company and their
successors and assigns.
"Senior Obligations" means collectively (a) revolving and term loans in the
aggregate maximum amount outstanding of $900.000 from Bank of Jackson, (b)
revolving and term loans in the aggregate maximum amount outstanding of
$1,400,000 from Union Planters Bank, (c) revolving and term loans in the
aggregate maximum amount outstanding of $1,500,000 from the asset based
lender selected to finance the Golston Company, and (d) seller financing
provided by Webb Golston related to the acquisition of Golston Company of
not more than $1,500,000.
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Agreement (continued)
"Solvent" shall mean, with respect to any Person on a particular date, that on
such date: (i) the fair value of the property of such Person is greater than
the total amount of liabilities, including, without limitation, contingent
liabilities, of such Person; (ii) the present fair salable value, in the
ordinary course of business, of the assets of such Person is not less than
the amount that will be required to pay the probable liability of such
Person on its debts as they become absolute and matured; (iii) such Person
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal
course of business; (iv) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature; and (v) such Person is
not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person's property would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount which, in light of all the facts
and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
"Subordinated Debt" shall mean any indebtedness of the Borrower or any
Subsidiaries, now existing or hereafter incurred, which indebtedness is, by
its terms, junior in right of repayment to the payment of the Debentures.
"Subsidiary" shall mean any corporation whether now existing or hereafter
acquired of which fifty percent (50%) or more of the Voting Shares are
owned, directly or indirectly, by Borrower.
"Voting Shares" of any corporation shall mean shares of any class or classes
(however designated) having ordinary voting power for the election of at
least a majority of the members of the Board of Directors (or other
governing bodies) of such corporation, other than shares having such power
only by reason of the happening of a contingency.
SECTION 1.02. OTHER DEFINITION PROVISIONS.
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents, certificate,
report or other document made or delivered pursuant to this Agreement, unless
the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the plural and
vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
(d) References to financial statements and reports shall be deemed to be a
reference to such statements and reports prepared in accordance with GAAP
recognized as such by the American Institute of Certified Public Accountants
acting through its Accounting Principles Board or by the Financial Accounting
Standards Board which principles are consistently applied, on the basis used by
Borrower in prior years, for all periods after the date hereof so as to
properly reflect the financial condition, and the results of operations and
statement of cash flows, of Borrower and its Consolidated Subsidiaries, if any.
(e) Accounting terms not specifically defined above, or not defined in this
Agreement, shall be construed in accordance with GAAP as recognized as of this
date by the American Institute of Certified Public Accountants.
ARTICLE II - LOAN PROVISIONS
SECTION 2.01. LOAN CLOSING.
(a) Subject to the terms and conditions of this Agreement, and the
compliance with such terms and conditions by all parties, Lender agrees to lend
to Borrower, and Borrower agrees to borrow from
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Agreement (continued)
Lender, the aggregate sum of up to FOUR MILLION SIX HUNDRED THOUSAND DOLLARS
($4,600,000) which shall be disbursed at the Loan Closing as follows:
Renaissance Capital Growth & Income III, Inc.: $2,300,000
Renaissance US Growth & Income Trust PLC: $2,300,000
(b) Each such disbursement is to be at such time and subject to the
conditions as provided hereunder and such borrowing shall be evidenced by
Borrower's duly executed Debenture (in one or more counterparts in the
aggregate sum of the Principal Amount advanced substantially in the form of
Exhibit 2.01(b) attached hereto and made a part hereof, with appropriate
insertion of names, dates and amounts. In the event of any differences in
terms between this Agreement and the Debenture, the Debenture will be
controlling; provided, however, that the holder of the Debenture shall be
entitled to all the rights and benefits of the Lender provided in this
Agreement.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at the
offices of Renaissance Capital Group, Inc. in Dallas, Texas.
(d) If, within 30 days of the date of this Agreement (i) Borrower has
failed to comply with the conditions precedent to the Loan Closing as specified
in Article III hereof (unless compliance with such conditions in whole or in
part has been waived or modified by Lender in its sole discretion) or (ii) the
Loan Closing has not occurred (unless the date of such Loan Closing has been
mutually extended) then, in either such case, the obligations of Lender under
this Agreement shall terminate, provided however that Borrower shall be
obligated for payment of the commitment fees and Lender expenses as provided in
Section 2.07 due and payable as of such date of termination.
SECTION 2.02. USE OF PROCEEDS.
(a) Borrower intends to use the money advanced hereunder, along with
funding from other sources, substantially for the following purposes:
Purchase of Common Stock of Golston Company $5,400,000
Fees and Working Capital $400,000
==========
Total $5,800,000
(b) Borrower hereby acknowledges that the proceeds from the Loan shall be
of benefit to the company for the growth of its business by providing capital
for acquisition of the Golston Company, Inc. which will provide added financial
and marketing opportunities.
SECTION 2.03. INTEREST RATE AND INTEREST PAYMENTS.
(a) Interest on the Principal Amount outstanding from time to time shall
accrue at the rate of 9.00% per annum, with the first installment payable on
FEBRUARY 1, 1997 and subsequent payments at the first day of each month
thereafter. Overdue principal and interest on the Debentures shall bear
interest, to the extent permitted by applicable law, at a rate of 9.00% per
annum. Interest on the Principal Amount of each Debenture shall be calculated,
from time to time, on the basis of the actual days elapsed in a year consisting
of 365 days.
SECTION 2.04. MATURITY.
(a) If not sooner redeemed or converted, the Debentures shall mature on
DECEMBER 1, 2003, at which time all the remaining unpaid principal, interest
and any other charges then due under this Agreement shall be due and payable in
full.
SECTION 2.05. MANDATORY PRINCIPAL REDEMPTION INSTALLMENTS.
(a) Mandatory principal redemption installments on each Debenture shall be
as provided for in the Debentures.
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Agreement (continued)
SECTION 2.06. OPTIONAL REDEMPTION.
(a) Optional principal redemption on each Debenture shall be as provided
for in the Debentures.
SECTION 2.07 CLOSING FEES AND LOAN CLOSING COSTS.
(a) Borrower agrees to pay to Lender, or Lender's designee, a Loan
Commitment fee of 1% of the loan amount available under this Agreement such to
be due and payable at Loan Closing or upon termination of this Agreement.
(b) Borrower agrees to pay to Lender, or Lender's designee, a Loan Closing
Fee of 1% of the amount of Loan funds disbursed at each Loan Closing, such to
be due and payable at Loan Closing.
(c) In addition, at the Loan Closing Borrower agrees to pay Lender's
reasonable costs and expenses (including, without limitation, the reasonable
fees and expenses of Lender's legal counsel) in connection with the
negotiation, preparation, execution and delivery of this Agreement, the
Debentures, the other Loan Documents and the Loan Closing or Subsequent Loan
Closings, provided that such costs and expenses shall not, in the aggregate,
exceed 0.5% of the loan amount available under this Agreement.
(d) Lender acknowledges the receipt of the payment by the Borrower of
$10,000 to cover Due Diligence expenses, with a remaining balance of $10,000
due upon closing..
(e) Borrower and Lender agree to a similar fee arrangement on any
additional funds provided under this Agreement or similar agreement between
Lender and Borrower.
SECTION 2.08. PLACEMENT FEE.
The Borrower shall be responsible for payment of any placement fees and
commissions, brokerage fees or finder's fees in connection with the Loan. All
such placement fee obligations are as listed in Exhibit 2.08 attached hereto.
The Lender has incurred no placement fee on this transaction.
SECTION 2.09. TAXES.
(a) Each Debenture shall be exchangeable for shares of Borrower's common
stock provided by Borrower and on such terms stated hereunder. Such exchange
for shares shall be made without deduction for any present or future taxes,
duties, charges or withholdings, (excluding, in the case of the Lender, any
foreign taxes, any federal, state or local income taxes and any franchise taxes
or taxes imposed upon it by the jurisdiction, or any political subdivision
thereof, under which the Lender is organized or is qualified to do business),
and all liabilities with respect thereto (herein "Taxes") shall be paid by
Borrower. If Borrower shall be required by law to deduct any Taxes for which
Borrower is responsible under the preceding sentence from any sum payable
hereunder to any Lender: (i) the sum payable shall be increased so that after
making all required deductions, such Lender receives an amount equal to the sum
it would have received had no such deductions been made; (ii) Borrower shall
make such deductions; and (iii) Borrower shall pay the full amount deducted to
the relevant taxing authority or other authority in accordance with applicable
law.
(b) Except as otherwise set forth in this Agreement or the other Loan
Documents, Borrower shall pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or under the Loan Documents or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the other Loan Documents (hereinafter referred to as "Other
Taxes").
(c) Borrower shall indemnify Lender for the full amount of Taxes and Other
Taxes reasonably paid by Lender or any liability (including any penalties or
interest assessed because of Borrower's defaults) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. This indemnification shall be made within thirty (30) days
from the date Lender makes written demand therefor. Lender shall subrogate any
and all rights and claims relating to such Taxes and Other Taxes to Borrower
upon payment of said indemnification.
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<PAGE> 9
Agreement (continued)
(d) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower in this Section 2.09
shall survive the payment in full of the Obligation.
SECTION 2.10 STOCK CONVERSION RIGHTS.
(a) Each Debenture shall be exchangeable for shares of Borrower's common
stock on such terms and in such amounts as shall be stated in the Debenture.
The holders of the stock issued upon exercise of the right of conversion as
provided in said Debenture shall be entitled to all the rights of the Lender as
stated in this Agreement or the other Loan Documents to the extent such rights
are specifically stated to survive the surrender of the Debenture for
conversion as therein provided.
SECTION 2.11 REGISTRATION RIGHTS AGREEMENT.
(a) The holder of shares of common stock of Borrower issued upon conversion
of the Debentures shall be entitled to the rights as provided in Article IX of
this Agreement.
ARTICLE III - CONDITIONS PRECEDENT
SECTION 3.01. DOCUMENT REQUIREMENTS.
(a) The obligation of Lender to advance funds at the Loan Closing Date
hereof is subject to the condition precedent that, on or before the date of
such advance, Lender shall have received the following in form and substance
satisfactory to Lender:
(i) One or more duly executed Debentures aggregating the Principal Amount of
Loan funds then advanced, each in amounts as requested by Lender, which shall
be styled "River Oaks Trust Company, FBO, Renaissance Capital Growth and Income
Fund III, Inc.," and "Renaissance U.S. Growth and Income Trust, PLC.", and in
the form of Exhibit 2.01(a)(1) with appropriate insertions of date, amount and
conversion features.
(ii) An agreement from Guarantor guaranteeing the Borrower's payment of all
interest, principal and other ancillary costs of the entire debt.
(iii) Stock pledge agreements from Borrower pledging as security, for all
payments of interest, principal and other ancillary costs of the entire debt,
all outstanding shares of each of the Borrower's wholly owned subsidiaries,
including but not limited to, B&B Electromatic, Inc., ISSI Acquisition Corp. II
dba Tri-Coastal Systems and Innovative Security Technologies, Inc., and
further, all outstanding shares of Golston Company, Inc., upon acquisition
thereof from use of the loan proceeds.
(iv) An agreement from the Borrower pledging as security, for all payments
of interest, principal and other ancillary costs of the entire debt (a) all
trademarks, copyrights and software technology relating to the Borrower's
Intelli-site product, and (b) all machinery and equipment.
(v) An opinion of legal counsel for Borrower dated as of the Loan Closing
Date, satisfactory in form and substance to Lender, as to due execution by the
Borrower of this Agreement, the Debenture and other Loan Documents and the
legal enforceability thereof.
(vi) A true and correct certificate signed by a duly authorized officer of
the Borrower and dated as of the Loan Closing Date stating that, to the best
knowledge and belief of such officer, after reasonable and due investigation
and review of matters pertinent to the subject matter of such certificate: (A)
all of the representations and warranties contained in Article IV hereof and
the other Loan Documents are true and correct as of the Loan Closing Date and
(B) no event has occurred and is continuing, or would result from the Loan,
which constitutes a Default or an Event of Default.
(vii) Copies of resolutions, as adopted by the Borrower's Board of
Directors, approving the execution, delivery and performance of this Agreement,
the Debentures, and the other Loan Documents, including the transactions
contemplated herein and accompanied by a certificate of the Secretary or
9
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Agreement (continued)
Assistant Secretary of Borrower stating that such resolutions have been duly
adopted, are true and correct, have not been altered or repealed and are in
full force and effect.
(viii) A signed certificate of the Secretary or Assistant Secretary of the
Borrower which shall certify the names of the officers of Borrower authorized
to sign each of the Loan Documents to be executed by such officer, together
with the true signatures of each of such officers. It is herewith stipulated
and agreed that Lender may thereafter rely conclusively on the validity of this
certificate as a representation of the officers of Borrower duly authorized to
act with respect to the Loan Documents until such time as Lender shall receive
a further certificate of the Secretary or Assistant Secretary of Borrower
canceling or amending the prior certificate and submitting the signatures of
the officers thereupon authorized in such further certificate.
(ix) Certificates of good standing (or other similar instrument) for the
Borrower issued by the Secretary of State of the state of incorporation of
Borrower, and certificates of qualification and good standing for Borrower
issued by the Secretary of State of each of the states wherein such Borrower
has operating facilities of such nature so as to be required to be qualified to
do business as a foreign corporation, dated within ten (10) days of Loan
Closing.
(x) A copy of the Articles of Incorporation of the Borrower and all
amendments thereto, certified by the Secretary of State of the state of
incorporation and dated within ten (10) days of the date of Loan Closing and a
copy of the bylaws of Borrower and all amendments thereto, certified by the
Secretary or Assistant Secretary of Borrower, as being true, correct and
complete as of the date of such certification.
(xi) Copies of the following financial statements for Borrower: (A) An
audited balance sheet and income statement for Borrower as of December 31, 1995
and (B) unaudited balance sheet and income statement for Borrower as of March
31, 1996, June 30, 1996 and September 30, 1996.
(xii) Such other information and documents as may reasonably be required by
Lender and Lender's counsel to substantiate Borrower's compliance with the
requirements of this Agreement.
SECTION 3.02. STOCK PURCHASE AGREEMENT AND AVAILABILITY OF OTHER FUNDING
(a) The obligation of Lender to advance funds at the Loan Closing Date
hereof is subject to the condition precedent Borrowers shall have obtained, on
or before the loan closing:
(i) an executed contract, in form satisfactory to Lenders, for the
purchase of all of the outstanding stock of the Golston Company, Inc. Such
contract will be substantially in the form of Exhibit 3.02(a)(i) attached
hereto and shall provide for a purchase price for such stock in an amount not
in excess of $6,000,000 of which not more than $4,000,000 shall be in cash,
$1,500,000 shall be in a secured promissory note, and $500,000 shall be paid
pursuant to a non-compete agreement.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loan hereunder, Borrower represents and warrants
to Lender that:
SECTION 4.01. ORGANIZATION AND GOOD STANDING.
(a) Borrower is duly organized and existing in good standing under the laws
of the state of its incorporation, is duly qualified as a foreign corporation
and in good standing in all states in which failure to qualify would have a
Material Adverse Effect, and has the corporate power and authority to own its
properties and assets and to transact the business in which it is engaged and
is or will be qualified in those states wherein it proposes to transact
material business operations in the future.
SECTION 4.02. AUTHORIZATION AND POWER.
(a) Borrower has the corporate power and requisite authority to execute,
deliver and perform the Loan Documents to be executed by Borrower. The
Borrower is duly authorized to, and has taken all
10
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Agreement (continued)
corporate action necessary to authorize, execute, deliver and perform the Loan
Documents executed by Borrower. The Borrower is and will continue to be duly
authorized to perform the Loan Documents executed by Borrower.
SECTION 4.03. NO CONFLICTS OR CONSENTS.
(a) Except as disclosed to Lender pursuant to Exhibit 4.03 - Schedule of
Conflicts or Consents, neither the execution and delivery of the Loan
Documents, nor the consummation of any of the transactions therein
contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any judgment, license, order or permit
applicable to Borrower, or any indenture, loan agreement, mortgage, deed of
trust, or other agreement or instrument to which Borrower is a party or by
which Borrower is or becomes bound, or to which Borrower is or becomes subject,
or violate any provision of the charter or bylaws of Borrower. No consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
Borrower of the Loan Documents or to consummate the transactions contemplated
hereby or thereby except those that have been obtained.
SECTION 4.04. ENFORCEABLE OBLIGATIONS.
(a) The Loan Documents have been duly executed and delivered by the
Borrower and are the legal and binding obligations of the Borrower, enforceable
in accordance with their respective terms, except as limited by any applicable
bankruptcy, insolvency or similar laws now or hereafter in effect affecting
creditors rights and debtor's obligations.
SECTION 4.05. NO LIENS.
(a) Except for Permitted Liens, all of the properties and assets owned by
the Borrower are free and clear of all Liens and other adverse claims of any
nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all liens for borrowed money is disclosed
to Lender pursuant to Exhibit 4.05.
SECTION 4.06. FINANCIAL CONDITION.
(a) Borrower has delivered to Lender copies of the balance sheet of
Borrower as of December 31, 1995, and the related statements of income,
stockholders' equity and statement of cash flow for the year ended, audited by
its independent Certified Public Accountant. Borrower has also delivered to
Lender copies of the balance sheet of Borrower as of September 30, 1996, and
the related statements of income, stockholders' equity and statement of cash
flow for the period ended such date, which financial statements have not been
certified by its independent Certified Public Accountant. Such financial
statements are true and correct in all material respects, fairly represent the
financial condition of Borrower as of such dates and have been prepared in
accordance with GAAP (except unaudited financial statements omit certain
footnotes); and as of the date hereof, there are no obligations, liabilities or
Indebtedness (including contingent and indirect liabilities and obligations) of
Borrower which are (separately or in the aggregate) material and are not
reflected in such financial statements or otherwise disclosed herein. Since
the date of the above referenced year end financial statements and quarterly
financial statements, there have not been, except as disclosed in Exhibit 4.06:
(i) any Material Adverse Change in the financial condition, results of
operations, business, prospects, assets or liabilities (contingent or
otherwise, whether due or to become due, known or unknown), of the Borrower;
(ii) any dividend declared or paid or distribution made on the capital stock of
the Borrower or any capital stock thereof redeemed or repurchased; (iii) any
incurrence of long-term debt by the Borrower; (iv) any salary, bonus or
compensation increases to any officers, key employees or agents of the Borrower
or; (v) any other transaction entered into by the Borrower except in the
ordinary course of business and consistent with past practice.
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Agreement (continued)
SECTION 4.07. FULL DISCLOSURE.
(a) To the best of Borrower's knowledge and belief after current
investigation, there is no material fact that Borrower has not disclosed to
Lender which could reasonably be expected to have a Material Adverse Effect on
the properties, business, prospects or condition (financial or otherwise) of
Borrower. Neither the financial statements referenced in Section 4.06 hereof,
nor any business plan, offering memorandum or prospectus, certificate or
statement delivered herewith or heretofore by Borrower to Lender in connection
with the negotiations of this Agreement, contained any untrue statement of a
material fact or omitted to state any material fact necessary to keep the
statements contained herein or therein from being misleading.
SECTION 4.08. NO DEFAULT.
(a) No event has occurred and is continuing which constitutes a Default or
an Event of Default under this Agreement.
SECTION 4.09. MATERIAL AGREEMENTS.
(a) The Borrower is not in default in any material respect under any
contract, lease, loan agreement, indenture, mortgage, security agreement or
other material agreement or obligation to which it is a party or by which any
of its properties is bound.
SECTION 4.10. NO LITIGATION.
(a) Except as disclosed to Lender pursuant to Exhibit 4.10 - Schedule of
Litigation attached hereto, there are no actions, suits, investigations,
arbitrations or administrative proceedings pending, or to the knowledge of
Borrower threatened, against Borrower, and there has been no change in the
status of any of the actions, suits, investigations, litigation or proceedings
disclosed to Lender which could have a Material Adverse Effect on Borrower or
on any transactions contemplated by any Loan Document.
SECTION 4.11. BURDENSOME CONTRACTS.
(a) To the best knowledge of the Borrower, it is not a party to, or bound
by, any contract or agreement, the faithful performance of which is so onerous
so as to create or to likely create a Material Adverse Effect on the business,
operations or financial condition of the Borrower.
SECTION 4.12. TAXES.
(a) All tax returns required to be filed by Borrower in any jurisdiction
have been filed and all taxes (including mortgage recording taxes),
assessments, fees and other governmental charges upon Borrower or upon any of
its properties, income or franchises have been paid. To the best knowledge of
Borrower, there is no proposed tax assessment against Borrower and there is no
basis for such assessment.
SECTION 4.13 PRINCIPAL OFFICE, ETC.
(a) The principal office and principal place of business of the Borrower
and each of its Subsidiaries is as follows:
Integrated Security Systems, Inc.
8200 Springwood Drive,
Suite 230
Irving, Texas 75063
B&B Electromatic, Inc.
14113 Main Street
Norwood, Louisiana 70761
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Agreement (continued)
ISSI Acquisition Corp. II dba Tri-Coastal Systems, Inc.
8200 Springwood Drive,
Suite 230
Irving, Texas 75063
Innovative Security Technologies, Inc.
8200 Springwood Drive,
Suite 230
Irving, Texas 75063
SECTION 4.14. USE OF PROCEEDS.
(a) The Borrower hereby acknowledges that it intends to use proceeds from
the Loan as disclosed in Section 2.02 hereof.
SECTION 4.15. EMPLOYEE BENEFIT AND INCENTIVE PLANS; ERISA.
(a) Borrower is not obligated under any Plans.
(b) Borrower is not a party to any collective bargaining agreement and is
not aware of any activities of any labor union that is currently seeking to
represent or organize its employees. Borrower has not experienced any labor
problems, including work stoppages, disputes or slowdowns with respect to its
employees.
SECTION 4.16. COMPLIANCE WITH LAW.
(a) To the best knowledge of Borrower, Borrower is in compliance with all
laws, rules, regulations, orders and decrees which are applicable to Borrower
or its properties by reason of any Governmental Authority which are material to
the conduct of the business of Borrower or any of its properties.
SECTION 4.17. COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS.
(a) To the best knowledge of Borrower, all properties of Borrower are in
compliance with all federal, state or local environmental protection laws,
statutes and regulations which are material to the conduct of the business of
Borrower, or its properties, and the Borrower is currently in compliance with
all material reporting requirements, rules, and regulations which are
applicable to Borrower or its properties by reason of such governmental
environmental protective agencies.
SECTION 4.18. SCHEDULE OF CAPITAL STOCK AND SEC REQUIREMENTS.
(a) Set forth on Exhibit 4.18 - Schedule of Capital Stock is a true and
correct schedule of all classes of authorized, issued, and outstanding Capital
Stock of the Borrower, all stock options, warrants, conversion rights,
subscription rights and other rights or agreements to acquire securities of
Borrower and any shares held in treasury or reserved for issue upon exercise of
such stock options, warrants or conversion rights, subscription rights and
other rights or agreements to acquire securities including date of termination
of such right and the consideration therefor.
(b) Except as provided in Exhibit 4.18 - Schedule of Capital Stock, to the
best of the Borrower's knowledge, all securities of Borrower have been issued
in compliance with the requirements of the 1933 Act, and the rules and
regulation promulgated thereunder, or pursuant to an exemption therefrom.
Lender acknowledges receipt from Borrower Registration 333-5023 and certain
comment letters from the SEC and responses thereto.
(c) The shares of common stock of the Borrower when issued to Lender upon
conversion of the Debentures will be duly and validly issued, fully paid and
nonassessable and in compliance with all applicable securities laws. Such
issuance will not give rise to preemptive rights or similar rights by any other
security holder of Borrower, except for anti-dilution provisions found in
certain securities
13
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Agreement (continued)
previously issued by the Borrower. Borrower shall at all times reserve and
keep available sufficient authorized and unissued shares of common stock to
effectuate the conversion of the Debentures.
SECTION 4.19. INSIDER.
(a) Neither the Borrower, nor any Person having "control" (as that term is
defined in the Investment Company Act of 1940, as amended, or in regulations
promulgated pursuant thereto (herein the "1940 Act")) of the Borrower is, an
"executive officer," "director," or "principal shareholder" (as those terms are
defined in the 1940 Act) of Lender.
(b) Except as set forth in the Borrower's Form 10-K dated for the period
ending December 31, 1995, there are no transactions between the Borrower and
any affiliates of Borrower.
(c) All agreements between the Borrower and any of its officers, directors,
and principal shareholders, including employment agreements, are listed on
Exhibit 4.19 - Schedule of Affiliate Transactions.
SECTION 4.20. SUBSIDIARIES.
(a) As of the date hereof, the Borrower has the following Subsidiaries: B&B
Electromatic, Inc., ISSI Acquisition Corp. II dba Tri-Coastal Systems, Inc.,
and Innovative Security Technologies, Inc.
(b) Except as disclosed in the Financial Statements and except for
Subsidiaries, the Borrower does not own any equity or debt interest or any form
of proprietary interest in any entity, or any right or option to acquire any
such interest in any such entity.
SECTION 4.21. CASUALTIES.
(a) Neither the business nor the properties of Borrower is currently
affected by any environmental hazard, fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or other casualty (whether or not covered by insurance), which could
have a Material Adverse Effect.
SECTION 4.22 INVESTMENT COMPANY ACT.
(a) Borrower is not an "investment company" as defined in Section 3 of the
1940 Act nor a company that would be an investment company except for the
exclusions from the definition of an investment company in Section 3(C) of the
1940 Act, and Borrower is not controlled by such a company.
SECTION 4.23. SUFFICIENCY OF CAPITAL.
(a) Borrower is, and after consummation of this Agreement and giving effect
to all Indebtedness incurred and transactions contemplated in connection
herewith will be, Solvent.
SECTION 4.24. CORPORATE NAMES.
(a) The Borrower has not, during the preceding five (5) years, been known
as or used any other corporate, fictitious or Tradenames.
SECTION 4.25 MARGIN REGULATION.
(a) As of the Loan Closing Date, the Borrower does not have class of
securities with respect to which a member of a national securities exchange,
broker, or dealer may extend or maintain credit to or for a customer pursuant
to rules or regulation adopted by the Board of Governors of the Federal Reserve
System under Section 7 of the 1934 Act.
SECTION 4.26 INSURANCE.
(a) All of the insurable properties of the Borrower are insured for its
benefit under valid and enforceable policies, issued by insurers of recognized
responsibility in amounts and against such risks and losses as is customary in
such industry. Such policies are listed in Exhibit 4.26 - Schedule of
Insurance.
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Agreement (continued)
SECTION 4.27 PATENTS, TRADEMARKS AND COPYRIGHTS.
(a) To the best of Borrower's knowledge and belief after current
investigation, Borrower owns all patents, trademarks and copyrights, if any,
necessary to conduct its business or possesses licenses or other rights, if
any, therefor. All such intangible property rights are listed in Exhibit 4.27 -
Schedule of Patents, Trademarks and Copyrights. Borrower has the right to use
such proprietary rights without infringing or violating the rights of any third
parties. No claim has been asserted by any person to the ownership of or right
to use any such proprietary right or challenging or questioning the validity or
effectiveness of any such license or agreement. Each of the proprietary rights
is valid and subsisting, and has not been canceled, abandoned or otherwise
terminated.
SECTION 4.28. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) All representations and warranties by Borrower herein shall survive the
Loan Closing and any subsequent Loan Closings and the delivery of the
Debentures, and any investigation at any time made by or on behalf of Lender
shall not diminish Lender's right to rely on Borrower's' representations and
warranties as herein set forth.
ARTICLE V - AFFIRMATIVE COVENANTS
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Lender shall otherwise consent in writing, which
consent shall not be unreasonably withheld, Borrower agrees that:
SECTION 5.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.
(a) The Borrower shall accurately and fairly maintain its books of account
in accordance with GAAP, employ a firm of independent certified public
accountants, which firm is one of the six largest national accounting firms or
which is approved by the Lender, to make annual audits of its accounts in
accordance with generally accepted auditing standards; permit the Lender and
its representatives to have access to and to examine its properties, books and
records (and to copy and make extracts therefrom) at such reasonable times and
intervals as the Lender may request; and to discuss its affairs, finances and
accounts with its officers and auditors, all to such reasonable extent and at
such reasonable times and intervals as the Lender may request.
(b) The Borrower shall provide the following reports and information to the
Lender and/or the Lender's designee:
(i) As soon as available, and in any event within forty-five (45) days
after the close of each quarter, the Company's report on Form 10-Q with
exhibits for said period. In addition, the Lender may at its sole discretion
request internal monthly reports for specific periods.
(ii) As soon as available, and in any event within ninety (90) days
after the close of each year, the Company's report on Form 10-K with exhibits
for said period.
(iii) Each quarter, concurrent with the periodic report required above,
a certificate executed by the Chief Financial Officer or Chief Executive
Officer of the Borrower, (A) stating that a review of the activities of the
Borrower during such fiscal period has been made under his supervision and that
the Borrower has observed, performed and fulfilled each and every obligation
and covenant contained herein and is not in default under any of the same or,
if any such default shall have occurred, specifying the nature and status
thereof, and (B) setting forth a computation in reasonable detail as of the end
of the period covered by such statements, of compliance with the Agreed Minimum
Financial Standards in Exhibit 7.01 as provided therein.
(iv) So long as any Debenture remains outstanding, promptly (but in any
event within five (5) business days) upon learning of the occurrence of a
Default or an Event of Default deliver a certificate
15
<PAGE> 16
Agreement (continued)
signed by the Chief Executive Officer or Chief Financial Officer of the
Borrower describing such Default, Event of Default and stating what steps are
being taken to remedy or cure the same.
(v) Promptly (but in any event within five (5) business days) upon the
receipt thereof by the Borrower or the Board of Directors of the Borrower,
copies of all reports, all management letters and other detailed information
submitted to the Borrower or the Board by independent accountants in connection
with each annual or interim audit or review of the accounts or affairs of the
Borrower made by such accountants.
(vi) With reasonable promptness, such other information relating to the
finances, properties, business and affairs of the Borrower and each Subsidiary,
as Lender may reasonably request from time to time.
(vii) Promptly upon its becoming available, one copy of each financial
statement, report, press release, notice or proxy statement sent by Borrower to
stockholders generally, and of each regular or periodic report, registration
statement or prospectus filed by Borrower with any securities exchange or the
SEC or any successor agency, and of any order issued by any Governmental
Authority in any proceeding to which the Borrower is a party.
SECTION 5.02. PREPARATION OF A BUDGET.
(a) Prior to the beginning of Borrower's fiscal year Borrower agrees to
prepare and submit to the Board and furnish to the Lender a copy of, an annual
plan for such year which shall include, without limitation, plans for
expansion, if any, plans for incurrences of Indebtedness and projections
regarding other sources of funds, quarterly projected capital and operating
expense budgets, cash flow statements, profit and loss statements and balance
sheet projections, itemized in such detail as the Board and/or the Lender may
request.
(b) Borrower shall furnish to Lenders monthly financial reports, including
budgets (as currently used by management in the conduct of business) within 30
days of the end of each month.
SECTION 5.03. OPERATION REVIEW.
(a) Borrower agrees that it will review its operations with Lender. Such
operations reviews will be in such depth and detail as Lender shall reasonably
request. Operations reviews, which usually will require a day or less to
complete, will be held as reasonably necessary, generally once a fiscal
quarter.
SECTION 5.04. PAYMENT OF TAXES AND OTHER INDEBTEDNESS.
(a) Borrower shall, and shall cause its Subsidiaries (if any) to, pay and
discharge (i) all taxes, assessments and governmental charges or levies imposed
upon it or upon its income or profits, or upon any property belonging to it,
before delinquent, (ii) all lawful claims (including claims for labor,
materials and supplies), which, if unpaid, might give rise to a Lien upon any
of its property, and (iii) all of its other Indebtedness, except as prohibited
hereunder; provided, however, that Borrower and its Subsidiaries, if any, shall
not be required to pay any such tax, assessment, charge or levy if and so long
as the amount, applicability or validity thereof shall currently be contested
in good faith by appropriate proceedings and appropriate accruals and reserves
therefor have been established in accordance with GAAP.
SECTION 5.05. MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS.
(a) Borrower shall, and shall cause its Subsidiaries (if any) to, preserve
and maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business, and
conduct its business in an orderly and efficient manner consistent with good
business practices and in accordance with all valid regulations and orders of
any Governmental Authority. Borrower shall keep its principal place of business
within the United States.
16
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Agreement (continued)
SECTION 5.06. SEC FILING AND MAINTENANCE OF SEC REPORTING REQUIREMENTS.
(a) So long as Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports and
statements required of a company whose securities are registered for public
trading under and pursuant to the 1934 Act, as amended, and any rules and
regulations issued thereunder, and to preserve and maintain its registration
thereunder and all of the rights of its security holders normally associated
with a publicly traded stock company.
SECTION 5.07. NOTICE OF DEFAULT.
(a) Borrower shall furnish to Lender, immediately upon becoming aware of
the existence of any condition or event which constitutes a Default or would
with the passage of time become a Default or an Event of Default, written
notice specifying the nature and period of existence thereof and the action
which Borrower is taking or proposes to take with respect thereto.
SECTION 5.08. OTHER NOTICES.
(a) Borrower shall promptly notify Lender of (i) any Material Adverse
Change in its financial condition or its business, (ii) any default under any
material agreement, contract or other instrument to which it is a party or by
which any of its properties are bound, or any acceleration of the maturity of
any Indebtedness owing by Borrower or its Subsidiaries, if any, (iii) any
material adverse claim against or affecting Borrower or its Subsidiaries, if
any, or any of its properties, and (iv) the commencement of, and any material
determination in, any litigation with any third party or any proceeding before
any Governmental Authority, the negative result of which has a Material Adverse
Effect on Borrower and its Subsidiaries, taken as a whole.
SECTION 5.09. COMPLIANCE WITH LOAN DOCUMENTS.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
promptly comply with any and all covenants and provisions of the Loan
Documents.
SECTION 5.10. COMPLIANCE WITH MATERIAL AGREEMENTS.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
comply in all material respects with all material agreements, indentures,
mortgages or documents binding on it or affecting its properties or business.
SECTION 5.11. OPERATIONS AND PROPERTIES.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
act prudently and in accordance with customary industry standards in managing
or operating its assets, properties, business and investments. Borrower shall,
and shall cause each of its Subsidiaries (if any) to, keep in good working
order and condition, ordinary wear and tear excepted, all of its assets and
properties which are necessary to the conduct of its business.
SECTION 5.12. BOOKS AND RECORDS; ACCESS.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
maintain complete and accurate books and records of its transactions in
accordance with good accounting practices. Borrower shall give each duly
authorized representative of Lender access during all normal business hours to,
and shall permit such representative to examine, copy or make excerpts from,
any and all books, records and documents in the possession of Borrower and its
Subsidiaries and relating to its affairs, and to inspect any of the properties
of Borrower and its Subsidiaries, if any. Borrower shall make a copy of this
Agreement, along with any waivers, consents, modifications or amendments,
available for review at its principal office by Lender or Lender's
representatives.
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Agreement (continued)
SECTION 5.13. COMPLIANCE WITH LAW.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
comply with all applicable laws, rules, regulations, and all orders of any
Governmental Authority applicable to it or any of its property, business
operations or transactions, a breach of which could reasonably be expected to
have a Material Adverse Effect.
SECTION 5.14. INSURANCE.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
maintain such worker's compensation insurance, liability insurance and
insurance on its properties, assets and business, now owned or hereafter
acquired, against such casualties, risks and contingencies, and in such types
and amounts, as are consistent with customary practices and standards of
companies engaged in similar businesses.
SECTION 5.15. AUTHORIZATIONS AND APPROVALS.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
promptly obtain, from time to time at its own expense, all such governmental
licenses, authorizations, consents, permits and approvals as may be required to
enable it to comply with its obligations hereunder and under the other Loan
Documents.
SECTION 5.16. ERISA COMPLIANCE.
(a) Borrower shall (i), at all times, make prompt payment of all
contributions required under all Plans, if any, and shall meet the minimum
funding standards set forth in ERISA with respect to its Plans subject to
ERISA, if any, (ii) notify Lender immediately of any fact in connection with
any of its Plans, which might constitute grounds for termination thereof or for
the appointment by the appropriate United States District Court of a trustee to
administer such Plan, together with a statement, if requested by Lender as to
the reason therefor and the action, if any, proposed to be taken with respect
thereto, and (iii) furnish to Lender upon its request such additional
information concerning any of its Plans as may be reasonably requested.
SECTION 5.17. FURTHER ASSURANCES.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any) to,
make, execute or endorse, and acknowledge and deliver or file or cause the same
to be done, all such notices, certifications and additional agreements,
undertakings, transfers, assignments, or other assurances, and take any and all
such other action, as Lender may, from time to time, deem reasonably necessary
or proper in connection with any of the Loan Documents, or the obligations of
Borrower or its Subsidiaries, if any, thereunder, which Lender may request from
time to time.
SECTION 5.18. INDEMNITY BY BORROWER.
(a) Borrower shall indemnify, save, and hold harmless, Lender and its
directors, officers, agents, attorneys, and employees (singularly or
collectively, the "Indemnitee") from and against (i) any and all claims,
demands, actions or causes of action that are asserted against any Indemnitee
if the claim, demand, action or cause of action directly or indirectly relates
to this Agreement and the other Loan Documents issued pursuant thereto, the use
of proceeds of the Loans, or the relationship of Borrower and Lender under this
Agreement or any transaction contemplated pursuant to this Agreement, (ii) any
administrative or investigative proceeding by any Governmental Authority
directly or indirectly related to a claim, demand, action or cause of action
described in clause (i) above, and (iii) any and all liabilities, losses,
costs, or expenses (including reasonable attorneys' fees and disbursements)
that any Indemnitee suffers or incurs as a result of any of the foregoing;
provided, however, that Borrower shall have no obligation under this Section
5.18 to Lender with respect to any of the foregoing arising out of the
negligence or willful misconduct of Lender or its assignees or the breach by
the Lender or its assignees
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Agreement (continued)
of this Agreement or any other Loan Document or other document executed in
connection with any of the aforesaid, the breach by Lender or its assignees of
any agreement or commitment with other parties, the violation or alleged
violation of any law, rule or regulation by Lender or its assignees, or from
the transfer or disposition by Lender of any Debenture or the Common Stock
issued upon conversion of the Debenture. If any claim, demand, action or cause
of action is asserted against any Indemnitee, such Indemnitee shall promptly
notify Borrower, but the failure to so promptly notify Borrower shall not
affect Borrower's obligations under this Section unless such failure materially
prejudices Borrower's right to participate in the contest of such claim,
demand, action or cause of action, as hereinafter provided. In the event that
such indemnitee's failure to properly notify the Borrower materially prejudices
Borrower's right to participate in the contest of such claim, demand, action,
or cause of action, then said Indemnitee shall have no right to receive, and
Borrower shall have no obligation to pay, any indemnification amounts
hereunder. Borrower may elect to defend any such claim, demand, action or
cause of action (at its own expense) asserted against said Indemnitee and, if
requested by Borrower in writing and so long as no Default or Event of Default
shall have occurred and be continuing, such Indemnitee (at Borrower's expense)
shall in good faith contest the validity, applicability and amount of such
claim, demand, action or cause of action and shall permit Borrower to
participate in such contest. Any Indemnitee that proposes to settle or
compromise any claim or proceeding for which Borrower may be liable for payment
to or on behalf of an Indemnitee hereunder shall give Borrower written notice
of the terms of such proposed settlement or compromise reasonably in advance of
settling or compromising such claim or proceeding and shall obtain Borrower's
written concurrence thereto. In the event that said Indemnitee fails to obtain
Borrower's prior written consent to any such settlement or compromise, said
Indemnitee shall have no right to receive and Borrower shall have no obligation
to pay any indemnification amounts hereunder. Each Indemnitee may employ
counsel in enforcing its rights hereunder and in defending against any claim,
demand, action, or cause of action covered by this Section 5.18; provided,
however, that each Indemnitee shall endeavor, but shall not be obligated, in
connection with any matter covered by this Section which also involves any
other Indemnitee, to use reasonable efforts to avoid unnecessary duplication of
effort by counsel for all Indemnitees, including by allowing Borrower to select
one lawyer for all parties, such selection to be subject to the approval of
such parties, which approval shall not be unreasonably withheld. Any
obligation or liability of Borrower to any Indemnitee under this Section 5.18
shall survive the expiration or termination of this Agreement and the repayment
of the Debentures.
5.19 Payment of Management Fee/Monitoring Fee
(a) Borrower shall pay each of Renaissance III and Renaissance PLC a
monitoring and financial advisory fee of $500 per month and shall reimburse
them for the reasonable travel and out-of-pocket expenses incurred by them or
their agents in monitoring Borrowers compliance with this Agreement.
ARTICLE VI - NEGATIVE COVENANTS
So long as any part of the Debentures have not been redeemed or converted
hereunder, and until such redemption or conversion in full, unless the Lender
shall otherwise consent in writing, which consent shall not be unreasonably
withheld, Borrower agrees that, unless permitted otherwise:
SECTION 6.01. LIMITATION ON INDEBTEDNESS.
(a) Borrower and its Subsidiaries shall not incur, create, contract, waive,
assume, have outstanding, guarantee or otherwise be or become, directly or
indirectly, liable in respect of any Indebtedness, except:
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Agreement (continued)
(i) Indebtedness arising out of this Agreement or otherwise
contemplated herein;
(i) Permitted Indebtedness; and
(i) on Exhibit 4.05.
SECTION 6.02. NEGATIVE PLEDGE.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to,
create, incur, permit or suffer to exist any Lien upon any of its property or
assets other than Permitted Liens, or payments upon any Subordinated Debt other
than regularly scheduled installments of principal and interest and shall not
directly or indirectly make any payment of any Subordinated Debt which would
violate the terms of this Agreement or of such Subordinated Debt or any
subordination agreement applicable to such Subordinated Debt.
SECTION 6.03. LIMITATION ON INVESTMENTS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to,
make or have outstanding any Investments in any Person, except for Borrower's
(and any Subsidiary's) ownership of stock of Subsidiaries, the acquisition of
Golston Company as contemplated herein, loans and other transactions between
the Borrower and any Subsidiaries, short term bank deposits or money market
investments, and such other "cash equivalent" investments as Lender may from
time to time approve.
SECTION 6.04. ALTERATION OF MATERIAL AGREEMENTS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to,
consent to or permit any alteration, amendment, modification, release, waiver
or termination of any material agreement to which it is a party other than in
the ordinary course of business.
SECTION 6.05. CERTAIN TRANSACTIONS.
(a) Except as permitted by Section 6.12, Borrower shall not, and shall not
permit its Subsidiaries (if any) to, enter into any transaction with, or pay
any management fees to, any Affiliate; provided, however, that Borrower and any
Subsidiary may enter into transactions with Affiliates upon terms not less
favorable to Borrower and any Subsidiary than would be obtainable at the time
in comparable transactions of Borrower and any Subsidiaries in arms-length
dealings with Persons other than Affiliates.
SECTION 6.06. LIMITATIONS ON ACQUISITION OF NON-RELATED BUSINESS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to,
engage in any line of business or acquire any new product lines or business or
acquire any companies unless such new product line or business of the company
acquired is primarily involved in the Borrower's current lines of business.
SECTION 6.07. LIMITATION ON SALE OF PROPERTIES.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to
(i) sell, assign, convey, exchange, lease or otherwise dispose of any of its
properties, rights, assets or business, whether now owned or hereafter
acquired, except in the ordinary course of its business and for a fair
consideration, or (ii) sell, assign or discount any accounts receivable except
in the ordinary course of business or to secure bank or commercial working
capital loans in the ordinary course of business.
SECTION 6.08. FISCAL YEAR AND ACCOUNTING METHOD.
(a) Borrower shall not, and shall not permit its Subsidiaries, if any, to,
change its method of accounting except as permitted by GAAP.
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Agreement (continued)
SECTION 6.09. LIQUIDATION AND DISPOSITIONS OF SUBSTANTIAL ASSETS.
(a) Borrower shall not permit its Subsidiaries to (i) dissolve or
liquidate, (ii) sell, transfer, lease or otherwise dispose of all or any
substantial part of its property or assets or business, or (iii) enter into any
other transaction that has a similar effect.
SECTION 6.10. NO AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any) to,
materially amend its Articles of Incorporation or bylaws except as is necessary
to fulfill the conditions of this Agreement.
SECTION 6.11. LIMITATION ON INCREASED EXECUTIVE COMPENSATION AND BONUS, PROFIT
SHARING OR OTHER INCENTIVE PAYMENTS.
(a) Borrower will not increase the salary, bonus, or other compensation
programs (whether in cash, securities, or other property, and whether payment
is deferred or current) of its top five executive officers unless such
compensation increase is approved by a majority of the Board or a Compensation
Committee of the Board of Directors, a majority of whom shall non-employee
Directors.
(b) Borrower shall not pay any Bonus, Profit Sharing or Other Incentive
Payments until such plans are formally adopted by the majority of the Board or
a Compensation Committee of the Board of Directors, a majority of which shall
be non-employee Directors.
SECTION 6.12. RESTRICTED PAYMENTS.
(a) So long as any Debentures are outstanding, Borrower shall not (i)
declare or pay any dividend (other than stock dividends) on any Common Stock,
or (ii) purchase, redeem, decrease, or otherwise acquire any shares of Common
Stock, or any Preferred Stock.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
SECTION 7.01. FINANCIAL RATIOS.
(a) So long as any part of the Debentures has not been redeemed or
converted hereunder, and until such redemption or conversion in full, or unless
the Lender (or if any portion of the Debentures has been assigned, the holders
of a majority in amount of the outstanding Principal Amount) shall otherwise
consent in writing, the Borrower will at all times maintain the agreed minimum
financial ratios or standards as provided and set forth in Exhibit 7.01 -
Agreed Minimum Financial Standards as attached hereto and made a part hereof.
Borrower shall deliver to Lender a compliance certificate covering these ratios
as required in Section 5.01(b)(iii).
ARTICLE VIII - EVENTS OF DEFAULT
SECTION 8.01. EVENTS OF DEFAULT.
(a) An "Event of Default" shall exist if any one or more of the following
events (herein collectively called "Events of Default") shall occur and be
continuing:
(i) Borrower shall fail to pay (or shall state in writing an intention not
to pay or its inability to pay), not later than ten (10) days after the due
date, any installment of interest on or principal of, any Debenture or any fee,
expense or other payment required hereunder;
(ii) Any representation or warranty made under this Agreement, or any of the
other Loan Documents, or in any certificate or statement furnished or made to
Lender pursuant hereto or in connection herewith or with the Loans hereunder,
shall prove to be untrue or inaccurate in any material respect as of the date
on which such representation or warranty was made;
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Agreement (continued)
(iii) Default shall occur in the performance of any of the covenants or
agreements of Borrower or of its Subsidiaries (if any) contained herein, or in
any of the other Loan Documents, which is not remedied within thirty (30) days
after written notice thereof to Borrower from Lender;
(iv) Default shall occur in the payment of any material indebtedness (other
than the Obligation) of the Borrower or its Subsidiaries (if any), or default
shall occur in respect of any note, loan agreement or credit agreement relating
to any such indebtedness and such default shall continue for more than the
period of grace, if any, specified therein and any such indebtedness shall
become due before its stated maturity by acceleration of the maturity thereof
or shall become due by its terms and shall not be promptly paid or extended;
(v) Any of the Loan Documents shall cease to be legal, valid and binding
agreements enforceable against the Borrower in accordance with the respective
terms thereof, or shall in any way be terminated or become or be declared
ineffective or inoperative, or shall in any way whatsoever cease to give or
provide the respective rights, titles, interests, remedies, powers or
privileges intended to be created thereby;
(vi) Borrower or its Subsidiaries (if any) shall (A) apply for or consent to
the appointment of a receiver, trustee, custodian, intervenor or liquidator of
itself, or of all or substantially all of such Person's assets, (B) file a
voluntary petition in bankruptcy, admit in writing that such Person is unable
to pay such Person's debts as they become due or generally not pay such
Person's debts as they become due, (C) make a general assignment for the
benefit of creditors, (D) file a petition or answer seeking reorganization or
an arrangement with creditors or to take advantage of any bankruptcy or
insolvency laws, (E) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against such Person in
any bankruptcy, reorganization or insolvency proceeding, or (F) take corporate
action for the purpose of effecting any of the foregoing;
(vii) An involuntary petition or complaint shall be filed against Borrower
or any of its Subsidiaries (if any) seeking bankruptcy or reorganization of
such Person or the appointment of a receiver, custodian, trustee, intervenor or
liquidator of such Person, or all or substantially all of such Person's assets,
and such petition or complaint shall not have been dismissed within sixty (60)
days of the filing thereof or an order, order for relief, judgment or decree
shall be entered by any court of competent jurisdiction or other competent
authority approving a petition or complaint seeking reorganization of Borrower
or its subsidiary (if any) or appointing a receiver, custodian, trustee,
intervenor or liquidator of such Person, or of all or substantially all of such
Person's assets;
(viii) Any final judgment(s) for the payment of money in excess of the sum
of $250,000 in the aggregate shall be rendered against Borrower or any
subsidiary and such judgment or judgments shall not be satisfied or discharged
at least ten (10) days prior to the date on which any of its assets could be
lawfully sold to satisfy such judgment;
(ix) The Borrower shall fail to issue and deliver shares of Common Stock as
provided herein upon conversion of the Debenture; or
(x) The Borrower shall fail to submit Lender's nominee, if any, for election
to the Board of Directors of the Borrower or shall remove Lender's nominee from
the Board of Directors of Borrower other than for cause.
SECTION 8.02. REMEDIES UPON EVENT OF DEFAULT.
(a) If an Event of Default shall have occurred and be continuing for a
period of thirty (30) days, then Lender may exercise any one or more of the
following rights and remedies, and any other remedies provided in any of the
Loan Documents, as Lender in its sole discretion may deem necessary or
appropriate:
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Agreement (continued)
(i) declare the unpaid Principal Amount (after application of any payments
or installments received by Lender) of, and all interest then accrued but
unpaid on, the Debentures and any other liabilities hereunder to be forthwith
due and payable, whereupon the same shall forthwith become due and payable
without presentment, demand, protest, notice of default, notice of acceleration
or of intention to accelerate or other notice of any kind, all of which
Borrower hereby expressly waives, anything contained herein or in the
Debentures to the contrary notwithstanding;
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce any of
Lender's rights and remedies under the Loan Documents, or otherwise provided
under or pursuant to any applicable law or agreement, all of which rights may
be specifically enforced.
SECTION 8.03. PERFORMANCE BY LENDER.
(a) Should Borrower fail to perform any covenant, duty or agreement
contained herein or in any of the other Loan Documents, Lender may perform or
attempt to perform such covenant, duty or agreement on behalf of Borrower. In
such event, Borrower shall, at the request of Lender, promptly pay any amount
reasonably expended by Lender in such performance or attempted performance to
Lender at its principal office in Dallas, Texas, together with interest
thereon, at the interest rate specified in the Debenture, from the date of such
expenditure until paid. Notwithstanding the foregoing, it is expressly
understood that Lender assumes no liability or responsibility for the
performance of any duties of Borrower hereunder or under any of the other Loan
Documents.
SECTION 8.04. PAYMENT OF EXPENSES INCURRED BY LENDER.
(a) Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided herein,
Borrower agrees to pay and shall pay all costs and expenses (including Lender's
attorney's fees and expenses) reasonably incurred by Lender in connection with
the preservation and enforcement of Lender's rights under this Agreement, the
Debentures, or any other Loan Document.
ARTICLE IX - REGISTRATION RIGHTS
SECTION 9.01. DEMAND FOR REGISTRATION.
(a) Subject to the Holder's rights to convert all or part of the
Debentures, the Borrower hereby agrees to register, subject to the terms and
conditions set forth herein, all or any portion of the Registrable Securities
at any time it shall receive a written request from the Holders of at least
fifty percent (50%) of the Registrable Securities Then Outstanding (or a lesser
percent if the anticipated aggregate offering price, net of underwriting
discounts and commissions, would exceed $1,000,000) that the Borrower file a
registration statement under the 1933 Act covering the registration of at least
a majority of the Registrable Securities Then Outstanding. The Borrower shall,
within 20 days of its receipt thereof, give written notice of such request to
all Holders of record of Registrable Securities. The Holders of said
Registrable Securities shall then have 15 days from the date of mailing of such
notice by the Borrower to request that all or a portion of their respective
Registrable Securities be included in said registration. The Borrower hereby
agrees, subject to the limitations hereof, to use its best lawful efforts to
effect as soon as reasonably possible, and in any event (if legally possible,
and as allowed by the SEC, and if no factor outside the Borrower's reasonable
control prevents it) within 150 days of the receipt of the initial written
registration request, to effect the registration under the 1933 Act of all
Registrable Securities which the Holders thereof (the "Initiating Holders")
have requested.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Borrower as a part of their request made pursuant
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Agreement (continued)
to this Agreement, and the Borrower shall include such information in the
written notice to the other Holders of Registrable Securities referred to in
Section 9.01(a). In such event, the right of any Holder to include his/her
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
the Borrower, the underwriter, a majority in interest of the Initiating Holders
and such Holder) is limited to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Borrower as provided in Section 9.03(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by mutual agreement of the Borrower and a
majority in interest of the Initiating Holders, which agreement shall not be
unreasonably withheld. Notwithstanding any other provision of this Section
9.01, if the underwriter advises the Initiating Holders and the Borrower in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Initiating Holder(s) shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated on a pro rata basis among all Holders that have
requested to participate in such registration.
(c) Borrower shall utilize Rule 144 if said exemption, in the Borrower's
sole determination, meets its distribution requirements.
(d) Notwithstanding the foregoing, if the Borrower shall furnish to the
Initiating Holders a certificate signed by the President of the Borrower
stating that in the good faith judgment of the Board of Directors of the
Borrower, it would be materially detrimental to the Borrower and its
shareholders for such registration statement to be filed at that time, and it
is therefore essential to defer the filing of such registration statement, the
Borrower shall have the right to defer the commencement of such a filing for a
period of not more than 180 days after receipt of the request of the Initiating
Holders; provided, however, that at least 12 months must elapse between any two
such deferrals.
SECTION 9.02. "PIGGY-BACK" REGISTRATION.
If, but without any obligation to do so, the Borrower proposes to register
any of its capital stock under the 1933 Act in connection with the public
offering of such securities for its own account or for the account of its
security holders, other than Holders of Registrable Securities pursuant hereto
(a "Piggy-Back Registration Statement"), (except for (i) a registration
relating solely to the sale of securities to participants in the Borrower's
stock plans or employee benefit plans or (ii) a registration relating solely to
an SEC Rule 145 transaction or any rule adopted by the SEC in substitution
thereof or in amendment thereto), then:
(a) The Borrower shall give written notice of such determination to each
Holder of Registrable Securities, and each such Holder shall have the right to
request, by written notice given to the Borrower within 15 days of the date
that such written notice was mailed by the Borrower to such Holder, that a
specific number of Registrable Securities held by such Holder be included in
the Piggy-Back Registration Statement (and related underwritten offering, if
any);
(b) If the Piggy-Back Registration Statement relates to an underwritten
offering, the notice given to each Holder shall specify the name or names of
the managing underwriter or underwriters for such offering. In addition such
notice shall also specify the number of securities to be registered for the
account of the Borrower and for the account of its shareholders (other than the
Holders of Registrable Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an underwritten
offering, each Holder of Registrable Securities to be included therein must
agree (i) to sell such Holder's Registrable Securities on the same basis as
provided in the underwriting arrangement approved by the Borrower, and (ii) to
timely complete and execute all questionnaires, powers of attorney,
indemnities, hold-back agreements,
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Agreement (continued)
underwriting agreements and other documents required under the terms of such
underwriting arrangements or by the SEC or by any state securities regulatory
body;
(d) If the managing underwriter or underwriters for the underwritten
offering under the Piggy-Back Registration Statement determines that inclusion
of all or any portion of the Registrable Securities in such offering would
adversely affect the ability of the underwriters for such offering to sell all
of the securities requested to be included for sale in such offering at the
best price obtainable therefor, the aggregate number of Registrable Securities
that may be sold by the Holders shall be limited to such number of Registrable
Securities, if any, that the managing underwriter or underwriters determine
may be included therein without such adverse effect as provided below. If the
number of securities proposed to be sold in such underwritten offering exceeds
the number of securities that may be sold in such offering, there shall be
included in the offering, first, up to the maximum number of securities to be
sold by the Borrower for its own account and for the account of other
stockholders (other than Holders of Registrable Securities), as they may agree
among themselves, and second, as to the balance, if any, Registrable Securities
requested to be included therein by the Holders thereof (pro rata as between
such Holders based upon the number of Registrable Securities initially
proposed to be registered by each), or in such other proportions as the
managing underwriter or underwriters for the offering may require; provided,
however, that in the event that the number of securities proposed to be sold in
such underwritten offering exceeds the number of securities that may be sold in
such offering pursuant to the terms and conditions set forth above and the
Piggy-Back Registration Statement is a result of public offering by the
Borrower of its securities for its own account, there shall be included in the
offering, first, up to the maximum number of securities to be sold by the
Borrower for its own account and second, as to the balance, if any, securities
to be sold for the account of the Borrower's stockholders (both the Holders of
Registrable Securities requested and such other stockholders of the Borrower
requested to be included therein) on a pro rata basis; and
(e) Holders of Registrable Securities shall have the right to withdraw
their Registrable Securities from the Piggy- Back Registration Statement, but
if the same relates to an underwritten offering, they may only do so during the
time period and on the terms agreed upon among the underwriters for such
underwritten offering and the Holders of Registrable Securities.
SECTION 9.03. OBLIGATIONS OF THE BORROWER.
Whenever required to effect the registration of any Registrable Securities
pursuant to this Agreement, the Borrower shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use its best lawful efforts to cause such
registration statement to become effective, and keep such registration
statement effective until the sooner of all such Registrable Securities having
been distributed, or until 120 days have elapsed since such registration
statement became effective (subject to extension of this period as provided
below);
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement, or 120 days have elapsed since such registration
statement became effective (subject to the extension of this period as provided
below);
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use its best lawful efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Borrower shall not be required in connection therewith or as
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Agreement (continued)
a condition thereto to qualify as a broker-dealer in any states or
jurisdictions or to do business or to file a general consent to service of
process in any such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to the Borrower and the Holders of a majority of the Registrable
Securities to be included in such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing; and
(g) In the event of the notification provided for in Section 9.03(f) above,
the Borrower shall use its best efforts to prepare and file with the SEC (and
to provide copies thereof to the Holders) as soon as reasonably possible an
amended prospectus complying with the 1933 Act, and the period during which the
prospectus referred to in the notice provided for in Section 9.03(f) above
cannot be used and the time period prior to the use of the amended prospectus
referred to in this Section 9.03(g) shall not be counted in the 120 day period
of this Section 9.03.
SECTION 9.04. FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the Borrower to
take any action pursuant to this Article IX that the selling Holders shall
furnish to the Borrower any and all information reasonably requested by the
Borrower, its officers, directors, employees, counsel, agents or
representatives, the underwriter or underwriters, if any, and the SEC or any
other Governmental Authority, including but not limited to: (i) such
information regarding themselves, the Registrable Securities held by them, and
the intended method of disposition of such securities, as shall be required to
effect the registration of their Registrable Securities, and (ii) the identity
of and compensation to be paid to any proposed underwriter or broker-dealer to
be employed in connection therewith.
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the 1933 Act, the Borrower
shall give the Holders of Registrable Securities on whose behalf such
Registrable Securities are to be registered and their underwriters, if any, and
their respective counsel and accountants, at such Holders' sole cost and
expense (except as otherwise set forth herein), such access to copies of the
Borrower's records and documents and such opportunities to discuss the business
of the Borrower with its officers and the independent public accountants who
have certified its financial statements as shall be reasonably necessary in the
opinion of such Holders and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the 1933 Act.
SECTION 9.05. EXPENSES OF DEMAND REGISTRATION.
Except as set forth below, all expenses, other than underwriting discounts
and commissions incurred in connection with not more than two demand
registrations pursuant to Section 9.01 above, including, without limitation,
all registration, filing and qualification fees, printers' and accounting fees,
fees and disbursements of counsel for the Borrower, and the reasonable fees and
disbursements of one counsel for the selling Holders, shall be borne by the
Borrower; provided, however, that the Borrower shall not be required to pay for
any expenses of any registration proceeding which was commenced prior to July
12, 1998, pursuant to Section 9.01, or if the registration request is
subsequently withdrawn at the written request of the Holders of the majority of
the Registrable Securities subject to such registration.
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Agreement (continued)
SECTION 9.06. EXPENSES OF PIGGY-BACK REGISTRATION.
(a) Each Holder shall bear and pay all commissions and discounts
attributable to the inclusion of such Holder's Registrable Securities in any
registration, filing or qualification of Registrable Securities pursuant to
Section 9.02 and the reasonable fees and disbursements of the counsel for the
selling Holders
SECTION 9.07. INDEMNIFICATION REGARDING REGISTRATION RIGHTS.
If any Registrable Securities are included in a registration statement under
this Article IX:
(a) To the extent permitted by law, the Borrower will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933 Act
or the 1934 Act, against any losses, claims, damages, liabilities (joint or
several) or any legal or other costs and expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action to which they may become subject under the 1933 Act, the
1934 Act or other federal or state law, insofar as such losses, claims,
damages, costs, expenses or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact with respect to the Borrower or its
securities contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements therein; (ii) the omission or alleged omission to state therein a
material fact with respect to the Borrower or its securities required to be
stated therein or necessary to make the statements therein not misleading; or
(iii) any violation or alleged violation by the Borrower of the 1933 Act, the
1934 Act, any federal or state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law.
Notwithstanding the foregoing, the indemnity agreement contained in this
Section 9.07(a) shall not apply and the Borrower shall not be liable (i) in any
such case for any such loss, claim, damage, costs, expenses, liability or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person, or (ii) for amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the prior written consent of the Borrower, which consent shall
not be unreasonably withheld.
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Agreement shall
indemnify and hold harmless the Borrower, each of its directors and officers
who have signed the registration statement, each Person, if any, who controls
the Borrower within the meaning of the 1933 Act or the 1934 Act, each of the
Borrower's employees, agents, counsel and representatives, any underwriter and
any other Holder selling securities in such registration statement, or any of
its directors or officers, or any person who controls such Holder, against any
losses, claims, damages, costs, expenses, liabilities (joint or several) to
which the Borrower or any such director, officer, controlling person, employee,
agent, representative, underwriter, or other such Holder, or director, officer
or controlling person thereof, may become subject, under the 1933 Act, the 1934
Act or other federal or state law, only insofar as such losses, claims,
damages, costs, expenses or liabilities or actions in respect thereto arise out
of or are based upon any Violation, in each case to the extent and only to the
extent that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such. Each such Holder will indemnify any legal or other expenses
reasonably incurred by the Borrower or any such director, officer, employee,
agent representative, controlling person, underwriter or other Holder, or
officer, director or of any controlling person thereof, in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section
9.07(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, costs, expenses,
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Agreement (continued)
liability or action if such settlement is effected without the prior written
consent of the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section 9.07
of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9.07, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonable fees and expenses
of such counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve the indemnifying party of its obligations under this Section 9.07,
except to the extent that the failure results in a failure of actual notice to
the indemnifying party and such indemnifying party is materially prejudiced in
its ability to defend such action solely as a result of the failure to give
such notice.
(d) If the indemnification provided for in this Section 9.07 is unavailable
to an indemnified party under this Section in respect of any losses, claims,
damages, costs, expenses, liabilities or actions referred to herein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, costs, expenses, liabilities or actions in
such proportion as is appropriate to reflect the relative fault of the
Borrower, on the one hand and of the Holder, on the other, in connection with
the Violation that resulted in such losses, claims, damages, costs, expenses,
liabilities or actions. The relative fault of the Borrower, on the one hand,
and of the Holder, on the other, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of the material
fact or the omission to state a material fact relates to information supplied
by the Borrower or by the Holder, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e) The Borrower, on the one hand, and the Holders, on the other hand,
agree that it would not be just and equitable if contribution pursuant to this
Section 9.07 were determined by a pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, costs, expenses,
liabilities and actions referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
reasonable legal or other expenses incurred by such indemnified party in
connection with defending any such action or claim. Notwithstanding the
provisions of this Section 9.07, neither the Borrower nor the Holders shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities were offered to the public exceeds the amount of
any damages which the Borrower or each such Holder has otherwise been required
to pay by reason of such Violation. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
SECTION 9.08. REPORTS UNDER THE 1934 ACT.
So long as the Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, with a view to making available to the Holders the
benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
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Agreement (continued)
securities of the Borrower to the public without registration or pursuant to a
registration on Form S-3, if applicable, the Borrower agrees to use its best
lawful efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other documents
required of the Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by such
registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ;
or list all Common Stock covered by such registration statement on such
securities exchange on which any of the Common Stock is then listed; or, if the
Common Stock is not then quoted on NASDAQ or listed on any national securities
exchange, use its best efforts to have such Common Stock covered by such
registration statement quoted on NASDAQ or, at the option of the Borrower,
listed on a national securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, (i) forthwith upon request a copy of the most recent annual or
quarterly report of the Borrower and such other SEC reports and documents so
filed by the Borrower, and (ii) such other information (but not any opinion of
counsel) as may be reasonably requested by any Holder seeking to avail himself
of any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
SECTION 9.09. ASSIGNMENT OF REGISTRATION RIGHTS.
(a) Subject to the terms and conditions of this Agreement, and the
Debentures, the right to cause the Borrower to register Registrable Securities
pursuant to this Agreement may be assigned by Holder to any transferee or
assignee of such securities; provided that said transferee or assignee is a
transferee or assignee of at least ten percent (10%) of the Registrable
Securities and provided that the Borrower is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act; it being the intention that so long as Holder
holds any Registrable Securities hereunder, either Holder or its transferee or
assignee of at least ten percent may exercise the demand right to registration
and piggy-back registration rights hereunder. Other than as set forth above,
the parties hereto hereby agree that the registration rights hereunder shall
not be transferable or assigned and any contemplated transfer or assignment in
contravention of this Agreement shall be deemed null and void and of no effect
whatsoever.
SECTION 9.10. OTHER MATTERS.
(a) Each Holder of Registrable Securities hereby agrees by acquisition of
such Registrable Securities that, with respect to each offering of the
Registrable Securities, whether each Holder is offering such Registrable
Securities in an underwritten or non-underwritten offering, such Holder will
comply with Rules 10b-2, 10b-6 and 10b-7 of the 1934 Act and such other or
additional anti-manipulation rules then in effect until such offering has been
completed, and in respect of any non-underwritten offering, in writing will
inform the Borrower, any other Holders who are selling shareholders, and any
national securities exchange upon which the securities of the Borrower are
listed, that the Registrable Securities have been sold and will, upon the
Borrower's request, furnish the distribution list of the Registrable
Securities. In addition, upon the request of the Borrower, each Holder will
supply the Borrower with such documents and information as the Borrower may
reasonably request with respect to the subject matter set forth and described
in this Section 9.10.
(b) Each Holder of Registrable Securities hereby agrees by acquisition of
such Registrable Securities that, upon receipt of any notice from the Borrower
of the happening of any event which makes
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Agreement (continued)
any statement made in the registration statement, the prospectus or any
document incorporated therein by reference, untrue in any material respect or
which requires the making of any changes in the registration statement, the
prospectus or any document incorporated therein by reference, in order to make
the statements therein not misleading in any material respect, such Holder will
forthwith discontinue disposition of Registrable Securities under the
prospectus related to the applicable registration statement until such Holder's
receipt of the copies of the supplemented or amended prospectus, or until it is
advised in writing by the Borrower that the use of the prospectus may be
resumed, and has received copies of any additional or supplemental filings
which are incorporated by reference in the prospectus.
(c) The Borrower hereby agrees not to effect any public sale or other
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such equity securities, during the period
commencing on the 7th day prior to, and ending on the 120th day (subject to
extension as provided in Section 9.03 hereof) following the effective date of
any underwritten demand registration, other than pursuant to Form S-8.
SECTION 9.11 TERMINATION OF RIGHTS.
(a) The Holders' right to demand registration and to participate in a
Piggy-Back Registration, as granted to Holders under this Article IX, shall
terminate on June 30, 2006, or after the Holder has exercised two demand
registration rights at the expense of the Borrower as provided in Article IX of
this Agreement, whichever is first to occur.
ARTICLE X - DIRECTORS AND BOARD MEETING ATTENDANCE
SECTION 10.01. BOARD REPRESENTATION OR ATTENDANCE BY LENDER DESIGNEE.
(a) Borrower herewith agrees that Lender shall have the right from time to
time, at Lender's option and so long as there is $1,000,000 face value of
Debentures that have not been fully converted or redeemed, to designate a
nominee to the Board of Directors of the Borrower, which designee is subject to
THE written approval of Borrower which approval shall not be unreasonably
withheld. Borrower will, at all times, use its reasonable best efforts to
secure the election of such designee as a Director of the Borrower, provided
that such designee may, at his or her option, elect to serve only as an
"Advisory Director" with all the rights of the Directors in regards to notice
and attendance at meetings of the Board of Directors, or committees thereof,
but without voting rights. All reasonable costs and expenses incurred by such
Designee as a Director or Advisory Director, or by Lender on behalf of such
Designee, shall be reimbursed by Borrower, consistent with payment policies
accorded to other independent directors.
(b) Further, though Lender may waive, from time to time, its right to
require a Board Designee, in such event it shall be entitled, at its own
expense, to have a representative of the Lender attend meetings of the Board of
Directors of the Borrower or of its Subsidiaries and such representative may
serve as an observer but without voice in matters under discussion except as
requested.
(c) Any such Designee or representative of the Lender shall, if requested
to do so, absent himself or herself from the meeting in the event of, and so
long as, the Directors are considering and acting on matters pertaining to any
rights or obligations of the Borrower or the Lender under this Agreement, the
Debenture, or the other Loan Documents. Borrower will provide Lender's
designated representative with the same notice of Board meetings and
information as the Borrower shall provide to its duly elected Directors.
SECTION 10.02. BORROWER'S RIGHT TO REQUEST LENDER TO PROVIDE AN ADVISOR AND A
DIRECTOR NOMINEE.
(a) Lender herewith agrees that, so long as no Default or Event of Default
exists under this Agreement and so long as the Debentures have not been fully
converted or redeemed, Lender will, at the written request of Borrower, use its
reasonable best efforts to provide, from time to time, a person or
30
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Agreement (continued)
persons, reasonably believed knowledgeable in investor relations, such person
or persons to be available to consult with, and serve as advisor to, the
Borrower about its communications with its shareholders and with the general
investment public. Further, if requested by Borrower, at least one such person
will be available to serve as a nominee to the Board of Directors of the
Borrower provided that such nominee may, at his or her option, elect to serve
only as an "Advisory Director" with all the rights of the Directors in regards
to notice and attendance at meetings of the Board of Directors, or committees
thereof, but without voting rights. All reasonable costs and expenses incurred
by such person or persons, or by Lender on behalf of such persons, shall be
reimbursed by Borrower, consistent with payment policies accorded to other
independent directors.
SECTION 10.03. LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A DIRECTOR
NOMINEE.
(a) It is provided and agreed that the actions and advice of any person
while serving pursuant to Section 10.01 or 10.02 as an advisor to the Borrower
or as a member of Borrower's Board of Directors, or while serving solely as a
representative of Lender in attendance at meetings of the Board of Directors,
shall be construed to be the actions and advice of that person alone and not be
construed as actions of the Lender as to any notice of requirements or rights
of Lender under this Agreement, the Debenture or the other Loan Documents; nor
as actions of the Lender to approve modifications, consents, amendments or
waivers thereof; and all such actions or notices shall be deemed actions or
notices of the Lender only when duly provided in writing and given in
accordance with the provisions of this Agreement.
SECTION 10.04. NONLIABILITY OF LENDER.
(a) The provisions of Section 10.01 and 10.02 notwithstanding, the
relationship between Borrower and Lender is, and shall at all times remain,
solely that of borrower and lender, and except for the agreement to use its
best efforts to provide a knowledgeable advisor (whose actions and advice shall
be deemed to be solely advised by such person in an individual capacity and not
advice by Lender), Lender neither undertakes nor assumes any responsibility or
duty to the Borrower to review, inspect, supervise, pass judgment upon, or
inform Borrower of any matter in connection with any phase of Borrower's
business, operations, or condition, financial or otherwise. Borrower shall
rely entirely upon its own judgment with respect to such matters, and any
review, inspection, supervision, exercise of judgment, or information supplied
to Borrower by Lender, or any representative or agent of Lender, in connection
with any such matter is for the protection of Lender, and neither Borrower nor
any third party is entitled to rely thereon.
ARTICLE XI - Agency and Inter-Lender Provisions
SECTION 11.01. LENDERS' REPRESENTATIONS AND WARRANTIES TO OTHER LENDERS
Each Lender represents and warrant to the other Lender and the Agent:
(a) It is legal for it to make its portion of the Loan, and the making of
such portion of the Loan complies with laws applicable to it;
(b) It has made, without reliance upon any other Lender, its own
independent review (including any desired investigations and inspections) of,
and it accepts and approves, the Loan, this Agreement and the associated
documents and all other matters and information which it deems pertinent. It
acknowledges that the Loan Documents are a complete statement of all
understandings and respective rights and obligations between and among Lenders
and Borrowers regarding the Loan.
(c) No Lender has made any express or implied representation or warranty to
any other Lender with respect to this transaction.
(d) It will, independently and without reliance upon any other Lender, and
based upon such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement, and will make
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Agreement (continued)
such investigation as it deems necessary to inform itself as to the Loan, the
Loan Document, the Borrower and any collateral; provided, however, nothing
contained in this Section shall limit Agent's obligation to provide the other
Lenders with the information and documents Agent is expressly required to
deliver under this Agreement.
(e) The relationship of Lender is, and shall at all times remain, solely
that of a lender of its respective Loan portion. Lenders are not partners or
joint venturer in connection with the Loan
SECTION 11.02. WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS
(a) So long as Renaissance III and Renaissance PLC each have not sold or
assigned any of the debentures issued to such Lender pursuant to this
Agreement, consent of both Renaissance III and Renaissance PLC will be required
for the waiver of principal or interest payment and any alterations thereto.
(b) If either Renaissance III and Renaissance PLC disposes of any part of
their Debentures, a waiver of an interest or principal payment and any
alterations thereto will require the consent of the holders of a majority by
dollar amount of the then outstanding Debentures issued pursuant to this
Agreement.
SECTION 11.03. AGENCY
(a) Renaissance III and Renaissance PLC each hereby designates and appoints
Renaissance Capital Group, Inc. ("Renaissance Group") as its Agent under this
Agreement and authorizes the Agent to take such action on its behalf under the
provisions of this Agreement and the other Loan Documents and to exercise such
powers as are set forth herein or therein, together with such other powers as
are reasonable incidental thereto. In performing its functions and duties under
this Agreement, the Agent shall act solely as agent of the Lenders and does not
assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for any of the Borrowers. The Agent
may perform any of its duties under this Agreement, or under the other Loan
Documents, by or through its agents or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement or in the other Loan Documents. Except
as expressly provided herein, the duties of the Agent shall be mechanical and
administrative in nature. The Agent shall have and may use its sole discretion
with respect to exercising or refraining from taking any actions which the
Agent is expressly entitled to take or assert under this Agreement and the
other Loan Documents. The Agent shall not have by reason of this Agreement a
fiduciary relationship with respect to any Lender. Nothing in this Agreement
or any of the other Loan Documents, express or implied, is intended to or shall
be construed to impose upon the Agent any obligations in respect of this
Agreement or any of the other Loan Documents except as expressly set forth
herein or therein. If the Agent seeks the consent or approval of the Majority
in Interest to the taking or refraining from taking any action hereunder, the
Agent shall send notice thereof to each Lender. The Agent shall promptly
notify each Lender any time that the Majority in Interest have instructed the
Agent to act or refrain from acting pursuant hereto. The Agent may employ
agents, co-agents and attorneys-in-fact and shall not be responsible to the
Lenders or the Borrower, except as to money or securities received by it or its
authorized agents, for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees or
agents shall be liable to any Lender for any action taken or omitted by it or
any of them under this Agreement or under any of the other Loan Documents, or
in connection herewith or therewith, except that no Person shall be relieved of
any liability imposed by law, intentional tort or gross negligence. The Agent
shall not be not be responsible to any Lender for any recitals, statements,
representations or warranties contained in this Agreement or for the execution,
effectiveness, genuineness, validity, enforceability, collectibility, or
sufficiency of this Agreement or any of the other Loan Documents or any of the
transactions contemplated thereby, or for the financial condition of any of the
Borrowers. The Agent shall not be
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Agreement (continued)
required to make any inquiry concerning either the performance or observance of
any of the terms, provisions or conditions of this Agreement or any of the
other Loan Documents or the financial condition of any of the Borrowers, or the
existence or possible existence of any Default or Event of Default. Agent
shall give Lender notice of any Default or Event of Default of which Agent has
actual notice. The Agent may at any time request instructions from the Lenders
with respect to any actions or approvals which by the terms of this Agreement
or of any of the other Loan Documents the Agent is permitted or required to
take or to grant, and if such instructions are promptly requested, the Agent
shall be absolutely entitled to refrain from taking any action or to withhold
any approval and shall not be under any liability whatsoever to any Person for
refraining from any action or withholding any approval under any of the Loan
Documents until it shall have received such instructions from the Majority in
Interest. Without limiting the foregoing, no Lender shall have any right of
action whatsoever against the Agent as a result of the Agent acting or
refraining from acting under this Agreement or any of the other Loan Documents
in accordance with the instructions of the Majority in Interest.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person, and with respect to all matters pertaining
to this Agreement or any of the other Loan Documents and its duties hereunder
or thereunder, upon advice of counsel selected by it.
(e) To the extent that the Agent is not reimbursed and indemnified by the
Borrowers, the Lenders will reimburse and indemnify the Agent for and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement or any of the
other Loan Documents or any action taken or omitted by the Agent under this
Agreement or any of the other Loan Documents, in proportion to each Lender's
pro rata share. The obligations of the Lenders under this indemnification
provision shall survive the payment in full of the Loans and the termination of
this Agreement.
(f) (i) The Agent is hereby authorized by each of the Borrowers and the
Lenders, from time to time, before or after the occurrence of an Event of
Default, to make such disbursements and advances ("Agent Advances") pursuant to
this Agreement and the other Loan Documents which the Agent, in its sole
discretion, deems necessary or desirable to preserve or protect the collateral,
or any portion thereof, in order to enhance the likelihood of, or maximize the
amount of, repayment by the Borrowers, or any guarantor or other Person, of the
Loans and other Obligations or to pay any other amount chargeable to any of the
Borrowers pursuant to the terms of this Agreement, including, without
limitation, costs, fees and expenses. The Agent Advances shall be repayable on
demand and be secured by the collateral.
(ii) If and so long as the Loan is secured or the Lender is a
beneficiary of any security agreement or pledge, the Lenders hereby irrevocably
authorize the Agent, at its option and in its discretion, to release any Lien
granted to or held by the Agent for the benefit of the secured creditors upon
any collateral (A) upon termination of the commitments and payments and
satisfaction of all Loans, (whether or not due) and all other Obligations which
have matured and which the Agent has been notified in writing are then due and
payable, (B) constituting property being sold or disposed of if the applicable
Borrower certifies to the Agent that the sale or disposition is made in
compliance with this Agreement (and the Agent may rely conclusively on any such
certificate, without further inquiry); (C) constituting property in which none
of the Borrowers owned any interest at the time the Lien was granted or at any
time thereafter; (D) constituting property leased to any of the Borrowers under
a lease which has expired or been terminated in a transaction permitted under
this Agreement or which will expire imminently and which has not been, and is
not intended by such Borrower to be, renewed or extended; or (E) if approved,
authorized or ratified in writing by the Majority in Interest. Upon request by
the Agent or each of the Borrowers at any time, the Lenders will confirm in
writing the Agent's authority to release any Lien
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Agreement (continued)
granted to or held by the Agent, for the benefit of the secured creditors, upon
particular types or items of collateral pursuant to this section.
(iii) So long as no Event of Default has occurred and is then
continuing, upon receipt by the Agent of confirmation from the Majority in
Interest of its authority to release any Lien granted to or held by the Agent,
for the benefit of the secured creditors, upon particular types or items of
collateral, and upon at least five (5) business days prior written request by
each of the Borrowers, the Agent shall (and is hereby irrevocable authorized by
the Lenders to) execute such documents as may be necessary to evidence the
release of the Liens granted to the Agent, for the benefit of the secured
creditors, herein or pursuant hereto upon such collateral; provided, however,
that the Agent (i) shall not be required to execute any such document on terms
which, in the Agent's opinion, would expose the Agent to liability or create
any obligation or entail any consequence other than the release and (ii) shall
not in any manner discharge, affect or impair the Obligations or any Liens
(other than those expressly being released) upon (or obligations of any of the
Borrowers in respect of) all interests retained by any Borrower, including
(without limitation) the proceeds of any sale, all of which shall continue to
constitute part of the collateral.
(iv) The Agent shall have no obligation whatsoever to any Lender to
assure that the collateral exists or is owned by any Borrower or is cared for,
protected or insured or has been encumbered or that the Liens granted to the
Agent, for the benefit of the secured creditors, herein or pursuant hereto have
been properly or sufficiently or lawfully created, perfected, protected or
enforced or are entitled to any particular priority, or to exercise at all or
in any particular manner or under any duty or care, disclosure or fidelity, or
to continue exercising, any of the rights, authorities and powers granted or
available to the pursuant to this section or pursuant to any of the Loan
Documents, it being understood and agreed that in respect of the collateral, or
any act, omission or event related thereto, the Agent may act in any manner it
may deem appropriate, in its sole discretion, given the Agent's own interest in
the collateral in its capacity as one of the Lenders and that the Agent shall
have no duty or liability whatsoever to any Lender as to any of the foregoing.
ARTICLE XII - MISCELLANEOUS
SECTION 12.01. STRICT COMPLIANCE.
(a) Any waiver by Lender of any breach or any term or condition of this
Agreement or the other Loan Documents shall not be deemed a waiver of any other
breach, nor shall any failure to enforce any provision of this Agreement or the
other Loan Documents operate as a waiver of such provision or of any other
provision, nor constitute nor be deemed a waiver or release of the Borrower for
anything arising out of, connected with or based upon this Agreement or the
other Loan Documents.
SECTION 12.02. WAIVERS AND MODIFICATIONS.
(a) All modifications, consents, amendments or waivers (herein "Waivers")
of any provision of this Agreement, the Debentures or any other Loan Documents,
and any consent to departure therefrom, shall be effective only if the same
shall be in writing by Lender and then shall be effective only in the specific
instance and for the purpose for which given. No notice or demand given in any
case shall constitute a waiver of the right to take other action in the same,
similar or other instances without such notice or demand. No failure to
exercise, and no delay in exercising, on the part of Lender, any right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right. The rights of Lender hereunder and under the other Loan
Documents shall be in addition to all other rights provided by law.
SECTION 12.03. LENDER LIABILITY.
(a) The duties, warranties, covenants and promises arising from the Loan
Documents of each Lender to Borrower shall be several and not joint, and the
Borrower shall have no legal or equitable
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Agreement (continued)
cause of action against one Lender (or its successors or assigns) for any
liability of the other Lender (or its successors or assigns)
SECTION 12.03. NOTICES.
(a) Any notices or other communications required or permitted to be given
by this Agreement or any other documents and instruments referred to herein
must be (i) given in writing and personally delivered, mailed by prepaid
certified, registered mail or sent by overnight service such as Federal
Express, or (ii) made by telex or facsimile transmission delivered or
transmitted to the party to whom such notice or communication is directed, with
confirmation thereupon given in writing and personally delivered or mailed by
prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be mailed
or delivered to the principal offices of the party to whom such notice is
addressed, as that address is specified herein on the signature page hereof.
Any such notice or other communication shall be deemed to have been given
(whether actually received or not) on the day it is mailed, postage prepaid, or
sent by overnight service or personally delivered or, if transmitted by telex
or facsimile transmission, on the day that such notice is transmitted;
provided, however, that any notice by telex or facsimile transmission, received
by any Borrower or Lender after 4:00 p.m., Standard Time at the recipient's
address, on any day, shall be deemed to have been given on the next succeeding
day. Any party may change its address for purposes of this Agreement by giving
notice of such change to the other parties pursuant to this Section 12.03.
SECTION 12.04. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION.
(a) Any suit, action or proceeding against the Borrower with respect to
this Agreement, the Debentures or any judgment entered by any court in respect
thereof, may be brought in the courts of the State of Texas, County of Dallas,
or in the United States courts located in the State of Texas as Lender in its
sole discretion may elect, and Borrower hereby submits to the non-exclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Borrower hereby agrees that service of all writs, process and
summonses in any such suit, action or proceeding brought in the State of Texas
may be brought upon, and Borrower hereby irrevocably appoints, the CT
Corporation, Dallas, Texas, as its true and lawful attorney-in-fact in the
name, place and stead of Borrower to accept such service of any and all such
writs, process and summonses. Borrower hereby irrevocably waives any
objections which it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement or any
Debenture brought in the courts located in the State of Texas, County of
Dallas, and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum.
SECTION 12.05. ARBITRATION
(a) Upon the demand of the Lender or Borrower (collectively the "parties"),
made before the institution of any judicial proceeding or not more than 60 days
after service of a complaint, third party complaint, cross-claim or
counterclaim or any answer thereto or any amendment to any of the above, any
Dispute (as defined below) shall be resolved by binding arbitration in
accordance with the terms of this arbitration clause. A "Dispute" shall
include any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now existing
or hereafter occurring between the parties arising out of, pertaining to or in
connection with this Agreement, any document evidencing, creating, governing,
or securing any indebtedness guaranteed pursuant to the terms hereof, or any
related agreements, documents, or instruments (the "Documents"). The parties
understand that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather that being decided through litigation in court
before a judge or jury and that once decided by an arbitrator the claims
involved cannot later be brought, filed, or pursued in court. IF BORROWER
SHALL FAIL TO PAY (OR SHALL STATE IN WRITING AN INTENTION NOT TO PAY OR ITS
INABILITY TO PAY), NOT LATER THAN TEN (10) DAYS AFTER THE DUE DATE, ANY
INSTALLMENT OF INTEREST ON OR PRINCIPAL OF, ANY DEBENTURE OR ANY
35
<PAGE> 36
Agreement (continued)
FEE, EXPENSE OR OTHER PAYMENT REQUIRED HEREUNDER, LENDER MAY, AT ITS SOLE
OPTION, ENFORCE ITS RIGHTS OUTSIDE THE ARBITRATION PROVISION FOUND IN THIS
SECTION 12.05 OR ANY DEBENTURE.
(b) Arbitrations conducted pursuant to this Agreement, including selection
of arbitrators, shall be administered by the American Arbitration Association
("Administrator") pursuant to the Commercial Arbitration rules of the
Administrator. Arbitrations conducted pursuant to the terms hereof shall be
governed by the provisions of the Federal Arbitration Act (Title 9 of the
United States Code), and to the extent the foregoing are inapplicable,
unenforceable or invalid, the laws of the State of Texas. Judgment upon any
award rendered hereunder may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
91 or similar governing state law. Any party who fails to submit to binding
arbitration following a lawful demand by the opposing party shall bear all
costs and expenses, including reasonable attorney's fees, incurred by the
opposing party in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this arbitration
clause shall limit the right of any party to (i) foreclose against any real or
personal property collateral or other security, (ii) exercise self-help
remedies (including repossession and setoff rights) or (iii) obtain provisional
or ancillary remedies such as injunctive relief, sequestration, attachment,
replevin, garnishment, or the appointment of a receiver from a court having
jurisdiction. Such rights can be exercised at any time except to the extent
such action is contrary to a final award or decision in any arbitration
proceeding. The institution and maintenance of an action as described above
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the Dispute to arbitration, nor render inapplicable the
compulsory arbitration provisions hereof. Any claim or Dispute related to
exercise of any self-help, auxiliary or other exercise of rights under this
section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the agreement of
the parties. All statutes of limitation applicable to any Dispute shall apply
to any proceeding in accordance with this arbitration clause. Any arbitrator
selected to act as the only arbitrator in a Dispute shall be required to be a
practicing attorney with not less than 5 years practice in commercial law in
the State of Texas. With respect to a Dispute in which the claims or amounts
in controversy do not exceed five hundred thousand dollars ($500,000), a single
arbitrator shall be chosen and shall resolve the Dispute. In such case the
arbitrator shall have authority to render an award up to but not to exceed five
hundred thousand dollars ($500,000) including all damages of any kind
whatsoever, costs, fees and expenses. Submission to a single arbitrator shall
be a waiver of all parties' claims to recover more than five hundred thousand
dollars ($500,000). A Dispute involving claims or amounts in controversy
exceeding five hundred thousand dollars ($500,000) shall be decided by a
majority vote of a panel of three arbitrators ("Arbitration Panel"), one of
whom must possess the qualifications to sit as a single arbitrator in a Dispute
decided by one arbitrator. If the arbitration is consolidated with one
conducted pursuant to the terms of an agreement between the Lender and the
Borrower related to the indebtedness guaranteed, then the Arbitration Panel
shall be one which meets the criteria set forth between the Lender and
Borrower. Arbitrator(s) may, in the exercise of their discretion, at the
written request of a party, (i) consolidate in a single proceeding any multiple
party claims that are substantially identical and all claims arising out of a
single loan or series of loans including claims by or against borrower(s),
guarantors, sureties and/or owners of collateral if different from the
Borrower, and (ii) administer multiple arbitration claims as class actions in
accordance with Rule 23 of the Federal Rules of Civil Procedure. The
arbitrator(s) shall be empowered to resolve any dispute regarding the terms of
this Agreement or the arbitrability of any Dispute or any claim that all or any
part (including this provision) is void or voidable but shall have no power to
change or alter the terms of this Agreement.
36
<PAGE> 37
Agreement (continued)
The award of the arbitrator(s) shall be in writing and shall specify the
factual and legal basis for the award.
(e) To the maximum extent practicable, the Administrator, the arbitrator(s)
and the parties shall take any action necessary to require that an arbitration
proceeding hereunder be concluded within 180 days of the filing of the Dispute
with the Administrator. The arbitrator(s) shall be empowered to impose
sanctions for any party's failure to proceed within the times established
herein. Arbitration proceedings hereunder shall be conducted in Texas at a
location determined by the Administrator. In any such proceeding a party shall
state as a counterclaim any claim which arises out of the transaction or
occurrence or is in any way related to the Documents which does not require the
presence of a third party which could not be joined as a party in the
proceeding, The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of the Documents and repayment in full of
sums owed to Lender by Borrower unless the parties otherwise expressly agree in
writing. Each party agrees to keep all Disputes and arbitration proceedings
strictly confidential, except for disclosures of information required in the
ordinary course of business of the parties or as required by applicable law or
regulation.
SECTION 12.06. INVALID PROVISIONS.
(a) If any provision of any Loan Document is held to be illegal, invalid or
unenforceable under present or future laws during the term of this Agreement,
such provision shall be fully severable; such Loan Document shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of such Loan Document; and the remaining provisions of such
Loan Document shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its severance from
such Loan Document. Furthermore, in lieu of each such illegal, invalid or
unenforceable provision shall be added as part of such Loan Document a
provision mutually agreeable to Borrower and Lender as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable. In the event Borrower and Lender are unable to agree
upon a provision to be added to the Loan Document within a period of ten (10)
business days after a provision of the Loan Document is held to be illegal,
invalid or unenforceable, then a provision acceptable to independent
arbitrators, such to be selected in accordance with the provisions of the
American Arbitration Association, as similar in terms to the illegal, invalid
or unenforceable provision as is possible and be legal, valid and enforceable
shall be added automatically to such Loan Document. In either case, the
effective date of the added provision shall be the date upon which the prior
provision was held to be illegal, invalid or unenforceable.
SECTION 12.07. MAXIMUM INTEREST RATE.
(a) Regardless of any provision contained in any of the Loan Documents,
Lender shall never be entitled to receive, collect or apply as interest on the
Debentures any amount in excess of interest calculated at the Maximum Rate,
and, in the event that any Lender ever receives, collects or applies as
interest any such excess, the amount which would be excessive interest shall be
deemed to be a partial prepayment of principal and treated hereunder as such;
and, if the principal amount of the Obligation is paid in full, any remaining
excess shall forthwith be paid to Borrower. In determining whether or not the
interest paid or payable under any specific contingency exceeds interest
calculated at the Maximum Rate, Borrower and Lender shall, to the maximum
extent permitted under applicable law, (i) characterize any non-principal
payment as an expense, fee or premium rather than as interest; (ii) exclude
voluntary prepayments and the effects thereof, and (iii) amortize, pro rate,
allocate and spread, in equal parts, the total amount of interest throughout
the entire contemplated term of the Debentures; provided that, if the
Debentures are paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period
of existence thereof exceeds interest calculated at the Maximum Rate, Lender
shall refund to Borrower the amount of such excess or credit the amount of such
37
<PAGE> 38
Agreement (continued)
excess against the principal amount of the Debentures and, in such event,
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in excess of
interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of
interest (if any) permitted by applicable law on such day that at any time, or
from time to time, may be contracted for, taken, reserved, charged or received
on the Indebtedness evidenced by the Debentures under the laws which are
presently in effect of the United States of America and the State of Texas or
by the laws of any other jurisdiction which are or may be applicable to the
holders of the Debentures and such Indebtedness or, to the extent permitted by
law, under such applicable laws of the United States of America and the State
of Texas or by the laws of any other jurisdiction which are or may be
applicable to the holder of the Debentures and which may hereafter be in effect
and which allow a higher maximum nonusurious interest rate than applicable laws
now allow.
SECTION 12.08. PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES.
(a) The Lender shall have the right to enter into a participation agreement
with any other party with respect to the Debentures, or to sell all or any part
of the Debentures, but any participation or sale shall not affect the rights
and duties of such Lender hereunder vis-a-vis Borrower. In the event that all
or any portion of the Loan shall be, at any time, assigned, transferred or
conveyed to other parties, any action, consent or waiver (except for compromise
or extension of maturity), to be given or taken by Lender hereunder (herein
"Action"), shall be such action as taken by the holders of a majority in amount
of the Principal Amount of the Debentures then outstanding, as such holders are
recorded on the books of the Borrower and represented by Lender's Agent as
described in subsection (b) below.
(b) Assignment or sale of the Debentures shall be effective, on the books
of the Borrower only upon (i) endorsement of the Debenture, or part thereof, to
the proposed new holder, along with a current notation of the amount of
payments or installments received and net Principal Amount yet unfunded or
unpaid, and presentment of such Debenture to the Borrower for issue of a
replacement Debenture, or Debentures, in the name of the new holder; (ii) a
designation by the holders of a single Lender's Agent for Notice, such agent to
be the sole party to whom Borrower shall be required to provide notice when
notice to Lender is required hereunder and who shall be the sole party
authorized to represent Lender in regard to modification or waivers under the
Debenture, this Agreement, or other Loan Documents; and (iii) delivery of an
opinion of counsel, reasonably satisfactory to Borrower, that transfer shall
not require registration or qualification under applicable state or federal
securities laws.
(c) So long as the Borrower is not in default hereunder, the Lender shall
not sell or assign an interest in the Debentures or rights under this Agreement
to any Person that the Borrower reasonably identifies to Lender as being
engaged as a competitor.
SECTION 12.09 CONFIDENTIALITY.
(a) All financial reports or information which are furnished to Lender, or
its director designee or other representatives, pursuant to this Agreement or
pursuant to the Debentures or other Loan Documents shall be treated as
confidential unless and to the extent that such information has been otherwise
disclosed by the Borrower, but nothing herein contained shall limit or impair
Lender's right to disclose such reports to any appropriate Governmental
Authority, or to use such information to the extent pertinent to an evaluation
of the Obligation, or to enforce compliance with the terms and conditions of
this Agreement, or to take any lawful action which Lender deems necessary to
protect its interests under this Agreement.
(b) Lender, its director designees, and agents shall use their reasonable
best efforts to protect and preserve the confidentiality of such information
except for such disclosure as shall be required for compliance by Lender or its
director designees with SEC reporting requirements or otherwise as a matter of
law. The provisions of Section 5.01 notwithstanding, Borrower may refuse to
provide information as
38
<PAGE> 39
Agreement (continued)
required pursuant thereto to an assignee or successor in interest to the Lender
unless and until such assignee or successor shall have executed an agreement to
maintain the confidentiality of the information as provided herein.
SECTION 12.10. BINDING EFFECT.
(a) The Loan Documents shall be binding upon and inure to the benefit of
Borrower and Lender and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the prior
written consent of Lender, assign any rights, powers, duties or obligations
thereunder.
SECTION 12.11. NO THIRD PARTY BENEFICIARY.
(a) The parties do not intend the benefits of this Agreement to inure to
any third party, nor shall this Agreement be construed to make or render Lender
liable to any materialman, supplier, contractor, subcontractor, purchaser or
lessee of any property owned by Borrower, or for debts or claims accruing to
any such persons against Borrower. Notwithstanding anything contained herein
or in the Debentures, or in any other Loan Document, no conduct by any or all
of the parties hereto, before or after signing this Agreement nor any other
Loan Document, shall be construed as creating any right, claim or cause of
action against Lender, or any of its officers, directors, agents or employees,
in favor of any materialman, supplier, contractor, subcontractor, purchaser or
lessee of any property owned by Borrower, nor to any other person or entity
other than Borrower.
SECTION 12.12. ENTIRETY.
(a) This Agreement and the Debentures and the other Loan Documents issued
pursuant thereto contain the entire agreement between the parties and supersede
all prior agreements and understandings, if any, relating to the subject matter
hereof and thereof.
SECTION 12.13. HEADINGS.
(a) Section headings are for convenience of reference only and, except as a
means of identification of reference, shall in no way affect the interpretation
of this Agreement.
SECTION 12.14. SURVIVAL.
(a) All representations and warranties made by Borrower herein shall
survive delivery of the Debentures and the making of the Loans.
SECTION 12.15. MULTIPLE COUNTERPARTS.
(a) This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same agreement, and any of
the parties hereto may execute this Agreement by signing any such counterpart.
SECTION 12.16. GOVERNING LAW.
(a) THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED,
AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS
OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
LOAN AGREEMENT AND ALL OF THE OTHER LOAN DOCUMENTS.
Section 12.17. REFERENCE TO BORROWER.
(a) The term Borrower shall mean Integrated Security Systems, Inc where the
context of the agreement makes such other reference appropriate.
(signature page follows)
39
<PAGE> 40
Agreement (continued)
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed, sealed, and delivered, as of the day and year first above written.
<TABLE>
<S> <C>
Address for Notice: BORROWER
- ------------------- --------
8200 Springwood Drive,
Suite 230 INTEGRATED SECURITY SYSTEMS, INC.
Irving, Texas 75063
By:
-----------------------------------------------
Gerald K. Beckman, President
Attest by:
--------------------------------
James Casey, Secretary
LENDER
Address for Notice: Renaissance US Growth & Income Trust PLC
- -------------------
8080 North Central Expressway, By:
Suite 210/LB59 -----------------------------------------------
Dallas, Texas 75206 Vance M. Arnold, Vice President
(214) 891 8294
Fax: (214) 891-8200 Attest by:
--------------------------------
Title: Secretary
LENDER
Address for Notice: ------
- -------------------
8080 North Central Expressway, Renaissance Capital Growth & Income Fund III, Inc.
Suite 210/LB59
Dallas, Texas 75206 By:
(214) 891 8294 -----------------------------------------------
Fax: (214) 891-8200 Vance M. Arnold, Vice President
Attest by:
--------------------------------
Title: Secretary
</TABLE>
40
<PAGE> 1
EXHIBIT 10.66
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is effective as of this
29th day of August 1996, by and between Integrated Security Systems, Inc.
("ISSI"), having an address for purposes of this Agreement at 8200 Springwood
Drive, Suite 230, Irving, Texas and I.S.T. Partners, Ltd. (the "Partnership"),
having an address for purposes of this Agreement at 2525 McKinney Avenue, Suite
B, Dallas, Texas.
In consideration of the premises and the mutual promises, covenants
and agreements contained herein, the parties hereto covenant and agree as
follows:
TERM. Subject to the terms and conditions hereinafter set forth, ISSI
hereby agrees to provide management services to the Partnership as provided
herein, commencing on the date hereof and shall continue until the Partnership
in terminated as the result of the repayment of capital accounts as provided
for in Section 10 of the Limited Partnership Agreement for the Partnership.
DUTIES AND SERVICES. ISSI shall provide and pay support services to the
Partnership for the marketing and development of the Code as provided in the
Marketing and Development Agreement dated July 29, 1996 between the Parties
(the "Marketing and Development Agreement"). These support services shall
include, but not be limited to, office space, office equipment and
communications. ISSI shall also provide day-to-day management of the marketing
and development efforts and shall provide senior executives to manage contract
personnel and operations.
TERM OF PAYMENT. ISSI shall be credited with 15% of all revenue, as
revenue is defined in the Private Placement Memorandum, associated with the
licensing or service of the Code. The Partnership shall receive 85% of all
such revenue associated with the licensing or service of the Code. Payment
shall be made to the Partnership within 10 days after ISSI's receipt of said
revenue.
TERMINATION. The Agreement shall terminate as provided for in Section 10
of the Limited Partnership Agreement of the Partnership. ISSI shall have no
further obligations under this Agreement except for: (a) any accrued and unpaid
benefits to Partnership contract personnel as of the date of any such
termination; and (b) any unpaid cost or expense reimbursement relating to
infrastructure support.
TERMINATION FOR CAUSE. The Partnership may terminate the Agreement for
cause which shall mean ISSI's failure to pay the Partnership revenue in
accordance with the Marketing and Development Agreement; if ISSI applies for or
consents to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself, or of all or substantially all, of its assets; ISSI files
a voluntary petition in bankruptcy or be unable to pay its debts as they become
due; ISSI makes a general assignment for the benefit of creditors or ISSI takes
corporate action for the purpose of effecting any of the foregoing.
<PAGE> 2
INDEMNIFICATION. ISSI shall indemnify, defend, and hold harmless the
Partnership and its General Partner from any loss, damage, liability, cost, or
expense, (including reasonable attorneys' fees and expenses and court costs)
arising out of any act or failure to act by the Partnership or its General
Partner if such act or failure to act is done or omitted in good faith in
furtherance of marketing and developing the Code and is not attributable to
gross negligence or willful misconduct by the Partnership or the General
Partner.
INVENTIONS AND IDEAS. This Partnership agrees to be bound by the
provisions of Section 8 of the Marketing and Development Agreement relating to
inventions and ideas.
GOVERNING LAW. This Agreement shall be governed as to its validity,
interpretation and effect by the laws of the State of Texas.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have executed this Agreement on the date first above written.
Integrated Security Systems, Inc.
- -----------------------------------
Gerald K. Beckmann, President
I.S.T. Partners, Ltd.
- -----------------------------------
by Founders Equity Group, Inc., its General Partner
Thomas J. Spackman, Jr., Vice President
<PAGE> 1
EXHIBIT 10.67
MARKETING AND DEVELOPMENT AGREEMENT
between
INTEGRATED SECURITY SYSTEMS, INC. and
INNOVATIVE SECURITY TECHNOLOGIES, INC.
and
I.S.T. PARTNERS, LTD.
September 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 1
- -------------------------------------------------------------------------
DEFINITIONS 1
SECTION 2 3
- -------------------------------------------------------------------------
OWNER'S OBLIGATIONS 3
2.1 Initial Deliveries. 3
2.2 Enhancements. 3
2.3 Provide Basic Infrastructure. 3
2.4 Royalties. 3
SECTION 3 3
- -------------------------------------------------------------------------
SALES REPRESENTATIVE'S OBLIGATIONS 3
3.1 Evaluation and Testing. 3
3.2 Development of Code. 3
3.3 Marketing and Sales. 3
3.4 Royalties. 4
SECTION 4 4
- -------------------------------------------------------------------------
GRANT OF EXCLUSIVE WORLDWIDE SALES AND MARKETING RIGHTS 4
SECTION 5 4
- -------------------------------------------------------------------------
ROYALTIES AND PAYMENT 4
5.1 Advance Royalties. 4
5.2 Ongoing Royalties. 4
5.3 Audit of Owner. 5
5.4 Audit of Sales Representative. 5
SECTION 6 5
- -------------------------------------------------------------------------
AVAILABILITY OF ENHANCEMENTS 5
SECTION 7 5
- -------------------------------------------------------------------------
LIMITED WARRANTY AND LIMITATIONS OF LIABILITY 5
7.1 Ownership and Authority. 5
7.2 Conformity to Specifications. 5
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SECTION 8 6
- ------------------------------------------------------------------------
OWNERSHIP AND RIGHTS 6
8.1 Ownership of Code by Owner. 6
8.2 Vesting of Rights. 6
8.3 Patent License. 6
SECTION 9 6
- ------------------------------------------------------------------------
INVENTIONS 6
9.1 Inventions Defined. 6
9.2 Assignment of Inventions. 6
SECTION 10 7
- ------------------------------------------------------------------------
MARKING OF PRODUCTS 7
SECTION 11 7
- ------------------------------------------------------------------------
TERM OF AGREEMENT 7
SECTION 12 7
- ------------------------------------------------------------------------
INDEMNIFICATION 7
12.1 Owner Indemnification. 7
12.2 Project Indemnification. 7
12.3 General Partner Indemnification. 8
12.4 Conditions. 8
SECTION 13 8
- ------------------------------------------------------------------------
MISCELLANEOUS 8
13.1 No Assertion of Rights. 8
13.2 Independent Contractor Status. 8
13.3 No Conflict of Interest. 8
13.4 Compliance with Law. 8
13.5 No Assignment. 9
13.6 Notices. 9
13.7 Governing Laws. 9
13.8 No Waiver. 9
13.9 Force Majeure. 9
13.10 Scope of Agreement; Amendment. 9
</TABLE>
<PAGE> 4
THIS MARKETING AND DEVELOPMENT AGREEMENT (this "Agreement") is
effective as of the 1st day of September 1996, by and between Integrated
Security Systems, Inc. and its wholly-owned subsidiary, Innovative Security
Technologies, Inc. (hereinafter collectively referred to as "Owner"), having
an address for purposes of this Agreement at 8200 Springwood Drive, Suite 230,
Irving, Texas, and I.S.T. Partners, Ltd. (hereinafter referred to as "Sales
Representative") having an address for purposes of this Agreement at 2525
McKinney Avenue, Suite B, Dallas, Texas.
WITNESSETH:
WHEREAS, Owner is the owner of all U.S. copyrights and other
proprietary rights in certain computer programs and related documentation that
are the subject of this Agreement (hereinafter defined as the "Code");
WHEREAS, Owner desires to grant Sales Representative the exclusive
worldwide right to market and license the Code, and Sales Representative
desires to enhance and supplement the Code in order to more effectively market
the Code; and
WHEREAS, each party hereto represents that it is ready, willing and
able to undertake the responsibilities and obligations set forth in this
Agreement and that it possesses the rights, resources and capabilities to
perform its responsibilities under this Agreement;
NOW, THEREFORE, in consideration of the premises, and of the
obligations herein made and undertaken, the parties hereto do hereby covenant
and agree as follows:
Section 1
DEFINITIONS
For the purposes of this Agreement, the definitions set forth in this
Section shall apply to the respective capitalized terms:
1.1 "AUTHORIZED END-USER COPY."
A copy of a Product that may be used by customers of Sales
Representative under the Owner License. Backup copies for use only in the
event of loss or destruction of an Authorized End-User Copy are not counted as
Authorized End-User Copies.
1.2 "CODE."
Computer programming code, including source code (i.e.,
human-readable) and object code (i.e., machine- readable) and associated
procedural code, commonly referred to as the Intelli-Site(R) system.
1
<PAGE> 5
1.3 "DERIVATIVE WORK."
A work that is based upon one or more pre-existing works, such as a
revision, modification, translation, abridgment, condensation, expansion or any
other form in which a pre-existing work may be recast, transformed or adapted,
and that, if prepared without the authorization of the Owner of the
pre-existing work, would constitute a copyright infringement.
1.4 "DOCUMENTATION."
The printed material relating to the Code, including the description
of the principles of operation of the Code.
1.5 "ENHANCEMENT."
A change or addition to the Code or Documentation, other than an Error
Correction, that improves its function, adds new function, or substantially
enhances its performance. Enhancements shall not include programs that have a
value and utility separate from the use of the Code and that, as a practical
matter, may be priced and offered separately from the Code.
1.6 "ERROR."
A defect in the Code or a mistake in the Documentation that prevents
the Code from functioning in material conformity with the specifications.
1.7 "ERROR CORRECTION."
A change to the Code or the Documentation that is in a form that
allows its application to the Code or inclusion in the Documentation to
re-establish material conformity with the specifications. All Error Correction
shall be considered part of the Code and Documentation for all purposes under
this Agreement.
1.8 "OWNER LICENSE."
A license agreement between Owner and Sales Representative's customers
under which copies of the Product will be provided to such customers. The
Owner License shall contain terms limiting the use of Products to designated
Central Processing Units (CPU's), allowing only one backup copy for each CPU,
prohibiting further copying and/or transfer of the Products by such customers,
and prohibiting reverse assembly, reverse compiling, or reverse engineering of
the Products.
1.9 "PRODUCT."
Computer programs that contain, or are Derivative Works of, the Code
or any subset thereof, and that are completed in marketable form (with
appropriate end-user Documentation) by Sales Representative and are offered by
Sales Representative to its customers or potential customers, in object code
form, under the terms of the Owner License.
2
<PAGE> 6
SECTION 2
OWNER'S OBLIGATIONS
2.1 INITIAL DELIVERIES.
Owner shall deliver to Sales Representative two (2) copies of the Code
(in object code and source code forms), and two (2) copies of the Documentation
within three (3) days following the date of this Agreement.
2.2 ENHANCEMENTS.
Owner shall offer Enhancements, proposed additions to the Code, and
Documentation in accordance with Section 6 hereof.
2.3 PROVIDE BASIC INFRASTRUCTURE.
Owner shall provide basic support services to the Sales Representative
that shall include, but not be limited to, office space, office equipment and
communications.
2.4 ROYALTIES.
Owner shall pay royalties to Sales Representative in accordance with
Section 5.
SECTION 3
SALES REPRESENTATIVE'S OBLIGATIONS
3.1 EVALUATION AND TESTING.
Sales Representative shall evaluate and test the Code and
Documentation to determine its suitability for use.
3.2 DEVELOPMENT OF CODE.
Sales Representative shall use all reasonable efforts to develop the
Code to meet customer requirements and to more effectively market the Code
(these additions shall be considered Enhancements). It is anticipated that to
effectively market the Code, engineering services will be needed that will
include engineering support of clients, additional device driver development,
additional application development, and functional enhancement.
3.3 MARKETING AND SALES.
Sales Representative shall use all reasonable efforts to market and
sublicense the Code in accordance with this Agreement. Sales Representative
shall use all reasonable efforts to package the Code that the Sales
Representative determines to be a commercially reasonable offering and to
market such Products to potential customers worldwide.
3
<PAGE> 7
3.4 ROYALTIES.
Sales Representative shall pay royalties to Owner in accordance with
Section 5.
SECTION 4
GRANT OF EXCLUSIVE WORLDWIDE SALES AND MARKETING RIGHTS
Owner hereby grants to Sales Representative, the worldwide exclusive
right to solicit, promote, sell and fulfill the Code and to take the following
actions:
1. Use and reproduce the Code and Documentation and prepare
Derivative Works thereof, in object code or source code form, for the
purposes of development, technical support, maintenance and warranty
service of Code.
2. Use, reproduce and distribute copies of the Code and
Documentation or Derivative Works thereof, in object code form only,
in furtherance of the marketing of Code to customers of Sales
Representative.
3. Use and copy the Code and Documentation or Derivative Works
thereof, for marketing, training and demonstration purposes with
respect to the Code.
The above grant of the exclusive sales and marketing rights prohibits
the Owner from in any way marketing or selling the Code through any
distribution channel other than the Sales Representative.
SECTION 5
ROYALTIES AND PAYMENT
5.1 ADVANCE ROYALTIES.
Sales Representative shall pay to Owner a non-refundable amount of
$250,000 for existing contracts, proposals and market prospects as detailed in
Exhibits F and G.
5.2 ONGOING ROYALTIES.
Owner desires to have all contracts placed in its name and any
contract or purchase order shall be styled accordingly. All net revenue of any
kind, as revenue is defined in the Private Placement Memorandum, associated
with the licensing or service of the Code shall be split as follows:
Owner 15%
Sales Representative 85%
4
<PAGE> 8
Owner shall remit the Sales Representative's portion within ten (10)
days after the receipt of said revenue.
5.3 AUDIT OF OWNER.
Upon Sales Representative's request, Sales Representative or an agent
or accounting firm chosen by Sales Representative shall be provided reasonable
access during normal business hours to the records of Owner for purposes of
audit of royalties due. Records sufficient to verify the revenue received,
copies of product authorized to be made, shall be maintained by Owner and made
available for audit.
5.4 AUDIT OF SALES REPRESENTATIVE.
Upon Owner's request, Owner or an agent or accounting firm chosen by
Owner shall be provided reasonable access during normal business hours to the
records of Sales Representative for purposes of audit of royalties due.
SECTION 6
AVAILABILITY OF ENHANCEMENTS
Owner may from time to time offer enhancements, to the extent
developed or acquired by Owner, to Sales Representative for inclusion in the
Code and Documentation. If the parties agree on inclusion of any Enhancements,
appropriate changes in the specifications and royalty provisions shall be set
forth in a written amendment to this Agreement, and thereupon the Enhancements
shall become part of the Code and Documentation for purposes of this Agreement.
Section 7
LIMITED WARRANTY AND LIMITATIONS OF LIABILITY
7.1 OWNERSHIP AND AUTHORITY.
Owner warrants that it is the exclusive owner of all U.S. copyrights
in the Code and Documentation and that it has all rights necessary for the
grant of the exclusive worldwide marketing rights granted by this Agreement.
7.2 CONFORMITY TO SPECIFICATIONS.
Owner warrants that the Code and Documentation will, at the time of
delivery, conform in all material respects to the specifications.
5
<PAGE> 9
SECTION 8
OWNERSHIP AND RIGHTS
8.1 OWNERSHIP OF CODE BY OWNER.
All Enhancements shall be owned by Owner. Owner shall own all U.S.
and international copyrights in the Enhancements. Owner shall not own any
interest in any programs that have a value and utility separate from the use of
the Code and that, as a practical matter, may be priced and offered separately
from the Code.
8.2 VESTING OF RIGHTS.
Sales Representative agrees to assign, and upon creation of each
Enhancement automatically assigns, to Owner, its successors and assigns,
ownership of all U.S. and international copyrights in each and every
Enhancement. From time to time upon Owner's request, Sales Representative
and/or its personnel shall confirm such assignment by execution and delivery of
such assignments, confirmations of assignment, or other written instruments as
Owner may request. Owner, its successors and assigns, shall have the right to
obtain and hold in its or their own name(s) all copyright registrations and
other evidence of rights that may be available for Enhancements.
8.3 PATENT LICENSE.
Sales Representative hereby grants to Owner, its successors and
assigns, the royalty-free, worldwide non- exclusive right and license under any
patents owned by Sales Representative, or with respect to which Sales
Representative has a right to grant such rights and licenses, to the extent
required by Owner to exploit the Enhancements and exercise its full rights in
the Enhancements, including (without limitation) the right to make, use and
sell products and services based on or incorporating such Enhancements.
SECTION 9
INVENTIONS
9.1 INVENTIONS DEFINED.
An "Invention" shall mean any idea, design, concept, technique,
invention, discovery or improvement, regardless of patentability, made solely
or jointly by Sales Representative and/or Sales Representative's contract
personnel, or jointly by Sales Representative and/or Owner during the term of
this Agreement. Invention shall not mean any programs that have a value and
utility separate from the use of the Code and that, as a practical matter, may
be priced and offered separately from the Code.
6
<PAGE> 10
9.2 ASSIGNMENT OF INVENTIONS.
Sales Representative assigns to Owner, all Inventions, together with
any potential patent rights, and the same shall become and remain property of
the Owner. Sales Representative shall make written disclosure to the Owner of
any features or concepts that Sales Representative believes to be new or
different. Under direction from the Owner, the Sales Representative agrees to
assist with the filing, preparation or prosecution of any patent application or
defense of any patent infringement.
SECTION 10
MARKING OF PRODUCTS
All Code and Documentation, including any Enhancements, shall be
marked with Owner's copyright notice. All Products offered by Sales
Representative shall display Owner's copyright notice, except that Sales
Representative may mark with its own copyright notice and register any
Derivative Works of the Code or Documentation prepared by Sales Representative,
provided that appropriate identification is made in such notice and in such
registrations of Owner's pre-existing works. The parties agree to cooperate in
any such registration and to provide necessary information and prepare and
deliver duly executed documents reasonably required in such regard.
SECTION 11
TERM OF AGREEMENT
The term of this Agreement shall commence on the date hereof and
continue until this Agreement is terminated as provided for in Section 10 of
the Limited Partnership Agreement of I.S.T. Partners, Ltd.
SECTION 12
INDEMNIFICATION
12.1 OWNER INDEMNIFICATION.
Owner agrees to and does hereby indemnify and hold harmless Sales
Representative from any and all claims, demands or actions related to the Code
or licensing of the Code or Documentation.
12.2 PROJECT INDEMNIFICATION.
Owner agrees that if the aggregate capital accounts of I.S.T.
Partners, Ltd. are not sufficient to complete any project or sales contract
relating to the Code or Documentation, that
7
<PAGE> 11
Owner has the sole and exclusive obligation to meet any additional funding
obligations to complete the project for sales contract. Sales Representative's
inability to perform under this Agreement as a result of insufficient aggregate
capital accounts of I.S.T. Partners, Ltd. shall not be considered a breach of
this Agreement.
12.3 GENERAL PARTNER INDEMNIFICATION.
Owner agrees to and does hereby indemnify and hold harmless the
General Partner from any and all claims, demands or actions related to the Code
or licensing of the Code or Documentation or for any errors in judgment, in the
absence of gross negligence or willful misconduct as stated in the Limited
Partnership Agreement.
12.4 CONDITIONS.
The foregoing indemnities shall be contingent upon the party seeking
to enforce the indemnity against the other party (1) giving written notice to
the other party of any claim, demand or action for which indemnity is sought;
(2) fully cooperating in the defense or settlement of any such claim, demand or
action; and (3) obtaining the prior written agreement of the indemnifying party
to any settlement or proposal of settlement.
SECTION 13
MISCELLANEOUS
13.1 NO ASSERTION OF RIGHTS.
It is expressly understood and agreed that, as between Owner and Sales
Representative, all right, title and interest in and to the Code and
Documentation and any other material furnished to Sales Representative under
this Agreement vests solely and exclusively in the Owner, and Sales
Representative shall neither derive nor assert any title or interest in or to
such materials except for the rights of use or licenses granted under this
Agreement.
13.2 INDEPENDENT CONTRACTOR STATUS.
Sales Representative is an independent contractor under this
Agreement, and nothing herein shall be construed to create a partnership, joint
venture or agency relationship between the parties hereto. Sales
Representative shall have no authority to enter into agreements of any kind on
behalf of Owner and shall not have the power or authority to bind or obligate
Owner in any manner to any third party.
13.3 NO CONFLICT OF INTEREST.
Sales Representative represents and warrants that it has full power
and authority to undertake the obligations set forth in this Agreement and that
it has not entered into any other agreements that would render it incapable of
satisfactorily performing its obligations hereunder, or that would place it in
a position of conflict of interest or be inconsistent with its obligations
hereunder.
8
<PAGE> 12
13.4 COMPLIANCE WITH LAW.
Sales Representative agrees that it shall comply with all applicable
laws and regulations of governmental bodies or agencies in its performance
under this Agreement.
13.5 NO ASSIGNMENT.
Sales Representative represents that it is acting on its own behalf
and is not acting as an agent for or on behalf of any third party and further
agrees that it may not assign its rights or obligations under this Agreement
without the proper written consent of Owner.
13.6 NOTICES.
All notices and other communications required or permitted to be given
under this Agreement shall be in writing and shall be considered effected when
deposited in the U.S. mail, postage prepaid and addressed to the appropriate
party at the address noted above, unless by such notice a different address
shall have been designated.
13.7 GOVERNING LAWS.
All questions concerning the validity, operation, interpretation and
construction of this Agreement will be governed by and determined in accordance
with the laws of the State of Texas.
13.8 NO WAIVER.
Neither party shall have by mere lapse of time, without giving notice
or taking other action hereunder, be deemed to have waived or breach by the
other party of any of the provisions of this Agreement. Further, the waiver by
either party of a particular breach of this Agreement by the other shall not be
construed or constitute a continuing waiver of such breach or other breaches in
the name of other provisions of this Agreement.
13.9 FORCE MAJEURE.
Neither party shall be in default if failure to perform any obligation
hereunder is caused solely by supervening conditions beyond that party's
control, including acts of God, civil commotion, strikes, labor disputes and
governmental demands of requirements.
13.10 SCOPE OF AGREEMENT; AMENDMENT.
The parties hereto acknowledge that each has read this Agreement,
understands it, and agrees to be bound by its terms. The parties further agree
that this Agreement is the complete and exclusive statement of agreement and
supersedes all proposals (oral or written), understandings, representations,
conditions, warranties, covenants and other communications between the parties
relating hereto. This Agreement may be amended only by a subsequent writing
that specifically refers to this Agreement and is signed by both parties, and
no other act, document, usage, or custom shall be deemed to amend this
Agreement.
9
<PAGE> 13
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized representatives as set forth
below.
Owner
Integrated Security Systems, Inc.
- ------------------------------------------
Gerald K. Beckmann, President
Innovative Security Technologies, Inc.
- ------------------------------------------
Gerald K. Beckmann, President
Sales Representative
I.S.T. Partners, Ltd.
- ------------------------------------------
by Founders Equity Group, Inc., its General Partner
Thomas J. Spackman, Jr., Vice President
10
<PAGE> 1
EXHIBIT 10.68
CONFIDENTIAL AGREEMENT
THIS CONFIDENTIAL AGREEMENT is entered into this 2nd day of January
1997 (the "Agreement") between INTEGRATED SECURITY SYSTEMS, INC. a Delaware
Corporation, with offices located at 8200 Springwood Drive, Suite 230, Irving,
TX 75063 ("ISSI"), and GERALD K. BECKMANN, an individual residing at 1017
Diamond Boulevard, Southlake, TX 76092 (the "Employee").
WHEREAS ISSI desires to employ Employee for certain services and under
terms and conditions contained herein, and
WHEREAS Employee desires to be employed by ISSI under certain terms
and conditions herein and to provide certain services to ISSI as defined
herein,
WHEREAS ISSI and Employee desire to continue their relationship
pursuant to this Agreement,
NOW, THEREFORE, in consideration of the mutual promises set forth in
this Agreement, both parties agree to be bound as follows:
1.0 EMPLOYMENT
1.1 Affiliate. "Affiliate" shall mean any corporation over which
Employee or ISSI, as the case may be, can exercise effective
management and control.
1.2 Change in Control. "Change in Control" shall mean:
(a) the acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person" which, for purposes of this definition,
excludes Employee or any of his Affiliates) or beneficial
ownership (within the meaning of Rule 13 (d) (3) promulgated
under the Exchange Act) of shares of common stock or other
securities of ISSI resulting in the beneficial ownership by
such individual, entity or group of fifty percent (50%) or
more of either (1) the then outstanding shares of common stock
of ISSI (The "Outstanding ISSI Common Stock") or (2) the
combined voting power of the then outstanding voting
securities of ISSI entitled to vote generally in the election
of directors (the "Outstanding ISSI Voting Securities"); or
(b) if individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to
constitute more than fifty percent (50%) of the members of the
Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by ISSI's stockholders, was approved
by a vote of at least two-thirds of the directors, then
constituting the Incumbent Board shall be considered as
<PAGE> 2
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 2
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an
actual or threatened election consents subject to Rule 14a-11
of Regulation 14A promulgated under the Exchange Act or other
actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board; or
(c) approval by the stockholders of ISSI of a
reorganization, merger or consolidation, unless following such
reorganization, merger or consolidation, (1) more than fifty
percent (50%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such
reorganization, merger or consolidation (the "Outstanding
Survivor Common Stock"), and the combined voting power of the
then outstanding voting securities of such corporation
entitled to vote generally in the election of directors (the
"Outstanding Survivor Voting Securities"), is then
beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding ISSI
Common Stock and Outstanding ISSI Voting Securities
immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger,
or consolidation of the Outstanding ISSI Common Stock and
Outstanding ISSI Voting Securities, as the case may be (for
purposes of determining whether such percentage test is
satisfied, there shall be excluded form the number of shares
of Outstanding Survivor Common Stock and Outstanding Survivor
Voting Securities owned by ISSI's stockholders, but not from
the total number of shares of Outstanding Survivor Common
stock and Outstanding Survivor Voting Securities, any shares
or voting securities received by any such stockholder in
respect of any consideration other than shares or voting
securities of ISSI, (2) no Person (excluding ISSI), any
employee benefit plan (or related trust) of ISSI, any
qualified employee benefit plan of such surviving corporation
and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or
indirectly, fifty percent (50%) or more of the Outstanding
ISSI Common Stock or Outstanding ISSI Voting Securities, as
the case may be, beneficially owns, directly or indirectly,
fifty percent (50%) or more of, respectively, the shares of
Outstanding Survivor Common Stock or the Outstanding Survivor
Voting Securities and (3) more than fifty percent (50%) of the
members of the board of directors of the surviving corporation
were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) (1) approval by the stockholders of ISSI of a
complete liquidation or dissolution of ISSI or (2) the first
to occur of (i) the sale or other disposition (in one
transaction or a series of related transactions) of all or
substantially all of the
<PAGE> 3
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 3
assets of ISSI, or (ii) the approval by the stockholders of
ISSI of any such sale or disposition, other than, in each
case, any such sale or disposition to a corporation, with
respect to which immediately thereafter, ((x) more than fifty
percent (50%) of, respectively, the shares of Outstanding
Survivor Common Stock and the Outstanding Survivor Voting
Securities is then beneficially owned, directly, or
indirectly, by all entities who were the beneficial owners,
respectively, of the Outstanding ISSI Common Stock and
Outstanding ISSI Voting Securities immediately prior to such
sale or other disposition in substantially the same proportion
as their ownership, immediately prior to such sale or other
disposition, of the Outstanding ISSI Common Stock and
Outstanding ISSI Voting Securities, as the case may be (for
purposes of determining whether such percentage test is
satisfied, there shall be excluded from the number of shares
of Outstanding Survivor Common Stock and Outstanding Survivor
Voting Securities of the surviving corporation, any shares or
voting securities received by any such stockholder in respect
of any consideration other than shares or voting securities of
ISSI, (y) no person excluding ISSI and any employee benefit
plan (or related trust) of ISSI, any Qualified employee
benefit plan of such transferee corporation and any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, fifty percent (50%) or
more of the Outstanding ISSI Common Stock or Outstanding ISSI
Voting Securities, as the case may be, beneficially owns,
directly or indirectly, fifty percent (50%) or more of,
respectively, the shares of Outstanding Survivor Common Stock
and the Outstanding Survivor Voting Securities and (z) more
than fifty percent (50%) of the members of the board of
directors of the Surviving Corporation were members of the
Incumbent Board at the time of the execution of the initial
agreement or action of the board providing for such sale or
other disposition of assets of ISSI.
(e) Notwithstanding anything to the contrary contained in
this Agreement, a Change in Control for purposes of this
Agreement shall not mean the occurrence of any event as set
forth in subparagraph (a), (b), (c), or (d) of this paragraph
1.2 if Employee participated (i) in the sale of Outstanding
ISSI Voting Securities or (ii) in the voting of Shares of
Outstanding ISSI Common Stock or Outstanding ISSI Voting
Securities that resulted, directly or indirectly, in the event
which, but for this subparagraph (e) , would otherwise
constitute a Change in Control under this Agreement.
2.0 EMPLOYMENT
ISSI agrees to and does hereby employ Employee, and Employee hereby agrees to
and does hereby continue in the employ of ISSI, for the period set forth in
paragraph 3 below (the Period of Employment), in the position and with the
duties and responsibilities set forth in paragraph 3 below, and upon the other
terms and conditions set forth in this Agreement.
<PAGE> 4
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 4
3.0 PERIOD OF EMPLOYMENT
The Period of Employment shall commence on the original date of this Agreement
and subject only to the provisions of paragraphs 10, 11, and 13.0 below,
relating, respectively, to death, disability and severance, shall continue
until the close of business two (2) years from the date of this Agreement. In
the event that Employee shall continue in the full- time employment of ISSI
after such two-year period or such later date without a written extension of
this Agreement, such continued employment shall be for successive annual
periods and shall be subject to the terms and conditions of this Agreement, and
the Period of Employment shall include the period during which Employee in fact
so continues in such employment.
4.0 POSITION
During the Period of Employment, Employee shall serve as President and Chief
Executive Officer (CEO) of ISSI. The functions, duties and responsibilities of
CEO shall be defined by the Board of Directors. It is expressly understood
that nothing in the foregoing shall preclude the Board of Directors from making
such organizational and reporting changes as the Board of Directors may, in
good faith, deem desirable and for the benefit of ISSI.
5.0 PERFORMANCE
Throughout the Period of Employment, Employee agrees to devote Employee's full
time and undivided attention during normal business hours to the business and
affairs of ISSI and, in particular, to performance of all functions, duties and
responsibilities as CEO of ISSI and any subsidiaries or divisions, except for
reasonable vacations and except for illness or incapacity; but nothing in this
Agreement shall preclude Employee from devoting reasonable periods during
normal business hours required for serving as a member of the Board of
Directors or as a member of a committee appointed by the Board of Directors.
Activities of Employee which are not associated with ISSI and do not,
individually or together, interfere with the regular performance of functions,
duties and responsibilities as CEO for ISSI, or do not have a conflict of
interest with ISSI, in the reasonable but sole judgment of ISSI, are permitted.
6.0 COMPENSATION
For the acceptance of the terms and conditions of this Agreement and for the
execution of this Agreement, Employee shall be paid One Hundred Twenty Five
Thousand Dollars ($125,000).
For all services to be rendered by Employee in any capacity during the Period
of Employment, including without limitation, services as CEO, member of the
Board of Directors, or member of any committee of ISSI and its subsidiaries,
divisions and affiliates, Employee shall be paid a minimum base fixed salary of
Two Hundred Eighty Three Thousand Two Hundred Forty Nine Dollars and 92/100
($283,249.92) payable in twenty four equal payments twice each calendar month
beginning January 1, 1997. Employee shall be eligible for an annual cash bonus
as
<PAGE> 5
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 5
determined by the Board of Directors. Any increase in compensation pursuant to
the above, including incentive awards or other compensation shall in no way
diminish any other obligations of ISSI under this Agreement. The compensation
provided for in this paragraph, together with the perquisites and benefits set
forth in paragraphs 7 and 8 below, are in addition to the benefits provided for
in paragraph 9 of this Agreement.
7.0 PERQUISITES
During the Period of Employment, Employee shall be entitled to perquisites,
including, without limitation, an appropriate private office, appropriate
secretarial and clerical support, and fringe benefits (which includes for e.g.
comprehensive medical benefits, 401(k) plan, and disability insurance) accorded
positions of equal rank, as well as to reimbursement, upon proper accounting,
of reasonable expenses and disbursements incurred by Employee in the course of
Employee's duties.
8.0 PARTICIPATION IN SUCCESS BY ACHIEVEMENT PLAN
During the Period of Employment, Employee shall be and shall continue to be a
full participant in any and all other incentive and compensation plans in which
ISSI employees may participate, both those that are in effect on the date of
this Agreement and any equivalent successor or new plans that may be adopted by
ISSI. Nothing in this Agreement shall preclude improvement of reward
opportunities in such plans or other plans in accordance with the practice of
ISSI.
9.0 BENEFIT PLANS
Nothing in this Agreement shall preclude ISSI from amending or terminating any
employee benefit plan or practice but, it being the intent of the parties that
Employee shall continue to be entitled during the Period of Employment to
perquisites as set forth in paragraph 7 above or at least equal to those
attached to Employee's position on the date of this Agreement, nothing in this
Agreement shall operate or be construed to reduce, or authorize a reduction,
without Employee's written consent, in the level of such perquisites and
benefits taken as a whole, if, and to the extent that, such perquisites,
benefits, and service credits are not payable or provided under any such plans
or practices by reason of such amendment or termination thereof, ISSI itself
shall pay or provide therefor. Under no circumstances shall Employee's current
medical plan be amended or terminated except with the express written
permission of Employee, unless substituted by a reasonably equivalent plan when
taken as a whole.
10.0 EFFECT OF DEATH
In the event of the death of Employee during the Period of Employment, the
legal beneficiary of Employee shall be entitled to the base or fixed salary
provided for in paragraph 6 above for the twelve (12) months after which death
shall have occurred, at the rate being paid at the time of death, and the
Period of Employment shall be deemed to have ended as of the close of business
<PAGE> 6
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 6
on the last day of the month in which death shall have occurred but without
prejudice to any payments otherwise due in respect of Employee death.
<PAGE> 7
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 7
11.0 EFFECT OF DISABILITY
11.1 Compensation in the Event of Disability
In the event of the Disability (as defined in paragraph 11.3
below) of Employee during the Period of Employment, Employee
shall be entitled to an amount equal to the base or fixed
salary provided for in paragraph 6 above, at the rate being
paid at the time of the commencement of Disability, for the
period of such Disability, but not in excess of twelve (12)
months from the end of the Period of Employment as defined in
paragraph 11.3 below.
11.2 Reduction of Compensation in the Event of Disability
The amount of any payments due under paragraph 11.1 shall be
reduced by any payments to which Employee may be entitled for
the same period because of disability under any disability or
pension plan of ISSI or any division, subsidiary or affiliate
thereof, or as a result of worker's compensation or non-
occupational disability payments from any and all plans paid
for in Employee's behalf by ISSI.
11.3 Definition of Disability
The term "Disability" as used in this Agreement shall mean an
illness or accident occurring during the Period of Employment
which prevents Employee from performing the President and CEO
duties as determined by the Board of Directors under this
Agreement for a period of three (3) consecutive months. The
Period of Employment shall be deemed to have ended at the
close of business on the last day of such three (3)
consecutive month period but without prejudice to any payments
due Employee in respect of disability under paragraph 11.1 or
otherwise due to Employee or Employee's legal beneficiary.
12.0 INDEMNIFICATION
ISSI shall indemnify Employee to the full extent authorized or permitted as
stated under Exhibit 1, Article X, Indemnification, of the Bylaws of ISSI,
attached and made part.
13.0 SEVERANCE
13.1 Notice of Termination
Either Employee or ISSI may terminate this Employment
Agreement at any time by providing 30 days' written notice to
the other party (the "Severance Notice").
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Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 8
13.2 Severance Payment
If the Severance Notice is served by ISSI, Employee shall
receive a single lump sum payment equal to six months of the
then current Employee's compensation at the time the Severance
Notice was served.
The acceptance of this severance payment by Employee shall
constitute the exclusive remedy of Employee with respect to
any claim Employee may have against ISSI for termination of
employment.
13.3 Securities
In the event of Change of Control as defined in paragraph 1.1
or termination of employment as defined in 13.1, then any and
all stock options, warrants, or other securities of ISSI
awarded to Employee shall be accelerated in maturity upon said
Change of Control or termination and Employee shall have the
right to exercise any and all rights said accelerated maturity
provides Employee, including, but not limited to, all
restricted stock, if any, becoming unrestricted and all stock
options and warrants becoming vested and exercisable.
Employee shall have the same other remaining terms and
conditions, rights and periods of exercise after accelerated
maturity as had existed prior to accelerated maturity.
13.4 Severance Allowance Entitlement
For six (6) months following termination by ISSI, Employee,
Employee's dependents and beneficiaries shall continue to be
entitled to comprehensive major medical plan) and perquisites
(excepting any incentive compensation of future grants of
stock options or warrants) to the same extent as if Employee
is no longer an employee of ISSI, ISSI shall pay or provide
for payment of such benefits to Employee, Employee's
dependents and beneficiaries.
13.5 Restrictive Covenant
During Employee's employment, and for a period of six (6)
months following termination (when termination is initiated by
ISSI) Employee agrees that he will not for himself or any
other person or business entity, compete with the "principal
core business" of ISSI (which is the manufacturing of road and
bridge equipment, navigational lighting equipment, and
perimeter security and the development of related security
integrated platform software, i.e., gates, pneumatic carriers
and gate operators and Intelli-Site); become employed by or
perform services in any capacity for any person or business
entity that competes with the "principal core business" of
ISSI.
<PAGE> 9
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 9
13.6 Recruiting of ISSI Employees
During the Restrictive Covenant period provided for in 13.5,
Employee agrees not to directly or indirectly recruit or
solicit any employee of ISSI or actively participate in the
solicitation of any employee of ISSI.
13.7 Request for Severance
In order to obtain the severance benefits provided for in
paragraph 13.2, Employee shall be required to submit a
"Request for Severance" indicating Employee's acceptance of
payment against all past, current and future claims. ISSI
shall have no obligation to pay any severance payment or
benefits unless and until Employee shall have submitted the
Request for Severance. In the event ISSI delays or fails to
pay severance benefits, ISSI will be responsible for paying
Employee attorneys fees and costs incurred in collecting the
severance and the severance benefits.
14.0 NON-DISCLOSURE OF CONFIDENTIAL OR PROPRIETARY INFORMATION
ISSI and Employee each represent, warrant and agree that the information
provided by ISSI, its Board of Directors or and authorized committee thereof to
Employee is proprietary in nature and will not be disseminated or disclosed to
third parties without first obtaining written permission from ISSI. Such
confidential information includes, but is not limited to, information,
knowledge, dates or property concerning any process, apparatus or product
manufactured, used, developed, investigated or considered by ISSI and also
specifically includes all confidential and/or proprietary information of any
other company revealed by ISSI, its Board of Directors or an authorized
committee thereof in confidence. All confidential information including
memoranda, notes, records, papers or other documents (and all copies thereof)
relating to ISSI's business and all property associated therewith in any way
obtained by Employee from ISSI, its Board of Directors or an authorized
committee thereof shall remain the property of ISSI and shall be delivered to
ISSI at any time upon ISSI's request. Such confidential information includes,
but is not limited to, any process, apparatus or product manufactured, used,
developed, investigated or considered by ISSI.
15.0 NO TRUST CREATED
Nothing contained in this Agreement and no action taken pursuant to the
provisions of this Agreement shall create or be construed to create a trust
fund of any kind. Any funds which may be set aside or provided for in this
Agreement shall continue for all purposes to be a part of the general funds of
ISSI and no person other than ISSI shall by virtue of the provisions of this
Agreement have any interest in such funds. To the extent that any person
acquires a right to receive payments from ISSI under this Agreement, such a
right shall be no greater than the right of any unsecured general creditor if
ISSI.
<PAGE> 10
Agreement between Integrated Security Systems, Inc. and January 1, 197
Gerald K. Beckman Page 10
16.0 SUCCESSOR IN INTEREST
This Agreement and the rights and obligations hereunder shall be binding upon
and inure to the benefit of the parties hereto and their respective legal
beneficiary, and shall also bind and insure to the benefit of any successor of
ISSI by merger or consolidation or any purchaser or assignee of all or
substantially all of its assets, but, except to any such successor, purchaser
or assignee of ISSI, neither this Agreement, nor any rights or benefits
hereunder may be assigned by either party hereto.
17.0 INVALID PROVISION
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall remain in full force and effect to the
fullest extent permitted by law.
18.0 MEDIATION OF DISPUTES
The parties agree that any controversy or claim arising out of or relating to
this Agreement or any dispute arising out of the interpretation of application
of this Agreement, which the parties hereto are unable to resolve, shall be
finally resolved and settled exclusively by binding mediation in Dallas, Texas
by a single mediator under the rules of normally accepted mediation within the
State of Texas. If the parties cannot agree upon a mediator, then each party
shall choose a single mediator at the expense of each party within thirty (30)
days of the date of the selection of the first mediator. The parties severally
recognize and consent to the mediation over each of their selected mediators.
Each party shall be responsible for its own expenses in presenting its case to
the mediator or mediators. The cost and expenses of the first mediator will be
split between the parties.
19.0 ATTORNEYS' FEES
ISSI agrees to pay Employee's attorneys' fees for representation relating to
changes in this Agreement; representation during negotiations pertaining said
changes, drafting various legal documents pertaining to such changes; and
drafting any Amended Employment Agreement and Severance Agreement if required
as part of said changes.
20.0 GOVERNING LAWS
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Texas applicable to the agreements made and to be
performed entirely in Texas.
<PAGE> 11
Agreement between Integrated Security Systems, Inc. and January 1, 1997
Gerald K. Beckman Page 11
21.0 SCOPE OF AGREEMENT
This Agreement does not supersede or modify in any respect any current or
future document relating to Employee's stock ownership or his right to own or
purchase stock (stock options) or relating to his rights in the 401(k) plan.
In all other respect this Agreement shall constitute the entire Agreement
between the parties superseding all prior written or oral agreements, and may
not be modified or amended and no waiver shall be effective unless by written
document signed by both parties hereto; provided, however, that any increase in
base salary, as provided in paragraph 6 hereof shall become an amendment to
this Agreement when approved by the Board of Directors of ISSI and recorded in
the approved minutes of such meeting.
Executed this ____ day of ________________, 19___.
INTEGRATED SECURITY SYSTEMS, INC. EMPLOYEE:
- ------------------------------------- -------------------------------------
James W. Casey Gerald K. Beckmann
Chief Financial Officer and Secretary
<PAGE> 1
EXHIBIT 10.69
CONFIDENTIAL AGREEMENT
THIS CONFIDENTIAL AGREEMENT is entered into this 2nd day of January
1997 (the "Agreement") between INTEGRATED SECURITY SYSTEMS, INC. a Delaware
Corporation, with offices located at 8200 Springwood Drive, Suite 230, Irving,
TX 75063 ("ISSI"), and JAMES W. CASEY, an individual residing at 52 Pascal
Lane, Austin, TX 78746 (the "Employee").
WHEREAS ISSI desires to employ Employee for certain services and under
terms and conditions contained herein, and
WHEREAS Employee desires to be employed by ISSI under certain terms
and conditions herein and to provide certain services to ISSI as defined
herein,
WHEREAS ISSI and Employee desire to continue their relationship
pursuant to this Agreement,
NOW, THEREFORE, in consideration of the mutual promises set forth in
this Agreement, both parties agree to be bound as follows:
1.0 EMPLOYMENT
1.1 Affiliate. "Affiliate" shall mean any corporation over which
Employee or ISSI, as the case may be, can exercise effective
management and control.
1.2 Change in Control. "Change in Control" shall mean:
(a) the acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person" which, for purposes of this definition,
excludes Employee or any of his Affiliates) or beneficial
ownership (within the meaning of Rule 13 (d) (3) promulgated
under the Exchange Act) of shares of common stock or other
securities of ISSI resulting in the beneficial ownership by
such individual, entity or group of fifty percent (50%) or
more of either (1) the then outstanding shares of common stock
of ISSI (The "Outstanding ISSI Common Stock") or (2) the
combined voting power of the then outstanding voting
securities of ISSI entitled to vote generally in the election
of directors (the "Outstanding ISSI Voting Securities"); or
(b) if individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to
constitute more than fifty percent (50%) of the members of the
Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by ISSI's stockholders, was approved
by a vote of at least two thirds of the directors, then
constituting the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board , but
excluding,
<PAGE> 2
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 2
for this purpose, any such individual whose initial assumption
of office occurs as a result of either an actual or threatened
election consents subject to Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) approval by the stockholders of ISSI of a
reorganization, merger or consolidation, unless following such
reorganization, merger or consolidation, (1) more than fifty
percent (50%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such
reorganization, merger or consolidation (the "Outstanding
Survivor Common Stock"), and the combined voting power of the
then outstanding voting securities of such corporation
entitled to vote generally in the election of directors (the
"Outstanding Survivor Voting Securities"), is then
beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding ISSI
Common Stock and Outstanding ISSI Voting Securities
immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger,
or consolidation of the Outstanding ISSI Common Stock and
Outstanding ISSI Voting Securities, as the case may be (for
purposes of determining whether such percentage test is
satisfied, there shall be excluded form the number of shares
of Outstanding Survivor Common Stock and Outstanding Survivor
Voting Securities owned by ISSI's stockholders, but not from
the total number of shares of Outstanding Survivor Common
stock and Outstanding Survivor Voting Securities, any shares
or voting securities received by any such stockholder in
respect of any consideration other than shares or voting
securities of ISSI, (2) no Person (excluding ISSI), any
employee benefit plan (or related trust) of ISSI, any
qualified employee benefit plan of such surviving corporation
and any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or
indirectly, fifty percent (50%) or more of the Outstanding
ISSI Common Stock or Outstanding ISSI Voting Securities, as
the case may be, beneficially owns, directly or indirectly,
fifty percent (50%) or more of, respectively, the shares of
Outstanding Survivor Common Stock or the Outstanding Survivor
Voting Securities and (3) more than fifty percent (50%) of the
members of the board of directors of the surviving corporation
were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) (1) approval by the stockholders of ISSI of a
complete liquidation or dissolution of ISSI or (2) the first
to occur of (i) the sale or other disposition (in one
transaction or a series of related transactions) of all or
substantially all of the assets of ISSI, or (ii) the approval
by the stockholders of ISSI of any such sale or
<PAGE> 3
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 3
disposition, other than, in each case, any such sale or
disposition to a corporation, with respect to which
immediately thereafter, ((x) more than fifty percent (50%) of,
respectively, the shares of Outstanding Survivor Common Stock
and the Outstanding Survivor Voting Securities is then
beneficially owned, directly, or indirectly, by all entities
who were the beneficial owners, respectively, of the
Outstanding ISSI Common Stock and Outstanding ISSI Voting
Securities immediately prior to such sale or other disposition
in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding ISSI Common Stock and Outstanding ISSI Voting
Securities, as the case may be (for purposes of determining
whether such percentage test is satisfied, there shall be
excluded from the number of shares of Outstanding Survivor
Common Stock and Outstanding Survivor Voting Securities of the
surviving corporation, any shares or voting securities
received by any such stockholder in respect of any
consideration other than shares or voting securities of ISSI,
(y) no person excluding ISSI and any employee benefit plan (or
related trust) of ISSI, any Qualified employee benefit plan of
such transferee corporation and any Person beneficially
owning, immediately prior to such sale or other disposition,
directly or indirectly, fifty percent (50%) or more of the
Outstanding ISSI Common Stock or Outstanding ISSI Voting
Securities, as the case may be, beneficially owns, directly or
indirectly, fifty percent (50%) or more of, respectively, the
shares of Outstanding Survivor Common Stock and the
Outstanding Survivor Voting Securities and (z) more than fifty
percent (50%) of the members of the board of directors of the
Surviving Corporation were members of the Incumbent Board at
the time of the execution of the initial agreement or action
of the board providing for such sale or other disposition of
assets of ISSI.
(e) Notwithstanding anything to the contrary contained in
this Agreement, a Change in Control for purposes of this
Agreement shall not/mean the occurrence of any event as set
forth in subparagraph (a), (b), (c), or (d) of this paragraph
1.2 if Employee participated (i) in the sale of Outstanding
ISSI Voting Securities or (ii) in the voting of Shares of
Outstanding ISSI Common Stock or Outstanding ISSI Voting
Securities that resulted, directly or indirectly, in the event
which, but for this subparagraph (e), would otherwise
constitute a Change in Control under this Agreement.
2.0 EMPLOYMENT
ISSI agrees to and does hereby employ Employee, and Employee hereby agrees to
and does hereby continue in the employ of ISSI, for the period set forth in
paragraph 3 below (the Period of Employment), in the position and with the
duties and responsibilities set forth in paragraph 3 below, and upon the other
terms and conditions set forth in this Agreement.
<PAGE> 4
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 4
3.0 PERIOD OF EMPLOYMENT
The Period of Employment shall commence on the original date of this Agreement
and subject only to the provisions of paragraphs 10, 11, and 13.0 below,
relating, respectively, to death, disability and severance, shall continue
until the close of business two (2) years from the date of this Agreement. In
the event that Employee shall continue in the full- time employment of ISSI
after such two-year period or such later date without a written extension of
this Agreement, such continued employment shall be for successive annual
periods and shall be subject to the terms and conditions of this Agreement, and
the Period of Employment shall include the period during which Employee in fact
so continues in such employment.
4.0 POSITION
During the Period of Employment, Employee shall serve as Chief Financial
Officer (CFO) of ISSI or as otherwise assigned by the Board of Directors The
functions, duties and responsibilities of CFO shall be defined by the Board of
Directors. It is expressly understood that nothing in the foregoing shall
preclude the Board of Directors from making such organizational and reporting
changes as the Board of Directors may, in good faith, deem desirable and for
the benefit of ISSI.
5.0 PERFORMANCE
Throughout the Period of Employment, Employee agrees to devote Employee's full
time and undivided attention during normal business hours to the business and
affairs of ISSI and, in particular, to performance of all functions, duties and
responsibilities as CFO of ISSI and any subsidiaries or divisions, except for
reasonable vacations and except for illness or incapacity; but nothing in this
Agreement shall preclude Employee from devoting reasonable periods during
normal business hours required for serving as a member of the Board of
Directors or as a member of a committee appointed by the Board of Directors.
Activities of Employee which are not associated with ISSI and do not,
individually or together, interfere with the regular performance of functions,
duties and responsibilities as CFO for ISSI, or do not have a conflict of
interest with ISSI, in the reasonable but sole judgment of ISSI, are permitted.
6.0 COMPENSATION
For the acceptance of the terms and conditions of this Agreement and for the
execution of this Agreement, Employee shall be paid Seventy Five Thousand
Dollars ($75,000).
For all services to be rendered by Employee in any capacity during the Period
of Employment, including without limitation, services as CFO, member of the
Board of Directors, or member of any committee of ISSI and its subsidiaries,
divisions and affiliates, Employee shall be paid a minimum base fixed salary of
One Hundred Twenty Thousand Dollars and 00/100 ($120,000.00) payable in twenty
four equal payments twice each calendar month beginning January 1, 1997.
<PAGE> 5
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 5
Employee shall be eligible for an annual cash bonus as determined by the Board
of Directors. Any increase in compensation pursuant to the above, including
incentive awards or other compensation shall in no way diminish any other
obligations of ISSI under this Agreement. The compensation provided for in
this paragraph, together with the perquisites and benefits set forth in
paragraphs 7 and 8 below, are in addition to the benefits provided for in
paragraph 9 of this Agreement.
7.0 PERQUISITES
During the Period of Employment, Employee shall be entitled to perquisites,
including, without limitation, an appropriate private office, appropriate
secretarial and clerical support, and fringe benefits (which includes for e.g.
comprehensive medical benefits, 401(k) plan, and disability insurance) accorded
positions of equal rank, as well as to reimbursement, upon proper accounting,
of reasonable expenses and disbursements incurred by Employee in the course of
Employee's duties.
8.0 PARTICIPATION IN SUCCESS BY ACHIEVEMENT PLAN
During the Period of Employment, Employee shall be and shall continue to be a
full participant in any and all other incentive and compensation plans in which
ISSI employees may participate, both those that are in effect on the date of
this Agreement and any equivalent successor or new plans that may be adopted by
ISSI. Nothing in this Agreement shall preclude improvement of reward
opportunities in such plans or other plans in accordance with the practice of
ISSI.
9.0 BENEFIT PLANS
Nothing in this Agreement shall preclude ISSI from amending or terminating any
employee benefit plan or practice but, it being the intent of the parties that
Employee shall continue to be entitled during the Period of Employment to
perquisites as set forth in paragraph 7 above or at least equal to those
attached to Employee's position on the date of this Agreement, nothing in this
Agreement shall operate or be construed to reduce, or authorize a reduction,
without Employee's written consent, in the level of such perquisites and
benefits taken as a whole, if, and to the extent that, such perquisites,
benefits, and service credits are not payable or provided under any such plans
or practices by reason of such amendment or termination thereof, ISSI itself
shall pay or provide therefor. Under no circumstances shall Employee's current
medical plan be amended or terminated except with the express written
permission of Employee, unless substituted by a reasonably equivalent plan when
taken as a whole.
10.0 EFFECT OF DEATH
In the event of the death of Employee during the Period of Employment, the
legal beneficiary of Employee shall be entitled to the base or fixed salary
provided for in paragraph 6 above for the twelve (12) months after which death
shall have occurred, at the rate being paid at the time of
<PAGE> 6
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 6
death, and the Period of Employment shall be deemed to have ended as of the
close of business on the last day of the month in which death shall have
occurred but without prejudice to any payments otherwise due in respect of
Employee death.
<PAGE> 7
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 7
11.0 EFFECT OF DISABILITY
11.1 Compensation in the Event of Disability
In the event of the Disability (as defined in paragraph 11.3
below) of Employee during the Period of Employment, Employee
shall be entitled to an amount equal to the base or fixed
salary provided for in paragraph 6 above, at the rate being
paid at the time of the commencement of Disability, for the
period of such Disability, but not in excess of twelve (12)
months from the end of the Period of Employment as defined in
paragraph 11.3 below.
11.2 Reduction of Compensation in the Event of Disability
The amount of any payments due under paragraph 11.1 shall be
reduced by any payments to which Employee may be entitled for
the same period because of disability under any disability or
pension plan of ISSI or any division, subsidiary or affiliate
thereof, or as a result of worker's compensation or non-
occupational disability payments from any and all plans paid
for in Employee's behalf by ISSI.
11.3 Definition of Disability
The term "Disability" as used in this Agreement shall mean an
illness or accident occurring during the Period of Employment
which prevents Employee from performing the President and CFO
duties as determined by the Board of Directors under this
Agreement for a period of three (3) consecutive months. The
Period of Employment shall be deemed to have ended at the
close of business on the last day of such three (3)
consecutive month period but without prejudice to any payments
due Employee in respect of disability under paragraph 11.1 or
otherwise due to Employee or Employee's legal beneficiary.
12.0 INDEMNIFICATION
ISSI shall indemnify Employee to the full extent authorized or permitted as
stated under Exhibit 1, Article X, Indemnification, of the Bylaws of ISSI,
attached and made part.
13.0 SEVERANCE
13.1 Notice of Termination
Either Employee or ISSI may terminate this Employment
Agreement at any time by providing 30 days' written notice to
the other party (the "Severance Notice").
<PAGE> 8
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 8
13.2 Severance Payment
If the Severance Notice is served by ISSI, Employee shall
receive a single lump sum payment equal to six months of the
then current Employee's compensation at the time the Severance
Notice was served.
The acceptance of this severance payment by Employee shall
constitute the exclusive remedy of Employee with respect to
any claim Employee may have against ISSI for termination of
employment.
13.3 Securities
In the event of Change of Control as defined in paragraph 1.1
or termination of employment as defined in 13.1, then any and
all stock options, warrants, or other securities of ISSI
awarded to Employee shall be accelerated in maturity upon said
Change of Control or termination and Employee shall have the
right to exercise any and all rights said accelerated maturity
provides Employee, including, but not limited to, all
restricted stock, if any, becoming unrestricted and all stock
options and warrants becoming vested and exercisable.
Employee shall have the same other remaining terms and
conditions, rights and periods of exercise after accelerated
maturity as had existed prior to accelerated maturity.
13.4 Severance Allowance Entitlement
For six (6) months following termination by ISSI, Employee,
Employee's dependents and beneficiaries shall continue to be
entitled to comprehensive major medical plan) and perquisites
(excepting any incentive compensation of future grants of
stock options or warrants) to the same extent as if Employee
is no longer an employee of ISSI, ISSI shall pay or provide
for payment of such benefits to Employee, Employee's
dependents and beneficiaries.
13.5 Restrictive Covenant
During Employee's employment, and for a period of six (6)
months following termination (when termination is initiated by
ISSI) Employee agrees that he will not for himself or any
other person or business entity, compete with the "principal
core business" of ISSI (which is the manufacturing of road and
bridge equipment, navigational lighting equipment, and
perimeter security and the development of related security
integrated platform software, i.e., gates, pneumatic carriers
and gate operators and Intelli-Site); become employed by or
perform services in any capacity for any person or business
entity that competes with the "principal core business" of
ISSI.
<PAGE> 9
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 9
13.6 Recruiting of ISSI Employees
During the Restrictive Covenant period provided for in 13.5,
Employee agrees not to directly or indirectly recruit or
solicit any employee of ISSI or actively participate in the
solicitation of any employee of ISSI.
13.7 Request for Severance
In order to obtain the severance benefits provided for in
paragraph 13.2, Employee shall be required to submit a
"Request for Severance" indicating Employee's acceptance of
payment against all past, current and future claims. ISSI
shall have no obligation to pay any severance payment or
benefits unless and until Employee shall have submitted the
Request for Severance. In the event ISSI delays or fails to
pay severance benefits, ISSI will be responsible for paying
Employee attorneys fees and costs incurred in collecting the
severance and the severance benefits.
14.0 NON-DISCLOSURE OF CONFIDENTIAL OR PROPRIETARY INFORMATION
ISSI and Employee each represent, warrant and agree that the information
provided by ISSI, its Board of Directors or and authorized committee thereof to
Employee is proprietary in nature and will not be disseminated or disclosed to
third parties without first obtaining written permission from ISSI. Such
confidential information includes, but is not limited to, information,
knowledge, dates or property concerning any process, apparatus or product
manufactured, used, developed, investigated or considered by ISSI and also
specifically includes all confidential and/or proprietary information of any
other company revealed by ISSI, its Board of Directors or an authorized
committee thereof in confidence. All confidential information including
memoranda, notes, records, papers or other documents (and all copies thereof)
relating to ISSI's business and all property associated therewith in any way
obtained by Employee from ISSI, its Board of Directors or an authorized
committee thereof shall remain the property of ISSI and shall be delivered to
ISSI at any time upon ISSI's request. Such confidential information includes,
but is not limited to, any process, apparatus or product manufactured, used,
developed, investigated or considered by ISSI.
15.0 NO TRUST CREATED
Nothing contained in this Agreement and no action taken pursuant to the
provisions of this Agreement shall create or be construed to create a trust
fund of any kind. Any funds which may be set aside or provided for in this
Agreement shall continue for all purposes to be a part of the general funds of
ISSI and no person other than ISSI shall by virtue of the provisions of this
Agreement have any interest in such funds. To the extent that any person
acquires a right to receive payments from ISSI under this Agreement, such a
right shall be no greater than the right of any unsecured general creditor if
ISSI.
<PAGE> 10
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 10
16.0 SUCCESSOR IN INTEREST
This Agreement and the rights and obligations hereunder shall be binding upon
and inure to the benefit of the parties hereto and their respective legal
beneficiary, and shall also bind and insure to the benefit of any successor of
ISSI by merger or consolidation or any purchaser or assignee of all or
substantially all of its assets, but, except to any such successor, purchaser
or assignee of ISSI, neither this Agreement, nor any rights or benefits
hereunder may be assigned by either party hereto.
17.0 INVALID PROVISION
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall remain in full force and effect to the
fullest extent permitted by law.
18.0 MEDIATION OF DISPUTES
The parties agree that any controversy or claim arising out of or relating to
this Agreement or any dispute arising out of the interpretation of application
of this Agreement, which the parties hereto are unable to resolve, shall be
finally resolved and settled exclusively by binding mediation in Dallas, Texas
by a single mediator under the rules of normally accepted mediation within the
State of Texas. If the parties cannot agree upon a mediator, then each party
shall choose a single mediator at the expense of each party within thirty (30)
days of the date of the selection of the first mediator. The parties severally
recognize and consent to the mediation over each of their selected mediators.
Each party shall be responsible for its own expenses in presenting its case to
the mediator or mediators. The cost and expenses of the first mediator will be
split between the parties.
19.0 ATTORNEYS' FEES
ISSI agrees to pay Employee's attorneys' fees for representation relating to
changes in this Agreement; representation during negotiations pertaining said
changes, drafting various legal documents pertaining to such changes; and
drafting any Amended Employment Agreement and Severance Agreement if required
as part of said changes.
20.0 GOVERNING LAWS
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Texas applicable to the agreements made and to be
performed entirely in Texas.
21.0 SCOPE OF AGREEMENT
<PAGE> 11
Agreement between Integrated Security Systems, Inc. and January 1, 1997
James W. Casey Page 11
This Agreement does not supersede or modify in any respect any current or
future document relating to Employee's stock ownership or his right to own or
purchase stock (stock options) or relating to his rights in the 401(k) plan.
In all other respect this Agreement shall constitute the entire Agreement
between the parties superseding all prior written or oral agreements, and may
not be modified or amended and no waiver shall be effective unless by written
document signed by both parties hereto; provided, however, that any increase in
base salary, as provided in paragraph 6 hereof shall become an amendment to
this Agreement when approved by the Board of Directors of ISSI and recorded in
the approved minutes of such meeting.
Executed this ____ day of ________________, 19___.
INTEGRATED SECURITY SYSTEMS, INC. EMPLOYEE:
- --------------------------------- ---------------------------------
Gerald K. Beckmann James W. Casey
Chairman, President Chief Executive Officer
<PAGE> 1
EXHIBIT 10.70
REAL ESTATE PURCHASE AGREEMENT
This Agreement for Purchase and Sale of Real Estate (the "Agreement") is
between Integrated Security Systems, Inc., a Delaware corporation or an
affiliate thereof reasonably acceptable to Seller (the "Buyer") and Golston
Family Partners, Ltd., a Texas limited partnership (the "Seller").
ARTICLE I: DEFINITIONS
1.1 Definitions. As used in this Agreement, the following capitalized
terms have the meanings set forth below:
a. "Business Day" means any day other than a Saturday or Sunday
on which commercial banks in Dallas, Texas are open for
business.
b. "Closing" means consummation of the purchase of the Property
by Buyer from Seller in accordance with the terms and
conditions of Article 8 of this Agreement.
c. "Closing Date" means the date specified in paragraph 8.1 of
this Agreement on which the Closing will be held.
d. "Effective Date" means the date on which this Agreement is
executed by Buyer and Seller, as evidenced by the date on the
signature page of this Agreement.
e. "Inspection Period" means the period commencing on the
Effective Date and ending on the day prior to the Closing
Date.
f. "Permitted Exceptions" means those exceptions or conditions
with respect to the title to the Property that are approved or
deemed approved by Buyer in accordance with paragraph 4.3.
g. "Property" means the real property located in the City of
Sanger, County of Denton, Texas, as described more
specifically on Exhibit A attached hereto, together with all
improvements located thereon and any easements and
appurtenances thereto.
h. "Purchase Price" means the total consideration to be paid by
Buyer to Seller for the purchase of the Property as provided
in paragraph 3.1 of this Agreement.
i. "Title Company" means such other title company as Seller and
Buyer may select.
1.2 Other Defined Terms. Certain other defined capitalized terms shall
have the respective meanings assigned to them elsewhere in this Agreement.
<PAGE> 2
ARTICLE 2: PURCHASE AND SALE
Subject to the terms and conditions contained in this Agreement,
Seller agrees to sell and convey to Buyer at Closing, and Buyer agrees to
purchase and pay for at Closing, the Property.
ARTICLE 3: PURCHASE PRICE AND PAYMENT
3.1 Purchase Price. The Purchase Price for the Property shall be One
Million Five Hundred Thousand Dollars ($1,500,000.00). Buyer and Seller agree
that of this total Purchase Price, $1,000,000 is the Purchase Price for the
land, and $500,000 is the Purchase Price for the improvements on the land and
appurtenances thereto. Buyer and Seller agree further that this transaction is
a single transaction with a total Purchase Price as stated above.
3.2 Payment. The Purchase Price is payable at Closing by all in cash by a
bank cashier's check, wire transfer, or other immediately available funds
acceptable to Seller.
ARTICLE 4: TITLE AND SURVEY
4.1 Title Commitment. Within forty-five (45) days after the Effective
Date, or five (5) days prior to the Closing date, whichever is sooner, Seller
shall, at Buyer's reasonable expense, deliver or cause to be delivered to Buyer
a current Commitment for Title Insurance (the "Title Commitment") issued by the
Title Company. The Title Commitment shall contain the express Commitment of
the Title Company to issue a Texas Form T-1 Owner's Policy of Title Insurance
to the extent permitted by Texas law. The Title Commitment shall be
accompanied by legible copies of all instruments that create or evidence title
exceptions affecting the Property.
4.2 Survey. Within forty-five (45) days after the Effective Date, closing
date, whichever is sooner, Buyer shall obtain, at Buyer's expense, a current
on-the-ground survey of the Property made by a duly licensed surveyor.
4.3 Review of Title Commitment and Survey. Buyer shall have fifteen (15)
Business Days (the "Review Period") after receipt of both the Title Commitment
and the Survey (the "Survey") in accordance with paragraph 4.1 and 4.2 above,
in which to review the Title Commitment and the Survey and give written notice
to Seller specifying Buyer's objections (the "Objections"), if any, to the
Title Commitment and the Survey. Zoning ordinances and the lien for current
taxes shall be deemed to be Permitted Exceptions. If Buyer fails to give
written notice of Objections to Seller prior to the expiration of the Review
Period, then all exceptions to title shown in the Title Commitment and the
Survey are deemed to be Permitted Exceptions. Seller shall have until three
(3) Business Days before the Closing Date in which to cure the Objections at
Buyer's sole expense or perform other remedial action expressly agreed to by
Buyer and Seller at Buyer's sole expense (the "Cure Period"), provided,
however, at Closing Seller shall pay off and release all liens against the
Property which secure Seller's financing of the Property.
4.4 Title Policy. At the Closing, Seller shall cause a standard form
Texas Owner Policy of Title insurance (the "Owner's Title Policy") to be
furnished to Buyer by the Title Company. The
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Owner's Title Policy shall be issued by the Title Company in the amount of the
Purchase price, and insuring that Buyer has good and indefeasible fee simple
title to the Property, subject only to the Permitted Exceptions. At Buyer's
option, the Survey shall be limited to "shortages in area." The tax exception
shall be limited to taxes for the year of Closing and subsequent years not yet
due and payable and subsequent assessments for prior years due to subsequent
change in land usage. The premium for the Owner's Title Policy shall be paid
by the Buyer.
ARTICLE 5: PROPERTY CONDITION AND INSPECTION
5.1 Inspection. Buyer shall have the right during the Inspection Period
to make such examinations, studies, appraisals, on-site inspections,
engineering and environmental tests and investigations (the "Inspections") of
the Property as Buyer may deem advisable, but at Buyer's sole cost and risk.
5.2 Inspection Approvals. If for any reason Buyer, in its sole and
absolute discretion, is not satisfied with the physical condition of the
property and improvements thereon or the results of its Inspections, Buyer
shall have the right to terminate this Agreement by giving written notice to
Seller prior to the expiration of the Inspection Period, and thereupon this
Agreement shall terminate and Seller and Buyer shall have no further
obligations, one to the other, with respect to the subject matter of this
Agreement, except as expressly described herein. If Buyer fails to deliver
such notice by the Closing Date, Buyer shall be deemed to have waived any such
objections, and this Agreement shall continue in full force and effect.
5.3 Disclaimer. SELLER DISCLAIMS, AND BUYER WAIVES, ANY AND ALL
WARRANTIES OF ANY NATURE REGARDING THE PROPERTY, OTHER THAN THE WARRANTIES
EXPRESSLY STATED IN THIS AGREEMENT AND THE TITLE WARRANTIES TO BE CONTAINED IN
THE DEED TO BE EXECUTED AT CLOSING. SELLER HAS NOT MADE AND DOES NOT MAKE ANY
REPRESENTATIONS, WARRANTIES OR COVENANTS OF ANY KIND OR CHARACTER WHATSOEVER,
OTHER THAN THE WARRANTIES EXPRESSLY STATED HEREIN AND THE TITLE WARRANTIES TO
BE CONTAINED IN THE DEED, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO THE
SQUARE FOOTAGE OF THE PROPERTY, THE QUALITY OR CONDITION OF THE PROPERTY, THE
SUITABILITY OR SAFETY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH
BUYER MAY CONDUCT THEREON OR THEREWITH, COMPLIANCE BY SELLER OR THE PROPERTY
WITH ANY LAWS, RULES, ORDINANCES, OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL
AUTHORITY, OR THE HABITABILITY, MERCHANTABILITY, OR FITNESS OF THE PROPERTY FOR
A PARTICULAR PURPOSE. SELLER HAS NOT, DOES NOT AND WILL NOT MAKE ANY
REPRESENTATIONS OR WARRANTIES WITH REGARD TO COMPLIANCE WITH ANY ENVIRONMENTAL
PROTECTION, POLLUTION, WATER OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR
REQUIREMENTS, INCLUDING BUT NOT LIMITED TO, THOSE PERTAINING TO THE USE,
HANDLING, GENERATING, TREATING, STORING OR DISPOSING OF ANY HAZARDOUS WASTE,
HAZARDOUS SUBSTANCES, PETROLEUM PRODUCTS, STORAGE TANKS OR ASBESTOS. WITHOUT
IN ANY WAY LIMITING THE
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FOREGOING, BUYER RELEASES SELLER FROM AND WAIVES ALL LIABILITY AGAINST SELLER
FOR, CONNECTED WITH OR ARISING OUT OF ANY AND ALL FEDERAL AND STATE STATUTORY
OR REGULATORY CLAIMS OR CAUSES OF ACTION FOR ENVIRONMENTAL CONTAMINATION AT, IN
OR UNDER THE PROPERTY. BUYER'S PURCHASE OF THE PROPERTY AND ACCEPTANCE OF THE
DEED CONSTITUTE ITS ACKNOWLEDGMENT THAT IT ACCEPTS THE PROPERTY "AS IS," "WHERE
IS", AND "WITH ALL FAULTS." BUYER SHALL MAKE ITS OWN INDEPENDENT INSPECTION OF
ALL ASPECTS OF THE PROPERTY AND IS ENTITLED TO NO RECOURSE WHATSOEVER AGAINST
SELLER UPON DISCOVERY OF ANY DEFECTS OF ANY KIND, LATENT OR PATENT. BUYER
ACKNOWLEDGES AND AGREES THAT THE PURCHASE PRICE TO BE PAID TO SELLER FOR THE
PROPERTY HAS BEEN NEGOTIATED TO TAKE INTO ACCOUNT THAT THE PROPERTY IS BEING
SOLD SUBJECT TO THE FOREGOING DISCLAIMERS. BUYER AND SELLER AGREE THAT THE
PROVISIONS OF THIS PARAGRAPH 5.3 SHALL SURVIVE THE CLOSING AND THE DELIVERY OF
THE DEED.
ARTICLE 6: REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of Seller. The following
representations and warranties of Seller are true and correct in all material
respects on the Effective Date and shall be true and correct in all material
respects on the Closing Date:
a. As of the Effective Date, Seller has good and indefeasible
title to the Property, and as of the Closing Date, Seller will
have good and indefeasible title to the Property, subject only
to the Permitted Exceptions. All requisite action necessary
to authorize Seller to enter into this Agreement and to carry
out Seller's obligations hereunder has been, or on the Closing
Date will have been taken. At Closing, Seller shall deliver
to Buyer documents evidencing the authorization required by
this paragraph, said documents to be certified as true and
correct by Seller;
b. Seller has not received any notice of any pending condemnation
action with respect to all or any portion of the Property and
to Seller's knowledge there are no existing condemnation or
other legal proceedings affecting the existing use of the
Property by any governmental authority having jurisdiction
over or affecting all or any part of the Property;
c. To Seller's knowledge, there is no litigation pending or
threatened which would affect Buyer's ownership, operation or
maintenance of the Property after Closing or Seller's ability
to perform this Agreement;
d. No further permission, approval or consent by third parties or
governmental authorities is required in order for Seller to
consummate this Agreement;
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e. Seller shall provide the Title Company with such other
information and/or documentation as the Title Company shall
reasonably request; and
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<PAGE> 6
f. All representations and warranties of Seller contained in this
Agreement, all documents attached to this Agreement, and all
documents delivered by Seller pursuant to this Agreement shall
be true and accurate in all respects as of the Closing, and
Seller shall have complied with all agreements and covenants
contained herein to be complied with by it prior to or at
Closing.
6.2 Representations and Warranties of Buyer. The following
representations and warranties of Buyer are true and correct in all material
respects on the Effective Date and shall be true and correct in all material
respects on the Closing Date:
a. Buyer has the full right, power and authority to purchase the
Property from Seller as provided in this Agreement and to
carry out Buyer's obligations under this Agreement, and all
requisite action necessary to authorize Buyer to enter into
this Agreement and to carry out Buyer's obligations hereunder
has been, or on the Closing Date will have been taken. At
Closing, Buyer shall deliver to Seller documents evidencing
the authorization required by this paragraph, said documents
to be certified as true and correct by Buyer's Secretary.
b. Buyer acknowledges that Buyer has been advised in writing that
Buyer should have an abstract covering the Property examined
by an attorney of Buyer's own selection or that Buyer should
be furnished with or obtain a policy of title insurance; and
c. Buyer shall provide the Title Company with such other
information and/or documentation at the Title Company shall
reasonably request.
d. All representations and warranties of Buyer contained in this
Agreement, all documents attached to this Agreement, and all
documents delivered by Buyer pursuant to this Agreement shall
be true and accurate in all respects as of the Closing, and
Buyer shall have complied with all agreements and covenants
contained herein to be complied with by it prior to or at
Closing. Buyer's President shall deliver to Seller at Closing
a certificate, dated as of the Closing Date, signed by him,
certifying to the truth of the matters stated in this
paragraph.
ARTICLE 7: CONDITIONS PRECEDENT TO CLOSING
The obligation of Seller and Buyer to consummate the transaction contemplated
by this Agreement is expressly subject to the simultaneous closing of the
transactions contemplated by the Stock Purchase Agreement executed of even date
herewith between S. Webb Golston, as seller, and Integrated Security Systems,
Inc. or an affiliate thereof as buyer, which Stock Purchase Agreement is
incorporated herein by reference.
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ARTICLE 8: CLOSING
8.1 Closing Date. Subject to fulfillment of the conditions described in
Article 7, hereof, and other obligations of Buyer and Seller provided for
herein, the Closing of the purchase and sale of the Property shall be held at
10:00 a.m. (local time) at the offices of Spackman & Co., Dallas, Texas, on
such date as the parties may mutually agree but in any event not later than
October 24, 1996.
8.2 Delivery by Seller. At the Closing, Seller shall deliver or cause to
be delivered to Buyer the following:
a. A Special Warranty Deed, duly executed and acknowledged by
Seller, in a form reasonably acceptable to the Buyer and
Seller, subject only to the Permitted Exceptions;
b. the Owner's Title Policy to Buyer;
c. all other documents required by this Agreement; and
d. all other items reasonably requested by Buyer's attorneys and
the Title Company as administrative requirements for
consummating the Closing.
8.3 Delivery by Buyer. At the Closing, Buyer shall deliver or cause to be
delivered to Seller the following:
a. the Purchase Price in the form required by paragraph 3.2 of
this Agreement;
b. all other documents required by this Agreement; and
c. all other items reasonably requested by Seller's attorneys and
the Title Company's administrative requirements for
consummating the Closing.
8.4 Prorations. Rents, interest, ad valorem and personal property taxes
relating to the Property for the calendar year in which the Closing occurs
shall be pro rated between Seller and Buyer as of the Closing Date based upon
taxes actually paid by Seller if Seller has paid such taxes prior to Closing,
and otherwise upon the ad valorem taxes due assuming payment in December of the
year of Closing. If the actual amount of taxes for the calendar year in which
the Closing shall occur is not known as of the Closing Date, the pro ration
shall be based on the most current assessed value and tax rates then in effect
with respect to the Property at the date of Closing. If the actual amount of
the ad valorem or personal property taxes are not known on the Closing Date,
the parties shall adjust the taxes pro rated at Closing within ten (10) days
after written demand therefor by either party when such taxes become known.
All other assessments affecting the Property, if any, assessed prior to
Closing, shall be pro rated as of the Closing Date and any remaining
obligations related thereto assumed by Buyer. Notwithstanding the
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foregoing, Buyer shall be solely responsible for the payment of any rollback
taxes on the Property for a change to the Buyer's use of the Property.
8.5 Possession. Possession of the Property shall be delivered to Buyer by
Seller at the Closing, subject only to the Permitted Exceptions.
8.6 Costs of Closing. Each party is responsible for paying the legal fees
of its counsel in negotiating, preparing, and closing the transaction
contemplated by this Agreement. Seller agrees to pay the cost of the Owner's
Title Policy and Buyer agrees to pay the costs of the Survey. Buyer shall be
responsible for the payment of any recording fees. Each party shall be
responsible for paying any other fees, costs and expenses identified herein as
being the responsibility of such party. All other closing expenses shall be
allocated between the parties in the customary manner for sales of real
property similar to the Property in the city in which the Property is located.
ARTICLE 9: DEFAULT
9.1 Default by Buyer. If Buyer fails or refuses to consummate the
purchase of the Property pursuant to this Agreement at the Closing, or if a
Closing does not occur under the Stock Purchase Agreement attached hereto as
Exhibit B, then Seller may, as his sole and exclusive remedy, terminate this
agreement by giving written notice thereof to Buyer prior to or at the Closing,
whereupon neither party hereto shall have any further rights or obligations to
the other hereunder or otherwise.
9.2 Default by Seller. If Seller fails or refuses to consummate the sale
of the Property to Buyer pursuant to this Agreement at the Closing, or if a
Closing does not occur under the Stock Purchase Agreement attached hereto as
Exhibit B, then Buyer may, as its sole and exclusive remedy, terminate this
Agreement by giving written notice thereof to Seller prior to or at the
Closing, whereupon neither party hereto shall have any further rights or
obligations to the other hereunder or otherwise.
ARTICLE 10: CASUALTY OR CONDEMNATION
Seller agrees to give Buyer prompt notice of any fire or other casualty
affecting the Property or of any actual or threatened taking or condemnation of
all or any portion of the Property which occurs prior to Closing. If, prior to
the Closing, there shall occur (i) damage to the Property caused by fire or
other casualty, which results in damages in excess of $100,000 or (ii) a
threatened or actual taking or condemnation of all or any material portion of
the Property or of access to the Property, then, in either such event, Buyer
shall have the right, as its exclusive remedy, to either (i) terminate this
Agreement by written notice delivered to Seller within ten (10) Business Days
after Buyer has received notice from Seller of such event (but no later than
the Closing Date) and the parties shall have no further obligations to each
other with respect to the subject matter of this Agreement, except as expressly
delineated herein, provided, however, if Buyer does not timely deliver such
termination notice, Buyer shall have waived its right to terminate this
Agreement pursuant to this Article 10 and shall proceed to Closing, without a
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reduction in the Purchase Price, in which event Seller shall assign (without
recourse or warranty) all its rights to any insurance proceeds resulting from
such event and Seller shall give a credit, for the benefit of Buyer, to the
Purchase Price the amount of any deductible amount under such insurance
policy(s).
ARTICLE 11: MISCELLANEOUS
11.1 Acknowledgments. Buyer acknowledges that Buyer has been advised in
writing that Buyer should have an abstract covering the Property examined by an
attorney of Buyer's own selection or that Buyer should be furnished with or
obtain a policy of title insurance covering the Property.
11.2 Amendment. This Agreement may not be amended or modified in any way
except in a written instrument which is signed by Seller and Buyer.
11.3 Assignment. Neither Buyer nor Seller shall have the right to assign
this Agreement, in whole or in part, without the other party's prior written
consent. Notwithstanding the foregoing, Buyer acknowledges that Seller
anticipates the sale of the Property to Buyer may be pursuant to an IRC Section
1031 exchange under which the Property may be conveyed by Seller to a third
party and simultaneously conveyed to Buyer at Closing. If Seller elects to
sell the Property pursuant to IRC Section 1031 exchange, Buyer agrees to
cooperate reasonably with Seller in such exchange on the condition that Buyer
will incur no additional costs or liability in doing so.
11.4 Attorneys' Fees. If any action at law or in equity is brought to
enforce, defend or interpret any of the provisions of this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs and expenses incident to any such action, in addition to any other
relief which may be awarded.
11.5 No Brokers. Each party represents and warrants to the other party
that (except for seller's contract with O. K. Rivers and Buyer's contracts
with Robert Finch & Associates and Bathgate McColley Capital Group, LLC), it
has not contracted or entered into any agreement with any real estate broker,
agent, finder, or any other party in connection with this transaction, and has
not taken any action which would result in any real estate broker's, finder's,
or other fees or commissions being due or payable to any other party with
respect to the transaction contemplated hereby. Each party hereby indemnifies
and agrees to hold the other party harmless from any loss, liability, damage,
cost, or expense (including but not limited to, reasonable attorneys' fees)
resulting to the other party by reason of a party's failure to pay a commission
to a its contracted agent. The indemnities set forth in this paragraph 11.5
shall survive Closing and the delivery of the deed or the earlier termination
of this Agreement.
11.6 Captions. The captions contained in this Agreement are for
convenience of reference only, and shall not limit, enlarge or in any way
affect the terms of this Agreement.
11.7 Computation. In determining a period of time prescribed by this
Agreement, the day of the act or event after which the designated period begins
to run is not to be included. The last
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<PAGE> 10
day of the period so computed is to be included, unless it is not a Business
Day, in which event the period of time runs until the end of the next day which
is a Business Day.
11.8 Costs and Expenses. Except as otherwise specified in this Agreement,
each party to this Agreement agrees to pay all his own fees and expenses
incurred by or on behalf of that party in connection with the negotiation,
execution and closing of the transaction contemplated by this Agreement.
11.9 Construction. Whenever used herein, and the context requires it, the
singular and plural numbers shall each include the other, and the masculine,
feminine and neuter gender shall each include the other.
11.10 Documents. All documents attached hereto or referred to herein
("Related Documents") are hereby incorporated herein by reference for all
purposes.
11.11 Entire Agreement. This Agreement (and all documents attached to or
incorporated into this Agreement): (a) supersedes all oral negotiations and
prior writing with respect to its subject matter; and (b) is intended by the
parties as the final expression of the agreement with respect to the terms and
conditions set forth in those documents and as the complete and exclusive
statement of the terms and conditions agreed to by the parties. No
representation, understanding, promise, warranty, agreement, or arrangement,
oral or written, express or implied, shall be enforceable against either party
unless it is contained in this Agreement, and no evidence thereof shall be
admissible in any action relating hereto.
11.12 Further Assurances. Each party to this Agreement agrees to perform
any further acts and to execute and deliver any further documents which may be
reasonably necessary to carry out the provisions of this Agreement.
11.13 Governing Law. This agreement shall be governed by and interpreted in
accordance with the laws of the State of Texas.
11.14 Notices.
a. Manner. All notices permitted or required under this
Agreement shall be sufficient only if in writing and delivered
as follows: (1) by personal delivery or overnight express
delivery (such as Federal Express), with charges paid by the
sender; (2) U.S. Mail, postage prepaid, certified, mail,
return receipt requested; or (3) facsimile if the contents of
such facsimile are promptly confirmed in the manner provided
herein.
b. Receipt. If a notice is served by personal or overnight
express delivery or facsimile, it shall be deemed received
upon the earlier to occur of (1) actual receipt, or (2) if
delivery is attempted and refused, upon such refusal. If a
notice is served by mail, it shall be deemed received upon the
earlier to occur of (1) actual receipt, (2) three (3) days
after deposited at a post office or official
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<PAGE> 11
depository under the care and custody of the United States
Postal Service, or (3) if delivery is attempted and refused,
upon such refusal.
c. Addresses. Notices shall be delivered to the following
address:
(1) If to Seller: Golston Family Partners, Ltd.
c/o Mr. S. Webb Golston, General Partner
Golston Company
P. O. Box 856
Sanger, TX 76266
with a copy to: Laurence S. Sanger, Esq.
Fischer & Sanger
5956 Sherry Lane, Suite 1204
Dallas, TX 75225
and
Mr. O. K. Rivers
c/o Carter-Tigart, Inc.
P. O. Box 54296
Hurst, TX 76054
(2) If to Buyer: Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230
Irving, TX 75063
Attention: President
with a copy to: Spackman & Co.
2525 McKinney Avenue, Suite B
Dallas, TX 75201
Attention: Thomas J. Spackman
11.15 Rule of Construction. The parties agree that the rule of construction
to the effect that any contractual ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation or construction of
this Agreement.
11.16 Third-Party Rights. The provisions of this Agreement shall not
entitle any party not a signatory of this Agreement to any rights as a
third-party beneficiary, or otherwise, it being the specific intention of the
parties hereto to preclude all non-signatory parties from any third-party
beneficiary rights, or any other rights whatsoever.
11.17 Time of Essence. Time is of the essence in the performance of all
Buyer's obligations under this Agreement.
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<PAGE> 12
11.18 Waiver. Any waiver by any party of any provision of this Agreement
shall not constitute or imply a subsequent or other waiver of the same or any
other provision of this Agreement.
Executed this 5th day of September 1996.
SELLER:
-----------------------------------
By: --------------------------
Title:
--------------------------
BUYER:
-----------------------------------
By:
--------------------------
Title:
--------------------------
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<PAGE> 13
EXHIBIT A
TO REAL ESTATE PURCHASE AGREEMENT DATED SEPTEMBER 5, 1996
BETWEEN GOLSTON FAMILY PARTNERS, LTD. ("SELLER")
AND NEW GOLSTON, INC. ("BUYER")
Description of Real Property to be Purchased
All of the property and improvements thereon known as 1609 South Austin and
properties known as 521 South Stemmons, together aggregating approximately 6.4
acres, located in the City of Sanger, County of Denton, Texas, and more
specifically as follows:
A. Description of Land.
See pages 1-4 attached hereto and made a part thereof.
B. Description of Improvements.
Four contiguous structures aggregating approximately 29,000
square feet of metal, tilt-up concrete and/or frame
construction and a separate structure of approximately 5,000
square feel of metal construction.
<PAGE> 14
COMMITMENT FOR TITLE INSURANCE
SCHEDULE A - CONTINUED
(Page 1 of Continuation)
File No. 9002796-11 JC Commitment No.
All that certain tract or parcel of land situated in the H. Tierwester Survey,
Abstract No. 1241, Denton County, Texas, being a part of a certain "First"
Tract described in a deed from B.R. McAfee etux, to Robert E. McClary, etux on
the 23rd day of August, 1968, recorded in Volume 570, Page 695, Deed Records of
said County, and being more fully described as follows:
BEGINNING at the Southwest corner of said "First" Tract at the intersection of
the West Boundary Line Interstate 35 East and the center of Austin St.;
THENCE S. 89 deb. 50'40" W. a distance of 475.48 feet to an iron pin;
THENCE N. 00 deg. 12'21" E. a distance of 316.71 feet to an iron pin;
THENCE East a distance of 491.40 feet to an iron pin on the West right of way
of Interstate Highway 35 at the beginning of a curve;
THENCE with said curve to the right, having a central angle of 01 deg. 18'56",
a radius of 5879.57 feet, a chord of S. 04 deb. 03'43" E, 237,60 feet to an
arc length of 237.62 feet to an iron pin;
THENCE S. 04 deg. 27'13" E. a distance of 21.60 feet to an iron pin;
THENCE S. 42 deg. 41'44" W. a distance of 54.41 feet to an iron pin;
THENCE S. 04 deg. 27'13" E. a distance of 17.00 feet to the POINT OF BEGINNING
and CONTAINING in all 3.4677 acres of land.
Page 1
AMERICAN TITLE COMPANY Lawyers Title Insurance Corporation
Commitment for Title Insurance - Continuation Page
<PAGE> 15
EXHIBIT "A"
All that certain tract or parcel of land lying in the Henry Tierwester Survey,
Abstract Number 1241, City of Sanger, Denton County, Texas, and being part of
Tract One and all of Tract Two as described by deed from Gerald E. Bridges to
Sanger Baptist Church on the 23rd day of November 1987, recorded in Volume
2293, Page 124, Real Property Records of Denton County, Texas, and being more
particularly described as follows:
BEGINNING at an iron pin in a East-West fence at the Northeast corner of said
Tract Two;
THENCE South 00o 01' 00" West with the East line of said Tract Two a distance
of 130.00 feet to an iron pin t the Southeast corner of said Tract Two and on a
North line of said Tract One;
THENCE South 89o 59' 00" East with a North line of said Tract one a distance of
338.97 feet to an iron pin on the West right-of-way of Interstate Highway 35;
THENCE Southeasterly with said right-of-way and with a curve to the left having
a central angle of 00o 13' 48", a radium of 5879.58 feet, a chord of South 04o
40' 48" East 23.60 feet, an arc length of 23.60 feet to an iron pin at the East
Southeast corner of said Tract One;
THENCE North 89o 59' 00" West with the South lien of said Tract One a distance
of 560.90 feet to an iron pin;
THENCE North 00o 01' 00" East a distance of 153.53 feet to an iron pin on a
North line of said Tract One in a East-West fence line;
THENCE South 89o 59' 00" East along and near a fence line a distance of 220.00
feet to the Point of Beginning and containing 0.9590 acres of land, more or
less.
NOTE: The Company does not represent that the above acreage or square
footage calculations are correct.
Page 2
<PAGE> 16
STATE OF TEXAS
COUNTY OF DENTON
WHEREAS, I, RICHARD W. POWELL, AM THE OWNER OF A 1.000 ACRE TRACT IN THE H.
TIERWESTER SURVEY, ABSTRACT 1241, CITY OF SANGER, COUNTY OF DENTON, TEXAS, AND
BEING ALL OF A CERTAIN (CALLED) 1.000 ACRE TRACT AS DESCRIBED IN A DEED FROM
FRED H. SIMMONS TO RICHARD W. POWELL ON THE 19TH DAY OF NOVEMBER, 1984,
RECORDED IN VOLUME 1523, PAGE 880, DEED RECORDS OF DENTON COUNTY, TEXAS, AND
BEING MORE FULLY DESCRIBED AS FOLLOWS:
COMMENCING AT AN IRON PIN AT THE INTERSECTION OF THE CENTER LINE OF AUSTIN
STREET AND THE WEST RIGHT-OF-WAY LINE OF INTERSTATE HIGHWAY 35;
THENCE SOUTH 89 DEGREES 50 MINUTES 40 SECONDS WEST, ALONG THE CENTER LINE OF
SAID AUSTIN STREET A DISTANCE OF 475.48 FEET TO THE POINT-OF-BEGINNING;
THENCE SOUTH 89 DEGREES 50 MINUTES 40 SECONDS WEST ALONG THE CENTER LINE OF
SAID AUSTIN STREET, A DISTANCE OF 137.46 FEET TO AN IRON PIN;
THENCE NORTH 00 DEGREES 12 MINUTES 21 SECONDS EAST A DISTANCE OF 317.08 FEET TO
A FENCE CORNER;
THENCE NORTH 90 DEGREES 00 MINUTES 00 SECONDS EAST A DISTANCE OF 137.46 FEET TO
AN IRON PIN;
THENCE SOUTH 00 DEGREES 12 MINUTES 21 SECONDS WEST A DISTANCE OF 316.77 FEET TO
THE POINT-OF-BEGINNING AND CONTAINING 1.000 ACRE OF LAND.
NOW THEREFORE KNOW THESE MEN BY THESE PRESENTS:
THAT, I, RICHARD W. POWELL, DO HEREBY ADOPT THIS PLAT, DESIGNATING THE HEREIN
DESCRIBED PROPERTY AS LOT 1 BLOCK 1 OF THE POWELL ADDITION TO THE CITY OF
SANGER, TEXAS, AND DO HEREBY DEDICATE TO THE PUBLIC USE FOREVER, THE STREETS
AND EASEMENTS SHOWN HEREON.
/S/ RICHARD W. POWELL
- ------------------------
RICHARD W. POWELL
STATE OF TEXAS
COUNTY OF DENTON
BEFORE ME, THE UNDERSIGNED NOTARY PUBLIC IN AND FOR SAID COUNTY AND STATE, ON
THIS DAY PERSONALLY APPEARED RICHARD W. POWELL KNOWN TO ME TO BE THE PERSON
WHOSE NAME IS SUBSCRIBED TO THE FOREGOING INSTRUMENT, AND ACKNOWLEDGED TO ME
THAT HE EXECUTED THE SAME FOR THE PURPOSE AND CONSIDERATIONS THEREIN EXPRESSED,
AND IN THE CAPACITY THEREIN STATED:
Page 3
<PAGE> 17
ATTACHED TO AND MADE A PART OF STEWART TITLE GUARANTY COMPANY POLICY NO.
0902207A
CONTINUATION OF SCHEDULE A, No. 2.
EXHIBIT "A"
All that certain tract or parcel of land situated in the Henry Tierwester
Survey, Abstract 1241, Denton County, Texas; said tract being a part of that
tract of land described in deed from R.M. Cole and wife, A.F. Cole, to Vic L.
Cole and wife, W.J. Cole, as recorded in Vol. 511, page 364, Deed Records of
Denton County, Texas; said tract being further described by metes and bounds as
follows:
BEGINNING at an iron pipe found in the Northeast corner of the aforementioned
Cole tract, said point being on a curve having a radius of 5879.6 feet and
being in the West line of Interstate Highway 35;
THENCE Southeasterly with curve 130.0 feet to an iron pin set;
THENCE South 89 degrees 59 minutes West 336.5 feet to an iron pin set;
THENCE North 130.0 feet to an iron pin set in a fence;
THENCE East 330.0 feet to the point of beginning.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Amendment No. 2 to the Registration Statement on Form SB-2 of our report
dated February 18, 1997 relating to the consolidated financial statements of
Integrated Security Systems, Inc., and our report dated September 30, 1996
relating to the financial statements of Golston Company, Inc., which appear in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
March 10, 1997
