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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
Integrated Security Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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INTEGRATED SECURITY SYSTEMS, INC.
8200 SPRINGWOOD DRIVE, SUITE 230
IRVING, TEXAS 75063
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 26, 2001
The 2001 Annual Meeting of Stockholders of Integrated Security Systems,
Inc., a Delaware corporation, will be held at the Company's executive offices,
8200 Springwood Drive, Suite 230, Irving, Texas 75063, on Friday, March 26, 2001
at 10:00 A.M., Dallas, Texas time, for the following purposes:
(1) To elect six persons to serve as directors until the Company's
2002 Annual Meeting of Stockholders or until their successors
are duly elected and qualified;
(2) To consider and act upon a proposal to approve the following
financial restructuring transactions:
o the issuance of an aggregate of $1.0 million
of the Company's promissory notes to
Renaissance Capital Growth & Income Fund
III, Inc. and Renaissance US Growth & Income
Trust PLC which were issued from October
2000 to January 2001;
o the amendment of the Company's Restated
Certificate of Incorporation to authorize
80,000 shares of a new Series F preferred
stock and 300,000 of a new Series G
preferred stock;
o the issuance to Renaissance of approximately
41,000 shares of Series F preferred stock
(depending on the amount of accrued
interest) in exchange for the promissory
notes of the Company held by Renaissance in
the aggregate principal amount of $1.0
million together with accrued interest;
o the issuance to Renaissance of approximately
254,000 shares of Series G preferred stock
(depending on the amount of accrued
interest) in exchange for all other
promissory notes and convertible debentures
of the Company held by Renaissance
together with accrued interest (constituting
approximately $6.4 million, including
accrued interest);
o The issuance to C. A. Rundell, Jr. of
approximately 2,000 shares of Series F
preferred stock (depending on the amount of
accrued interest) in exchange for the
promissory note of the Company held by
Mr. Rundell in the principal amount of
$50,000 together with accrued interest; and
o the issuance to C. A. Rundell, Jr. and The
Rundell Foundation of approximately 13,000
shares of Series G preferred stock
(depending on the amount of accrued
interest) in exchange for the promissory
notes of the Company held by them in the
aggregate principal amount of $300,000
together with accrued interest.
(3) To consider and act upon a proposal to amend the Company's
Restated Certificate of Incorporation to increase the number
of authorized shares of Common Stock from 35,000,000 to
70,000,000;
(4) To consider and act upon a proposal to amend the Company's
Restated Certificate of Incorporation to reduce the
liquidation preference of the Series D $20 convertible
preferred stock;
(5) To consider and act upon a proposal to amend the Company's
1997 Omnibus Long-Term Incentive Plan to increase the number
of shares of Common Stock which may be issued under the plan
from 2,000,000 to 7,500,000; and
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(6) To transact any other business properly brought before the
meeting or any adjournments or postponements thereof.
The board of directors has fixed Tuesday, February 13, 2001, at the
close of business, as the record date for the determination of stockholders
entitled to notice of, and to vote at, the meeting and any adjournments or
postponements thereof. Only holders of record of the Company's Common Stock on
that date and holders of the Company's Series D preferred stock on that date are
entitled to vote on matters coming before the annual meeting and any
adjournments or postponements thereof. A complete list of stockholders entitled
to vote at the annual meeting will be maintained in the Company's offices at
8200 Springwood Drive, Suite 230, Irving, Texas 75063, for the ten days prior to
the meeting.
Please advise the Company's transfer agent, American Stock Transfer,
6201 15th Avenue, Third Floor, Brooklyn, NY 11218, of any change in your
address.
THE EFFECTIVENESS OF THE FINANCIAL RESTRUCTURING PROPOSAL IS CONTINGENT
ON THE APPROVAL OF THE FINANCIAL RESTRUCTURING PROPOSAL AND THE APPROVAL OF THE
AMENDMENTS TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION SET FORTH IN
PROPOSALS THREE AND FOUR. AS A RESULT, IF STOCKHOLDERS DO NOT APPROVE PROPOSALS
THREE AND FOUR, THEN THE COMPANY CANNOT COMPLETE THE FINANCIAL RESTRUCTURING
EVEN IF THE STOCKHOLDERS APPROVE THE FINANCIAL RESTRUCTURING PROPOSAL.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED WITHIN THE UNITED STATES.
IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE REGISTERED IN
DIFFERENT NAMES OR AT DIFFERENT ADDRESSES, EACH SUCH PROXY CARD SHOULD BE SIGNED
AND RETURNED TO ENSURE THAT ALL OF YOUR SHARES WILL BE VOTED. THE PROXY CARD
SHOULD BE SIGNED BY ALL REGISTERED HOLDERS IN THE EXACT NAMES AS THE SHARES ARE
SO REGISTERED. ANY PERSON GIVING A PROXY HAS THE POWER TO REVOKE IT AT ANY TIME
PRIOR TO ITS EXERCISE AND, IF PRESENT AT THE ANNUAL MEETING, MAY WITHDRAW IT AND
VOTE IN PERSON.
By Order of the Board of Directors,
C. A. Rundell, Jr.
Chairman of the Board and Chief Executive Officer
Irving, Texas
February __, 2001
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INTEGRATED SECURITY SYSTEMS, INC.
8200 Springwood Drive, Suite 230
Irving, Texas 75063
---------------------------------
PROXY STATEMENT
---------------------------------
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 26, 2001
This proxy statement and the accompanying proxy are being mailed on or
about February ___, 2001 in connection with a solicitation of proxies by the
board of directors of Integrated Security Systems, Inc. to holders of the
Company's Common Stock and holders of the Company's Series D preferred stock.
The proxies are to be used at the annual meeting of stockholders to be held on
March 26, 2001.
At the Company's annual meeting, stockholders will act upon the matters
outlined in the accompanying notice of annual meeting of stockholders. In
addition to customary items such as the election of directors, stockholders are
being requested to act upon several additional items of significant importance
to the Company. Management also will report on the Company and respond to
questions from stockholders.
All holders of record of shares of Common Stock and Series D preferred
stock at the close of business on February 13, 2001 are entitled to notice of
and to vote at the annual meeting. On the record date, the Company had
outstanding 10,782,417 shares of Common Stock and 92,750 shares of Series D
preferred stock. Each share of Common Stock is entitled to one vote for each
director to be elected and upon all other matters to be voted upon by the
stockholders at the annual meeting. The holders of the Company's Series D
preferred stock are entitled to vote on all matters submitted to a vote of
holders of Common Stock, voting with the Common Stock as a single class. Each
share of Series D preferred stock is entitled to the number of votes equal to
the number of shares of Common Stock into which the share of Series D preferred
stock could be converted on the record date. Each share of Series D preferred
stock currently has 25 votes. In addition, the holders of Series D preferred
stock are entitled to vote separately as a class on proposal two, the financial
restructuring, and proposal four, the amendment to the Restated Certificate of
Incorporation of the Company to reduce the liquidation preference of the Series
D preferred stock.
The presence, in person or by proxy, of holders of a majority of the
outstanding shares of Common Stock and the Series D preferred stock, together as
a class, entitled to vote as of the record date is necessary to constitute a
quorum at the annual meeting. Proxies received by us but marked as abstentions
and broker non-votes will be included in the calculation of the number of shares
considered to be present for quorum purposes at the annual meeting. If you hold
your shares in "street name," that is, through a broker or other nominee, you
will need to bring a copy of a brokerage or other nominee statement reflecting
your stock ownership as of the record date and check in at the registration desk
at the annual meeting. You cannot vote these shares unless you also bring a
broker-issued proxy as discussed below.
Many of the Company's stockholders hold their stock in "street name,"
which means that the shares are registered in their brokers', banks' or other
nominee holders' names rather than in the
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stockholders' own names. The street name holder should provide to you, along
with these proxy solicitation materials that the Company has provided to the
street name holder, the street name holder's own request for voting
instructions. By completing the voting instruction card, you may direct your
street name holder how to vote your shares. Your broker or nominee will not be
permitted to exercise voting discretion with respect to some of the matters to
be acted upon. Thus, if you do not give your broker or nominee specific
instructions, your shares may not be voted on those matters and will not be
counted in determining the number of shares necessary for approval. Shares
represented by these "broker non-votes" will, however, be counted in determining
whether there is a quorum present at the annual meeting. The effect of broker
non-votes and abstentions is described with respect to each proposal below in
"Summary of Proposals to be Considered at the Annual Meeting." Alternatively, if
you want to vote your street name shares at the annual meeting, you must contact
your broker directly in order to obtain a proxy issued to you by your nominee
holder. A broker letter that identifies you as a stockholder is not the same as
a broker-issued proxy. If you fail to bring a nominee-issued proxy to the annual
meeting, you will not be able to vote your nominee-held shares at the annual
meeting.
Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with the Secretary of the
Company either a notice of revocation or a proxy you have executed bearing a
later date. The powers of the proxy holders will be suspended as to your shares
if you attend the annual meeting in person and so request, although attendance
at the annual meeting will not by itself revoke a previously granted proxy. If
you hold your shares in street name and you would like to vote your shares at
the annual meeting, you will also need to bring with you a legal proxy from your
broker. All properly executed, unrevoked proxies received before the annual
meeting will be voted in accordance with the directions contained therein. When
no direction has been given by a stockholder returning a proxy, the proxy will
be voted (a) FOR the election as directors of the nominees named in this proxy
statement, (b) FOR the financial restructuring proposal, (c) FOR the proposal to
amend the Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock, (d) FOR the proposal to amend the Restated
Certificate of Incorporation to reduce the liquidation preference of the Series
D preferred stock, and (e) FOR the proposal to amend the 1997 Omnibus Long-Term
Incentive Plan.
SUMMARY OF PROPOSALS TO BE CONSIDERED AT THE ANNUAL MEETING
The following is a summary of the proposals presented in this proxy
statement. You are urged to read this entire proxy statement and the attached
exhibits.
Proposal 1. Election of Directors. At the annual meeting, stockholders
will elect six directors, who make up the entire board of directors, to hold
office until the next annual meeting of stockholders or until their successors
are elected and qualified. The affirmative vote of a plurality of the shares of
Common Stock and Series D preferred stock, voting together as a class,
represented at the annual meeting will be required to elect each of these
directors. Votes may be cast in favor of or withheld with respect to each
nominee. Abstentions and broker non-votes will not be taken into account in
determining the outcome of the election.
Proposal 2. Financial Restructuring. Stockholders are being asked to
approve the financial restructuring proposal which consists of the following:
o the issuance of an aggregate of $1.0 million of the Company's
promissory notes to Renaissance which were issued from October
2000 to January 2001;
o the amendment of the Company's Restated Certificate of
Incorporation to authorize 80,000 shares of a new Series F
preferred stock and 300,000 of a new Series G preferred stock;
o the issuance to Renaissance of approximately 41,000 shares of
Series F preferred stock (depending on the amount of accrued
interest) in exchange for the promissory notes of the Company
held by Renaissance in the aggregate principal amount of $1.0
million together with accrued interest;
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o the issuance to Renaissance of approximately 254,000 shares of
Series G preferred stock (depending on the amount of accrued
interest) in exchange for all other promissory notes and
convertible debentures of the Company held by Renaissance
together with accrued interest (constituting approximately
$6.4 million, including accrued interest);
o The issuance to C. A. Rundell, Jr. of approximately 2,000 shares
of Series F preferred stock (depending on the amount of accrued
interest) in exchange for the promissory note of the Company held
by Mr. Rundell in the principal amount of $50,000 together with
accrued interest; and
o the issuance to C. A. Rundell, Jr. and The Rundell Foundation of
approximately 13,000 shares of Series G preferred stock
(depending on the amount of accrued interest) in exchange for
the promissory notes of the Company held by them in the aggregate
principal amount of $300,000 together with accrued interest.
To be adopted, the financial restructuring proposal must receive
(a) the affirmative vote of a majority of the issued and outstanding shares of
Common Stock and Series D preferred stock, voting together as a single class,
and (b) the affirmative vote of a majority of the issued and outstanding shares
of Series D preferred stock, voting separately as a class. Uninstructed shares
are not entitled to vote on this matter, and therefore broker non-votes will
have the effect of negative votes on this proposal. Abstentions have the effect
of negative votes.
THE EFFECTIVENESS OF THE FINANCIAL RESTRUCTURING PROPOSAL IS CONTINGENT
ON THE APPROVAL OF THE FINANCIAL RESTRUCTURING PROPOSAL AND THE APPROVAL OF THE
AMENDMENTS TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION SET FORTH IN
PROPOSALS THREE AND FOUR. AS A RESULT, IF THE STOCKHOLDERS DO NOT APPROVE
PROPOSALS THREE AND FOUR, THEN THE COMPANY CANNOT COMPLETE THE FINANCIAL
RESTRUCTURING EVEN IF THE STOCKHOLDERS APPROVE THE FINANCIAL RESTRUCTURING
PROPOSAL.
Proposal 3. Amendment to Restated Certificate of Incorporation to
Increase Number of Authorized Shares of Common Stock. Stockholders are being
asked to approve an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
35,000,000 to 70,000,000 to have enough shares of Common Stock to issue upon
conversion of the Company's preferred stock to be issued under the financial
restructuring proposal. To be adopted, the approval of the amendment to the
Restated Certificate of Incorporation must receive the affirmative vote of the
majority of the issued and outstanding shares of Common Stock and Series D
preferred stock, voting together as a single class. Uninstructed shares are not
entitled to vote on this matter, and therefore broker non-votes will have the
effect of negative votes on this proposal. Abstentions have the effect of
negative votes.
Proposal 4. Amendment to the Restated Certificate of Incorporation to
Reduce the Liquidation Preference of the Series D Preferred Stock. Stockholders
are being asked to approve an amendment to the Company's Restated Certificate of
Incorporation to reduce the liquidation preference of the Series D preferred
stock as set forth on Exhibit C attached hereto. The current liquidation
preference of the Series D preferred stock is $20.00 per share plus any accrued
and unpaid dividends. The amendment provides that the liquidation preference of
the Series D preferred stock would be $0.01 per share until either all shares of
Series F preferred stock and Series G preferred stock have been converted or
redeemed or the holders of the Series F preferred stock and Series G preferred
stock have recovered an amount equal to the liquidation preference of the Series
F and G preferred stock, at which time the liquidation preference would revert
back to an amount equal to $20.00 per share plus any accrued and unpaid
dividends. To be adopted, the amendment must receive (a) the affirmative vote of
a majority of the issued and outstanding shares of Common Stock and Series D
preferred stock, voting together as a single class, and (b) the affirmative vote
of a majority of the issued and outstanding shares of Series D preferred stock,
voting separately as a class. Uninstructed shares are not entitled to vote on
this matter, and therefore broker non-votes will have the effect of negative
votes on this proposal. Abstentions have the effect of negative votes.
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Proposal 5. Amendment to the 1997 Omnibus Long-Term Incentive Plan.
Stockholders are being asked to approve an amendment to the plan to increase the
number of shares of Common Stock which may be issued under the plan from
2,000,000 to 7,500,000. To be approved, this matter must receive the affirmative
vote of the majority of the issued and outstanding shares of Common Stock and
Series D preferred stock, voting together as a single class. Uninstructed shares
are not entitled to vote on this matter, and therefore broker non-votes will
have the effect of negative votes on this proposal. Abstentions have the effect
of negative votes.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of Common Stock and Series D preferred stock entitled to vote on all
matters submitted to a vote by the holders of Common Stock, beneficially owned
as of January 31, 2001, by (a) each director and named executive officer of the
Company, (b) all officers and directors of the Company as a group, and (c) all
persons who are known by the Company to be beneficial owners of 5% or more of
the Company's outstanding Common Stock. Unless otherwise noted, each of the
persons listed below has sole voting and investment power with respect to the
shares indicated as beneficially owned by such person. The Company's Common
Stock and Series D preferred stock are its only classes of voting securities.
All of the Series D preferred stock is convertible into shares of Common Stock
at any time. The holder of each share of Series D preferred stock is entitled to
one vote for each shares of Common Stock into which such share of Series D
preferred stock could then be converted. Presently, the holder of each share of
Series D preferred stock is entitled to 25 votes. This table shows the number of
shares of Series D preferred stock owned by each named beneficial owner. This
table also shows the approximate percentage of the outstanding shares of Series
D preferred stock owned by each named beneficial owner before the financial
restructuring and after the financial restructuring.
AMOUNT AND APPROXIMATE PRO FORMA PRO FORMA
NATURE OF PERCENTAGE AMOUNT AND APPROXIMATE
BENEFICIAL OF VOTING NATURE OF PERCENTAGE OF
OWNERSHIP STOCK OWNED BENEFICIAL VOTING STOCK
BEFORE THE BEFORE THE OWNERSHIP AFTER OWNED AFTER THE
TITLE OF CLASS FINANCIAL FINANCIAL THE FINANCIAL FINANCIAL
NAME OF BENEFICIAL OWNER OF STOCK RESTRUCTURING(1) RESTRUCTURING(2) RESTRUCTURING(3) RESTRUCTURING(4)
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Renaissance Capital Growth Common 8,374,295 44.6% 20,261,528 69.5%
& Income Fund III, Inc. Stock(7)
Series D 7,500 8.1% 7,500 8.1%
Preferred Stock
Renaissance US Growth & Common 8,095,389 43.8% 19,432,428 68.4%
Income Trust PLC Stock(8)
Series D 7,500 8.1% 7,500 8.1%
Preferred Stock
C. A. Rundell, Jr.(5)(6) Common 2,014,190 16.5% 3,643,334 26.5%
Stock(9)
Series D 13,250 14.3% 13,250 14.3%
Preferred Stock
Phillip R. Thomas Common 1,490,942 13.7% 1,490,942 13.7%
Stock(10)
Gerald K. Beckmann Common 1,063,166 9.4% 1,063,166 9.4%
Stock(11)
Alan M. Arsht(5)(6) Common 316,955 2.9% 316,955 2.9%
Stock(12)
Series D 7,500 8.1% 7,500 8.1%
Preferred Stock
Frank R. Marlow(5)(6) Common 188,911 1.7% 188,911 1.7%
Stock(13)
Series D 1,250 1.3% 1,250 1.3%
Preferred Stock
Holly J. Burlage(5)(6) Common 168,619 1.5% 168,619 1.5%
Stock(14)
Series D 1,500 1.6% 1,500 1.6%
Preferred Stock
Jack Caldwell(5)(6) Common Stock(15) 101,343 0.9% 101,343 0.9%
James E. Jack(5)(6) Common 93,575 0.9% 93,575 0.9%
Stock(16)
Series D 1,250 1.3% 1,250 1.3%
Preferred Stock
Robert M. Galecke(5)(6) Common 46,081 0.4% 46,081 0.4%
Stock(17)
Series D 500 0.5% 500 0.5%
Preferred Stock
John P. Jenkins(5)(6) -- -- -- --
William D. Breedlove(5)(6) Common Stock -- -- -- --
All current directors and
executive officers as a 2,929,674 24.8% 4,558,818 34.9%
group (8 persons)
- ----------
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
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(2) The holder of each share of Series D preferred stock is entitled to one
vote for each shares of Common Stock into which such share of Series D
preferred stock could then be converted. Presently, the holder of each
share of Series D preferred stock is entitled to 25 votes. The percentage
of voting stock is calculated by dividing the number of shares of Common
Stock owned by the beneficial owner by the total number of shares of voting
stock. The total number of shares of voting stock is equal to the number of
issued shares of Common Stock plus the issued Series D preferred stock on a
fully-diluted basis.
(3) Assumes that the financial restructuring as described in proposal two in
this proxy statement has occurred. Includes shares of Common Stock into
which existing promissory notes and convertible debt have been converted,
as described in detail in proposal two in this proxy statement. Shares of
Series D preferred stock will not be converted into shares of Common Stock
in connection with the proposed financial restructuring.
(4) The holder of each share of Series D preferred stock is entitled to one
vote for each shares of Common Stock into which such share of Series D
preferred stock could then be converted. After the proposed financial
restructuring, the holder of each share of Series D preferred stock will be
entitled to 25 votes. The percentage of voting stock is calculated by
dividing the number of shares of Common Stock owned by the beneficial owner
by the total number of shares of voting stock. The total number of shares
of voting stock is equal to the number of issued shares of Common Stock
plus the issued Series D preferred stock on a fully-diluted basis.
(5) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX
75063.
(6) Mr. Rundell is a Director, Chairman of the Board and Chief Executive
Officer of the Company. Messrs. Arsht, Marlow, Jack, Galecke, and Jenkins
are directors of the Company. Mr. Caldwell is President of a subsidiary of
the Company. Ms. Burlage is Executive Vice President, Chief Financial
Officer and Secretary of the Company. Mr. Breedlove is a director nominee
of the Company.
(7) Based on a Schedule 13G (Amendment No. 8) filed with the SEC on February 8,
2001, Renaissance Capital Growth & Income Fund III, Inc. is deemed the
beneficial owner of an aggregate of 8,374,295 shares of Common Stock,
comprised of 393,259 shares of Common Stock; 814,299 shares of Common Stock
issuable upon the exercise of warrants within 60 days; 187,500 shares of
Common Stock issuable upon the conversion of 7,500 shares of Series D
preferred stock; 3,183,060 shares of Common Stock issuable upon the
conversion of convertible promissory notes payable within 60 days; and
3,796,177 shares of Common Stock issuable upon the conversion of
convertible debentures within 60 days.
The address for Renaissance Capital Growth & Income Fund III, Inc. is 8080
N. Central Expressway, Suite 210, Dallas, TX 75206. The board of directors
of Renaissance Capital Growth & Income Fund III, Inc. exercises voting and
investment control over the securities of the Company that entity holds.
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(8) Based on a Schedule 13G (Amendment No. 8) filed with the SEC on February 8,
2001, Renaissance US Growth & Income Trust PLC is deemed the beneficial
owner of an aggregate of 8,095,389 shares of Common Stock, comprised of
393,258 shares of Common Stock; 808,617 shares of Common Stock issuable
upon the exercise of warrants within 60 days; 187,500 shares of Common
Stock issuable upon the conversion of 7,500 shares of Series D preferred
stock; 2,909,837 shares of Common Stock issuable upon the conversion of
convertible promissory notes payable within 60 days; and 3,796,177 shares
of Common Stock issuable upon the conversion of convertible debentures
within 60 days.
The address for Renaissance US Growth & Income Trust PLC is 8080 N. Central
Expressway, Suite 210, Dallas, TX 75206. The board of directors of
Renaissance US Growth & Income Trust PLC exercises voting and investment
control over the securities of the Company that entity holds.
(9) Includes 562,843 shares of Common Stock; 164,126 shares of Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days; 705,971 shares of Common Stock issuable upon the exercise of warrants
within 60 days; 250,000 shares of Common Stock issuable upon the
conversion of convertible promissory notes payable within 60 days; and
331,250 shares of Common Stock issuable upon the conversion of 13,250
shares of Series D preferred stock.
(10) Includes 1,382,524 shares of Common Stock; 108,418 shares of Common Stock
issuable upon the exercise of warrants within 60 days. The address for Mr.
Thomas is 3510 Turtle Creek Boulevard, Ph-A, Dallas, TX 75219-5542.
(11) Includes 525,672 shares of Common Stock; 409,473 shares of Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days; and 128,021 shares of Common Stock issuable upon the exercise of
warrants within 60 days. The address for Mr. Beckmann is 1017 Diamond
Boulevard, Southlake, TX 76092.
(12) Includes 4,455 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 125,000 shares of
Common Stock issuable upon the exercise of warrants within 60 days; and
187,500 shares of Common Stock issuable upon the conversion of
7,500 shares of Series D preferred stock.
(13) Includes 42,615 shares of Common Stock; 79,879 shares of Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days; 35,167 shares of Common Stock issuable upon the exercise of warrants
within 60 days; and 31,250 shares of Common Stock issuable upon the
conversion of 1,250 shares of Series D preferred stock.
(14) Includes 9,254 shares of Common Stock; 95,625 shares of Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days; 26,240 shares of Common Stock issuable upon the exercise of warrants
within 60 days; and 37,500 shares of Common Stock issuable upon the
conversion of 1,500 shares of Series D preferred stock.
(15) Includes 101,343 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days.
(16) Includes 20,000 shares of Common Stock; 21,492 shares of Common Stock
issuable upon the exercise of outstanding options exercisable within 60
days; 20,833 shares of Common Stock issuable upon the exercise of warrants
within 60 days; and 31,250 shares of Common Stock issuable upon the
conversion of 1,250 shares of Series D preferred stock.
(17) Includes 25,248 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 8,333 shares of Common
Stock issuable upon the exercise of warrants within 60 days; and 12,500
shares of Common Stock issuable upon the conversion of 500 shares of Series
D preferred stock.
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PROPOSAL ONE
ELECTION OF DIRECTORS
GENERAL
The nominees for director listed below will stand for election at this
annual meeting for a one-year term of office expiring at the 2002 Annual Meeting
of Stockholders or until their successors are duly elected and qualified.
The following table sets forth certain information as to the nominees
for director of the Company:
NAME AND AGE POSITIONS AND OFFICES WITH THE COMPANY DIRECTOR SINCE
------------ -------------------------------------- --------------
C. A. Rundell, Jr., 67 Director, Chairman of the Board and 1999
Chief Executive Officer
William D. Breedlove, 61 Director Nominee --
Alan M. Arsht, 57 Director 1999
Robert M. Galecke, 59 Director 1996
John P. Jenkins, 50 Director 2000
Frank R. Marlow, 62 Director 1995
DIRECTORS AND NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
C. A. RUNDELL, 67, Director and Chairman of the board of directors, has
been a director of the Company since March 1999. Mr. Rundell was appointed Chief
Executive Officer of the Company upon Gerald K. Beckmann's resignation as
President, Chief Executive Officer and director on August 31, 2000. Mr. Rundell
is also a director and Chairman of the board of NCI Building Systems, since
1988. Also since 1989, Mr. Rundell has owned and operated Rundell Enterprises, a
sole proprietorship engaged in providing acquisitions and financial consulting
services to various business enterprises. Mr. Rundell is a director and member
of the executive committee of Tyler Technologies, Inc., a provider of
information management systems and services for county governments and other
enterprises. Mr. Rundell was the President and Chief Executive Officer of Tyler
Technologies, Inc. from 1997 to 1998, Chairman of the board from 1996 to 1997,
and temporary Chief Executive Officer from 1996 to 1997. Mr. Rundell is also a
director of Renaissance US Growth & Income Trust, PLC, a director of Dain
Rauscher Corporation, a holding company for a full-service regional brokerage
and investment banking company and Tandy Brands Accessories, Inc., a
manufacturer of accessories for men, women and boys. Mr. Rundell earned an
M.B.A. with Distinction from Harvard University and a B.S. in Chemical
Engineering from The University of Texas at Austin.
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WILLIAM D. BREEDLOVE, 61, Nominee for the board of directors of the
Company. Mr. Breedlove has served as Vice Chairman of Hoak Breedlove Wesneski &
Co. (HBW), and investment banking firm, since August 1996. Mr. Breedlove has
held senior management positions in commercial and merchant banking for over 30
years. Prior to HBW's formation in 1996, Mr. Breedlove was chairman, managing
director and co-founder of Breedlove Wesneski & Co., a private merchant banking
firm. From 1984 to 1989, Mr. Breedlove also served as president and director of
Equus Capital Corporation, the corporate general partner of three public and
private limited partnerships operating as management leveraged buyout funds. Mr.
Breedlove's experience also includes 22 years at First National Bank in Dallas,
the last three years of which he served as chairman and chief executive officer
of the lead bank and vice chairman of InterFirst Corporation. Mr. Breedlove
currently serves as a director of NCI Building Systems, Inc., Park Pharmacy
Corporation and seven private companies. He has previously served as director of
several other publicly-held companies, including interFirst Corporation, Texas
Oil and Gas Corporation, Dillard's Department Stores, and Cronus Industries,
Inc. Mr. Breedlove received his B.B.A. degree in finance and banking from the
University of Texas at Austin.
ALAN M. ARSHT, 57, Director has been a director of the Company since
1999. Mr. Arsht has been President of Arsht & Company, Inc., a New York based
investment banking firm established in 1986. From 1977 to 1986, Mr. Arsht was
Senior Vice President and Managing Director of Thomson McKinnon Securities, Inc.
He also served as Vice President, Corporate Finance at Wertheim & Company, Inc.
and was Special Assistant to the Deputy Secretary of the U.S. Treasury
Department. Mr. Arsht also held positions at the U.S. Securities and Exchange
Commission. Mr. Arsht earned an M.B.A. in Finance from American University and a
B.A. in History from East Texas State University.
ROBERT M. GALECKE, 59, Director, has been a director of the Company
since May 1996. Mr. Galecke is currently Vice President of Finance and
Administration for the University of Dallas. Prior to that he was a principal in
the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to May
1996. He also served as Executive Vice President, Chief Operating Officer and
Chief Financial Officer of Southmark Corporation, a financial services insurance
and real estate holding company, from 1986 to 1992. From 1989 to 1995, Mr.
Galecke served as Chairman of the board, President and Chief Executive Officer
of National Heritage, Inc. Mr. Galecke received a graduate degree from the
School of Banking at the University of Wisconsin, Madison, and a B.S. in
Economics from the University of Wisconsin at Stevens Point.
JOHN P. JENKINS, 50, Director, has been a director of the Company since
September 2000. Mr. Jenkins served as Chairman, Chief Executive Officer and
President of TAVA Technologies, Inc., a systems integrator providing
sophisticated IT solutions to manufacturing and process industries from 16
locations across the U.S. In July 1999, Real Software, a Belgian IT service and
software provider, acquired TAVA. Mr. Jenkins continued as CEO and President of
the U.S. operations, Real Enterprise Solutions, until June 2000. Prior to TAVA
Technologies, Inc., Mr. Jenkins was President of Morgan Technical Ceramics,
Inc., and Vice President and General Manager of the Structural Ceramic Division
of Coors Ceramic Company, a subsidiary of Adolph Coors Company. Mr. Jenkins
holds a Juris Doctor degree from the University of Denver and a B.S. degree in
Mechanical Engineering from the University of Washington.
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FRANK R. MARLOW, 62, Director, has been a director of the Company since
May 1995. Mr. Marlow served as Vice President, Sales and Marketing for the
Company from October 1993 to February 1995. Mr. Marlow is currently Vice
President of Sales for Conformity, formerly Money Star, a technology company
based in Austin, Texas. From 1995 until 1998, Mr. Marlow was Vice President of
Hogan Systems, a publicly-traded company subsequently purchased by Computer
Sciences Corp. Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL
Corporation and Syntelligence Corporation in executive sales and training
positions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR NAMED ABOVE.
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COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The board of directors held six meetings during the fiscal year ended
June 30, 2000. None of the directors attended fewer than 83% of the meetings of
the board of directors and its committees on which they served. The board of
directors has established two committees: a compensation and stock option
committee and an audit committee. The Company's board of directors acts as the
nominating committee to nominate persons for election to the board of directors.
The compensation and stock option committee is currently composed of
Messrs. Rundell, Jack and Marlow. The compensation and stock option committee
met two times during the fiscal year ended June 30, 2000. The compensation and
stock option committee determines the amount and form of compensation and
benefits payable to all officers and employees, and advises and consults with
management regarding the benefit plans and compensation policies of the Company.
The compensation and stock option committee also reviews and approves stock
option grants to directors, executive officers and employees of the Company.
The audit committee is currently composed of Messrs. Rundell, Galecke,
Jack and Arsht. Messrs. Galecke, Jack and Arsht are independent directors, based
on the definition of independence in Rule 4200(a)15 of the listing standards of
the National Association of Securities Dealers. Although Mr. Rundell was
independent based on such definition during the fiscal year ended June 30, 2000,
he has not been considered an independent director under such definition since
he was appointed to the position of the Chief Executive Officer of the Company
as of August 31, 2000. The board of directors believes that even though Mr.
Rundell is currently not an independent director, it is in the best interests of
the Company that he should continue as a member of the audit committee in order
to be immediately available to the committee to discuss issues and concerns and
answer any questions the committee may have as well as to fulfill the need of
the Company's senior management to be kept aware and informed of any
developments concerning the audit committee. The audit committee met four times
during the fiscal year ended June 30, 2000. This committee recommends to the
board of directors the appointment of independent auditors, reviews the plan and
scope of audits, reviews the Company's significant accounting policies and
internal controls, and has general responsibility for related matters. Prior to
the mailing of this proxy statement to the stockholders of the Company, this
committee met with the Company's independent auditors to review the fiscal 2000
audit and the significant accounting policies and internal controls. The audit
committee adopted an audit committee charter on June 13, 2000, a copy of which
is attached to this proxy statement as Exhibit A.
AUDIT COMMITTEE REPORT
The audit committee of the board of directors, which was established in
June 1993, oversees the external audit of the Company's financial statements and
reviews the internal audit, control and financial reporting procedures of the
Company. A full description of the activities of the audit committee is
contained in the audit committee charter, which is attached to this proxy
statement as Exhibit A. For the fiscal year ended June 30, 2000 and for the
purposes of this report, the audit committee was composed of Messrs. Galecke,
Arsht, Jack and Rundell.
During the fiscal year ended June 30, 2000, the audit committee met
with representatives of Grant Thornton LLP, the Company's independent
accountants, to review the results of the fiscal 1999 audit and to review the
scope of the fiscal 2000 audit.
In August 2000, the audit committee met with Grant Thornton LLP to
review the results of the fiscal 2000 audit. The committee will meet with Grant
Thornton LLP again in 2001 to review the scope of the fiscal 2001 audit. At the
August 2000 meeting, the committee reviewed the results of the fiscal 2000 audit
with the members of the Grant Thornton LLP engagement team. The committee also
11
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discussed the fiscal 2000 audited financial statements and the results of the
fiscal 2000 audit with the Company's management.
During the August 2000 meeting, the audit committee discussed the
matters required to be discussed by Statements on Auditing Standards No. 61 with
Grant Thornton LLP, including the restrictions on ownership of securities
imposed as part of the independence standards that the Grant Thornton LLP
engagement team must observe. The committee received during the August 2000
meeting the written disclosures and letter from Grant Thornton LLP required by
Independence Standards Board Standard No. 1. Standard No. 1 requires auditors to
communicate, in writing, at least annually all relationships between the auditor
and the Company that, in the auditor's professional judgment, may reasonably be
thought to affect the auditor's independence. The committee has received this
written disclosure and has discussed with Grant Thornton LLP its independence.
The communication from Grant Thornton LLP required by Standard No. 1 did not
disclose any matter or relationship that impaired its independence.
Based upon these reviews, discussions and disclosures, the audit
committee made a recommendation to the board of directors that the fiscal 2000
audited financial statements be included in the Company's Annual Report on Form
10-KSB for the fiscal year ending June 30, 2000.
By the Audit Committee:
Robert M. Galecke, Chairman
Alan M. Arsht
James E. Jack
C. A. Rundell, Jr.
AUDIT FEES
The following table summarizes the fees paid or payable to Grant
Thornton LLP for services rendered for the fiscal year ended June 30, 2000.
Audit fees in connection with the Annual Report on
Form 10-K and quarterly reports ......................... $ 53,546
Financial systems design and implementation fees ........ --
All other fees --
--------
Total all other fees .................................... --
========
TOTAL ................................................... $ 53,546
========
OFFICERS
The following table sets forth the officers of the Company.
NAME AGE CURRENT POSITION
---- --- ----------------
C. A. Rundell, Jr. 67 Chairman of the Board and Chief Executive Officer
Holly J. Burlage 37 Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
Jack G. Caldwell 63 President, B&B Electromatic, Inc.
Lars H. Halverson 42 President, Intelli-Site, Inc.
The following is a brief description of the business backgrounds of
each of the officers who are not also nominees for directors. For a narrative
description of the business background of Mr. Rundell, see "Directors and
Nominees for Election to the Board of Directors" above.
HOLLY J. BURLAGE, 37, Executive Vice President, Chief Financial
Officer, Secretary and Treasurer, joined the Company in February 1994 as
Accounting Manager, became Controller in 1995, became Vice President, Secretary
and Treasurer in May 1997, and became Chief Financial Officer in July 1999.
Prior to joining the Company, Ms. Burlage was Controller of Signature Home Care
Group, Inc., a home health care company, from 1993 to 1994, and Controller and
Chief Accounting Officer of National Heritage, Inc., a publicly-traded long-term
care company, from 1989 to 1993. Ms. Burlage holds a B.B.A. from Baylor
University.
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JACK G. CALDWELL, 63, President, B&B Electromatic, Inc., joined the
Company in January 1998. Prior to joining the Company, Mr. Caldwell was a
Results Manager for Thomas Group, Inc. from 1992 to 1998. From 1986 to 1992, Mr.
Caldwell served as the European Operations Manager for E-Systems and was
Director of Sales and Marketing from 1978 to 1986 for the Cooper Industries. Mr.
Caldwell earned an M.B.A. and B.S. degrees from East Texas State University.
LARS H. HALVERSON, 42, President, Intelli-Site, Inc., joined the
Company in January 2001. Prior to joining the Company, Mr. Halverson was a Sales
Account Manager with Honeywell, Inc. from 1985 to 2001. From 1982 to 1984, Mr.
Halverson served as Field Sales Representative for Moore Business Forms, Inc.
Mr. Halverson earned a B.A. in Business Administration and Economics from the
University of North Texas.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation of the Chief Executive Officer
and the two executive officers of the Company whose compensation exceeded
$100,000 for the fiscal years ended June 30, 2000, 1999 and 1998.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
----------------------------- -----------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED OPTION/
POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS
------------------ ---- --------- -------- ------------ ------------ -------
Gerald K. Beckmann 2000 $ 277,078 -- -- -- 100,000
Chief Executive Officer 1999 296,393 -- -- -- --
and President(1) 1998 289,425 -- -- -- 200,000
Holly J. Burlage 2000 $ 125,650 -- -- -- 40,000
Executive Vice President 1999 105,011 -- -- -- 60,000
and Chief Financial 1998 90,368 $ 15,000 -- -- 17,500
Officer
Jack G. Caldwell 2000 $ 149,213
President 1999 140,510 -- -- -- 100,000
B&B Electromatic, Inc. 1998 58,333 -- -- -- 61,790
- ----------
(1) Resigned as of August 31, 2000.
No other executive officer's salary and bonus exceeded $100,000
annually and no executive had any form of long-term incentive plan compensation
arrangement with the Company during the fiscal years ended June 30, 2000, 1999
and 1998.
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STOCK OPTION GRANTS
The following table provides information concerning the grant of stock
options during the twelve months ended June 30, 2000 to the named executive
officers:
% OF TOTAL
NUMBER OF OPTIONS GRANTED
FOR THE TWELVE SECURITIES UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION
MONTHS ENDED 6/30/00 OPTIONS GRANTED(1) IN FISCAL YEAR(%) PRICE($) DATE
- -------------------- --------------------- ----------------- -------- ----------
Gerald K. Beckmann(2) 50,000 11.1% $0.563 08/23/09
Gerald K. Beckmann(2) 50,000 11.1 0.625 06/26/10
Holly J. Burlage 20,000 4.4 0.563 08/23/09
Holly J. Burlage 20,000 4.4 0.625 06/26/10
Jack G. Caldwell 10,000 2.2 0.563 08/23/09
Jack G. Caldwell 20,000 4.4 0.625 06/26/10
- ----------
(1) The options for all listed vest with respect to 25% of the shares issuable
thereunder six months after the date of grant and with respect to
cumulative increments of 25% of the shares issuable thereunder on each
anniversary of the date of grant.
(2) Resigned as of August 31, 2000.
OPTION EXERCISES AND HOLDINGS
The following table provides information related to the number of
shares received upon exercise of options, the aggregate dollar value realized
upon exercise, and the number and value of options held by the named executive
officers of the Company at June 30, 2000.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/ SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR END AT FISCAL YEAR END($)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
FOR THE TWELVE MONTHS ENDED 6/30/00
- -----------------------------------
Gerald K. Beckmann 346,973 137,500 $ 7,031 $21,094
Holly J. Burlage 90,625 69,375 2,813 8,437
Jack G. Caldwell 98,843 92,947 1,406 4,219
DIRECTOR COMPENSATION
Currently, directors are compensated by incentive stock options in an
amount equivalent to $7,500 annually for serving on the board in addition to
$1,250 for each committee on which they serve. All directors are reimbursed for
their out-of-pocket expenses incurred in connection with their attendance at
board meetings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 12, 2000, Mr. Rundell, Chairman of the board of directors,
Chief Executive Officer and a stockholder of the Company, loaned the Company
approximately $200,000, at 9% annual interest. On June 28, 2000, The Rundell
Foundation, an affiliate of Mr. Rundell, loaned the Company approximately
$100,000, at 9% annual interest. To date, both of the loans remain outstanding.
If the Company's stockholders approve the financial restructuring proposal, then
this $300,000 of debt will be converted into approximately 13,000 shares of
Series G preferred stock (depending on the amount of accrued interest). On
November 17, 2000, Mr. Rundell loaned the Company approximately $50,000, at 8%
annual interest. One of the requirements of the financial restructuring is that
the Company must obtain a minimum investment of $100,000 from sources other than
Renaissance prior to the date of the 2001 Annual Meeting of Stockholders. This
$50,000 loan from Mr. Rundell is 50% of the $100,000 requirement. If the
Company's stockholders approve the financial restructuring proposal, this
$50,000 of debt will be converted into approximately 2,000 shares of Series F
preferred stock (depending on the amount of accrual interest). In addition, Mr.
Rundell serves as a director of Renaissance US Growth & Income Trust PLC and
served as a director of Renaissance Capital Growth & Income Fund III, Inc. until
October 12, 2000.
On December 31, 1996, Renaissance loaned the Company $4.6 million at a
9% annual interest rate. Renaissance is currently a stockholder of the Company.
In addition, during 1999 and 2000, Renaissance loaned the Company approximately
$1.63 million at 9% interest rate. Pursuant to the terms of a letter agreement
dated as of November 13, 2000 with the Company, the Company issued promissory
notes to Renaissance for an aggregate of $1 million with an 8% interest rate. If
the financial restructuring proposal is approved, the new Renaissance promissory
notes will be converted into approximately 41,000 shares of Series F preferred
stock (depending on the amount of accrued interest) and all other convertible
debt, promissory notes and accrued interest will be converted into shares of
Series G preferred stock.
Mr. Jenkins joined the board of directors in September 2000. In
addition to his board duties, Mr. Jenkins currently serves as a consultant to
the Company's subsidiary, Intelli-Site, Inc., on a part-time basis at an hourly
rate of $120.00. Intelli-Site did not employ Mr. Jenkins as a consultant in
fiscal year 2000. Intelli-Site paid Mr. Jenkins total compensation of $28,495
from September 2000 through December 31, 2000.
Mr. Beckmann was the Company's Chief Executive Officer and President
until August 2000. Mr. Beckmann was a consultant to the Company from August 2000
until October 2000 on a part-time basis at an hourly rate of $120.00. The
Company paid Mr. Beckmann total compensation of $277,078 for fiscal year 2000
and $45,833 for fiscal year 2001.
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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PROPOSAL TWO
PROPOSED FINANCIAL RESTRUCTURING
INTRODUCTION
On November 13, 2000, the Company entered into a letter agreement with
Renaissance, a copy of which is attached hereto as Appendix B. Pursuant to the
terms of the letter agreement, the Company issued an aggregate of $1.0 million
of the Company's secured convertible promissory notes to Renaissance. The
funding of these new Renaissance promissory notes was conditioned in part on the
Company's board of directors' approval of a proposed financial restructuring as
set forth in the letter agreement. The Company's board of directors approved the
letter agreement, including the financial restructuring proposal, on November
13, 2000. As required by the letter agreement, in connection with issuance of
the new Renaissance promissory notes, the Company's board of directors is
soliciting stockholder approval of the financial restructuring proposal, which
consists of the following:
o the issuance of an aggregate of $1.0 million of the Company's
promissory notes to Renaissance which were issued from October
2000 to January 2001;
o the amendment of the Company's Restated Certificate of
Incorporation to authorize 80,0000 shares of a new Series F
preferred stock and 300,000 of a new Series G preferred stock;
o the issuance to Renaissance of approximately 41,000 shares of
Series F preferred stock (depending on the amount of accrued
interest) in exchange for the promissory notes of the Company
held by Renaissance in the aggregate principal amount of $1.0
million together with accrued interest;
o the issuance to Renaissance of approximately 254,000 shares of
Series G preferred stock (depending on the amount of accrued
interest) in exchange for all other promissory notes and
convertible debentures of the Company held by Renaissance
together with accrued interest (constituting approximately
$6.4 million, including accrued interest);
o The issuance to C. A. Rundell, Jr. of approximately 2,000
shares of Series F preferred stock (depending on the amount of
accrued interest) in exchange for the promissory note of the
Company held by Mr. Rundell in the principal amount of $50,000
together with accrued interest; and
o the issuance to C. A. Rundell, Jr. and The Rundell Foundation
of approximately 13,000 shares of Series G preferred stock
(depending on the amount of accrued interest) in exchange for
the promissory notes of the Company held by them in the
aggregate principal amount of $300,000 together with accrued
interest.
According to the terms of the letter agreement, the holders of Series F
preferred stock and Series G preferred stock will have the right to convert
their shares of preferred stock into shares of Common Stock. The Company's
current Restated Certificate of Incorporation does not authorize enough shares
of Common Stock to cover such a potential conversion. In order to effect the
financial restructuring proposal, the stockholders must also approve an
amendment to
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the Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock as set forth in proposal three in this proxy statement.
In addition, according to the terms of the letter agreement, prior to
the issuance of the Series F preferred stock and the Series G preferred stock,
the Company must amend the Certificate of Designation, Preferences and Rights of
the Series D preferred stock to modify the liquidation preference amount as set
forth in proposal four in this proxy statement. If the stockholders do not
approve proposal four in this proxy statement, then the financial restructuring
proposal cannot be completed.
Management believes that if the Company's stockholders do not approve
the financial restructuring proposal, then there is a significant risk that the
Company will not have sufficient cash to continue its operations. The Company is
currently in payment default and financial covenant default of the Company's
convertible debentures held by Renaissance. This default coupled with the need
for additional cash is another reason for the financial restructuring. Also, if
the financial restructuring proposal is not completed by March 13, 2001, then
under the terms of the letter agreement, all of the Company's debt owed to
Renaissance will become immediately due and payable. The Company does not have
enough cash to repay the Renaissance debt and the Company does not have any
foreseeable way to obtain the cash to repay the Renaissance debt.
According to the Delaware General Corporation Law, the Company's
Restated Certificate of Incorporation and the Company's bylaws, stockholder
approval is required to increase the number of the Company's authorized shares
of Common Stock from 35,000,000 to 70,000,000. The Company needs 70,000,000
authorized shares of Common Stock to have enough shares to issue upon conversion
of the Company's Series F and G preferred stock to be issued under the financial
restructuring proposal. Although according to the Delaware General Corporation
Law, the Company's Restated Certificate of Incorporation and the Company's
bylaws, stockholder approval is not required to effect the proposed financial
restructuring, the board of directors believes that it is in the best interests
of the Company to seek stockholder approval of the financial restructuring
proposal. If the stockholders do not approve the financial restructuring
proposal then the board of directors will not complete the financial
restructuring pursuant to the terms set forth in the letter agreement.
If the financial restructuring is effected, then, assuming
approximately 65.9 million fully diluted shares of Common Stock outstanding as
of March 26, 2001, the percentage equity ownership of the current Common Stock
holders will be approximately 17.4%. However, in the absence of a financial
restructuring, the percentage equity ownership of the current Common Stock
holders would be approximately 26.9%, on a fully diluted basis, assuming that
the holders of the Series A preferred stock, the Series D preferred stock,
warrants, options and Renaissance converted all their stock and exercised all
their rights as of March 26, 2001.
The following table shows the percentage of equity interest of the
Company's Common Stock holders on a fully diluted basis currently, and after the
financial restructuring.
PERCENTAGE EQUITY INTEREST
PERCENTAGE EQUITY INTEREST OF COMMON STOCK
HOLDERS, ON A FULLY DILUTED BASIS
-------------------------------------------------------------------
CURRENTLY, ASSUMING ALL ASSUMING THE FINANCIAL
OUTSTANDING CONVERTIBLE DEBT RESTRUCTURING IS APPROVED AND
AND PREFERRED STOCK IS ALL PREFERRED STOCK IS
PARTIES IN INTEREST CONVERTED INTO COMMON STOCK(1) CONVERTED INTO COMMON STOCK(2)
------------------- ------------------------------ ------------------------------
Current Common Stock Holders(3) 26.9% 17.4%
Current Warrant and Option Holders 25.8% 16.7%
Renaissance 41.0% 60.2%
Mr. C. A. Rundell, Jr. and The
Rundell Foundation 6.3% 5.6%
(1) Assumes all outstanding warrants, options, convertible promissory notes and
other convertible debt, Series A preferred stock and Series D preferred
stock as of January 31, 2001 are converted.
(2) Assumes that (a) the exchange of approximately $1.0 million of new
promissory notes and interest arrearages of the Company to Renaissance into
approximately 41,000 shares of Series F preferred stock, (b) exchange of a
50,000 convertible note, (c) the exchange of approximately $6.4 million of
all other existing promissory notes, convertible debt and interest
arrearages of the Company held by Renaissance for approximately 254,000
shares of Series G preferred stock, (d) the exchange of the convertible
Rundell promissory note for approximately 2,000 shares of Series F
preferred stock, and (e) the exchange of an aggregate of approximately
$324,000 in indebtedness of the Company to C. A. Rundell, Jr. and The
Rundell Foundation for approximately 13,000 shares of Series G preferred
stock, have occurred on exchange date of March 26, 2001.
(3) Includes (a) shares held by management, (b) shares of Common Stock
currently held by holders of the Company's Series A convertible preferred
stock and Series D convertible preferred stock, and (c) shares of Common
Stock issuable upon conversion of a convertible promissory note to be
issued upon the receipt of an additional $50,000 that is required by the
letter agreement. More specifically, the terms of the letter agreement that
dictates the structure of the financial restructuring require that before
Renaissance invests $1,000,000 in the Company, the Company must receive a
minimum investment of $100,000 from sources other than Renaissance. C. A.
Rundell, Jr. has invested $50,000 pursuant to a promissory note convertible
into approximately 2,000 shares of Series F preferred stock if the
Company's stockholders approve of the financial restructuring. The Company
expects to raise the remaining required $50,000 by issuing a promissory
note convertible into approximately 2,000 shares of Series F, which, on a
fully-diluted basis, is the equivalent of approximately 250,000 shares of
Common Stock.
BACKGROUND AND REASONS FOR FINANCIAL RESTRUCTURING
General.
The Company was formed in December 1991 with a business plan to be a
single source supplier for all hardware and software needs for security and
traffic products used in the commercial, industrial and government sectors. When
the Company made its initial public offering in April 1993, the Company's
subsidiaries consisted of Automatic Access Controls, Inc., known as AAC, B&B
Electromatic, Inc., and IST, now named Intelli-Site, Inc. AAC was a distributor
of commercial and industrial security products. B&B Electromatic, Inc. is a
manufacturer of security gate operators and road and bridge barriers.
Intelli-Site is a start-up software developer and retail seller of control
systems that integrate security devices for personal computers.
The Company's business model misjudged the level of competition in the
security hardware distribution business. By the middle of 1995, the Company's
revenues and margins fell far short of its business plan and the Company
required additional cash funding. During the second quarter of 1995, the Company
discontinued the operations of AAC due to AAC's cash
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requirements and merged certain functions of AAC with B&B Electromatic and
Intelli-Site. At that time, the Company decided to focus on its two remaining
subsidiaries, B&B Electromatic and Intelli-Site, both of which were suffering
operational challenges. Management developed a plan to stabilize these two
companies, including the acquisition of a systems integration company,
Tri-Coastal Systems, Inc. In September 1995, the Company purchased substantially
all of the assets and liabilities of Tri-Coastal Systems, Inc. in exchange for
21,000 shares of the Company's Common Stock, valued at the time at $55,125.
Tri-Coastal Systems sells, designs, installs and services electronic security
systems primarily for commercial and industrial buildings.
In December 1996, the Company acquired all of the outstanding stock of
Golston Company, Inc. for approximately $4.8 million in a combination of cash
and seller notes, and the assumption of an additional $650,000 in existing debt.
Golston designs, manufactures and markets specialty products for the financial
and healthcare industries. The Company financed this purchase through the
issuance of convertible debentures described below to Renaissance.
In the fall of 1998, the Company needed additional funding as a result
of continuing operating losses. At that time, Intelli-Site, Inc. was creating
significant cash deficits because it receives payments from its customers only
after it satisfactorily performs the work. In addition, B&B Electromatic, Inc.
was undergoing a downturn in the road and bridge market. Renaissance, who had
originally financed the Golston acquisition, loaned the Company additional funds
pursuant to convertible promissory notes. During 1998 the Company began
development of a new NT based Intelli-Site product because Intelli-Site was not
achieving market acceptance as anticipated.
During the spring of 1999, the Company's operating cash deficit was
increasing as a result of lower revenues and higher than budgeted software
development costs. Management made a decision to refocus the Company on two
subsidiaries, B&B Electromatic and Intelli-Site, and to sell its other
subsidiaries, Golston and Tri-Coastal Systems. In May 1999, the Company sold
Golston for $3.2 million in cash and a $100,000 promissory note. In August 1999,
the Company sold Tri-Coastal Systems for a $66,000 promissory note.
When the Company decided in the spring of 1999 to shift its focus,
management assumed that the development of the Intelli-Site software was
complete. However, due to unanticipated delays in the completion of the product,
the Company did not meet the anticipated sales levels for the product and the
Company once again experienced operating cash shortfalls. In the fall of 1999,
the Company raised $1.8 million through a private placement of Series D
preferred stock. In late 1999, B&B Electromatic experienced a significant
downturn in perimeter security sales. B&B Electromatic also experienced a much
lower sales volume than anticipated for the new railroad barrier product. These
factors in fiscal 2000 depressed the Company's stock price and impaired the
Company's liquidity.
The Company most recently tried to market a private placement in late
summer 2000, but was unsuccessful due to market conditions and poor financial
performance.
Renaissance Convertible Debentures.
In December 1996, the Company entered into a convertible debenture
financing with Renaissance to finance the purchase of Golston Company, Inc. The
Company issued an aggregate of $4.6 million in convertible debentures to
Renaissance. The Renaissance convertible debentures have an annual interest rate
of 9%. The debentures, plus interest, are due on or before December 1,
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2003. Interest is payable in monthly installments on the first day of each month
until the principal amount and all accrued and unpaid interest is paid in full.
Conversion Price. The debentures are convertible into shares of the
Company's Common Stock at an initial conversion price of $1.05 per share. On
March 26, 1998, because the Company did not have net sales of at least $16.5
million for year end 1997 and did not have net income after tax for 1997 of at
least $2 million (which were milestones set forth in the debentures), the
conversion price on the debentures was reduced to $0.549 per share, the average
closing price of the Company's Common Stock for the 20-day period beginning on
the date of the public announcement of its financial results for the quarter
ended December 31, 1997. As of March 26, 2001, the principal amount of the
debentures would be convertible into 7,592,353 shares of Common Stock and the
accumulated and unpaid interest on the debentures would be convertible into
774,572 shares of Common Stock.
Antidilution Provisions. If there is a stock split or subdivision of
shares of Common Stock into a greater number of shares, the conversion price
will be proportionately decreased. If there is a combination of shares of Common
Stock into a smaller number of shares, the conversion price will be
proportionately increased.
Mandatory Principal Installments. If the debentures are not sooner
redeemed or converted, then beginning on December 1, 1999, the Company is
required to make mandatory principal payments in an amount equal to $10 per
$1,000 of then outstanding principal. The Company has not made any of these
mandatory principal payments, which as of March 26, 2001 totaled approximately
$619,154. At maturity, the Company will be required to make a final installment
of all of the remaining unpaid principal amount plus all unpaid interest and
other charges due.
Mandatory Redemption in the Event of Certain Changes. If the Common
Stock is not listed for exchange on the NASDAQ National Market, the New York
Stock Exchange, the American Stock Exchange, or quoted on the NASDAQ Small Cap
System, or any person acquires more than 50% of the Common Stock, then the
Company is required, if requested by Renaissance, to redeem the debentures at
the greater of (a) the market value of the debentures or (b) 167% of the par
value of the debentures. Since March 24, 1999, the Company's Common Stock has
not been listed on any permitted exchange. To date, the Company has not received
notice of the exercise of mandatory redemption rights.
Optional Redemption by the Company. On any interest payment date, and
after prior irrevocable notice, the Company may redeem all of the debentures at
120% of par if:
o The closing bid price for the Common Stock averages at least
$4.00 per share for the 21 consecutive trading days;
o The $4.00 bid price is supported by a minimum of 30 times
fully diluted net earnings per share of Common Stock in the
aggregate for the last four consecutive fiscal quarters
preceding the date of notice of redemption;
o The average, over 20 days, of the daily trading volume is
not less than 10,000 shares; and
o The Company has filed a registration statement covering
the shares of Common Stock issuable upon conversion of the
debentures.
Right to Appoint Director. Pursuant to the loan agreement under which
the debentures were issued, the lender may designate a nominee to the Company's
board, subject to the Company's written approval, which may not be unreasonably
withheld. If the lender does not request a board designee, then the lender may
have a representative attend board meetings. The failure to submit the lender's
nominee, if any, for election to the Company's board of directors for any reason
other than good cause is an event of default under the debentures and the loan
agreement.
Registration Rights. The holders have registration rights under the
loan agreement under which the debentures were issued. The holders of at least
50% of the registrable securities then outstanding may demand that the Company
file a registration statement and use the Company's best efforts to register the
securities within 150 days of the registration request. The holders also have
piggyback registration rights. The registration rights terminate on the earlier
to occur of June 30, 2006 or after the holders have demanded two registrations.
Security. The debentures are secured (a) under the terms of the stock
pledge agreements, by all outstanding shares of each of the Company's
wholly-owned subsidiaries and (b) under the terms of stock pledge agreements
from the Company, trademarks, copyrights and software technology relating to the
Company's Intelli-Site product and all machinery and equipment of the Company.
Events of Default; Remedies. The debentures are secured (a) under the
terms of the stock pledge agreements, by all outstanding shares of each of the
Company's wholly-owned subsidiaries and (b) under the terms of stock pledge
agreements from the Company, trademarks, copyrights and software technology
relating to the Company's Intelli-Site product and all machinery and equipment
of the Company.
The term "Events of Default" includes:
o the failure to pay, not later than 10 days after the due date, any
interest or principal of the debenture;
o any representation or warranty under the loan agreement or loan
documents is untrue in any material respect as of the date made;
o default in the performance of any covenant under the loan
agreement, security agreement, pledge agreement or other loan
documents, after the expiration of a 30-day cure period;
o default in the payment of any Material Indebtedness, as defined in
the debenture;
o any of the loan documents ceases to be enforceable or becomes
inoperative;
o bankruptcy events;
o any final judgment for the payment of money in excess of $250,000
is rendered against the Company and not satisfied or discharged at
least 10 days before assets could be sold to pay the judgment;
o the failure of the Company to deliver shares of Common Stock upon
conversion of the debenture; or
o the failure to submit Renaissance's nominee, if any, for election
to the Company's board for any reason other than good cause.
Upon the occurrence of an Event of Default, the holder may:
o declare all principal and interest due and payable;
o reduce any claim to judgment; and/or
o pursue and enforce the holder's rights and remedies.
In addition, the Company must pay all costs and expenses reasonably
incurred by the holder in connection with preserving its rights.
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Renaissance Promissory Notes.
Pre-existing Renaissance Notes. From February 22, 1999 through
September 29, 2000, Renaissance made loans to the Company evidenced by 12
promissory notes. The dates and amounts of these 12 promissory notes are
outlined in the table below. Unless otherwise indicated in the footnotes to the
table, these 12 promissory notes are not convertible and were not renewed or
extended. Each of the promissory notes accrues interest at a rate of 9% per
year. It is anticipated that as of March 26, 2001, the Company will owe an
aggregate of approximately $1.8 million including the principal balance and
accrued unpaid interest to Renaissance under the notes detailed in the following
table.
The form of each of the pre-existing Renaissance notes is filed with
the SEC as an exhibit to the Company's Amendment No. 2 to Form 10-KSB for the
fiscal year ended June 30, 2000.
AMOUNT OF PROMISSORY NOTES ISSUED TO AMOUNT OF PROMISSORY NOTES ISSUED TO
RENAISSANCE CAPITAL GROWTH & INCOME RENAISSANCE US GROWTH & INCOME TRUST
DATE FUND III, INC.($) PLC($)
---- ------------------------------------ ------------------------------------
February 22, 1999 $ 375,000(1) $ 225,000(1)
August 12, 1999 115,000(2) 115,000(2)
May 5, 2000 150,000 150,000
August 25, 2000 100,000 100,000
September 15, 2000 100,000 100,000
September 29, 2000 50,000 50,000
(1) These are convertible promissory notes with an initial conversion price
of $0.549 per share. These notes were amended on May 5, 2000 to add
additional collateral as security for repayment. The amended promissory
notes are secured by a security agreement with the Company's
subsidiaries and a stock pledge agreement. All of the Company's
convertible promissory notes are secured by a security agreement with
the Company's subsidiaries and a stock pledge agreement. Under the
terms of these promissory notes, the payee has certain rights regarding
the registration of shares of Common Stock issued in connection with
the conversion of the notes under the terms of a registration rights
agreement dated February 22, 1999.
(2) These promissory notes were renewed and extended on May 5, 2000.
New Renaissance Notes. Pursuant to the terms of the letter agreement
with Renaissance, Renaissance loaned $1 million to the Company, as evidenced by
10 new secured convertible promissory notes of the Company payable to
Renaissance. These notes were issued from October 20, 2000 through January 12,
2001. Under the letter agreement, these new Renaissance promissory notes are
due and payable by March 13, 2001. They accrue interest at a rate of 8% per
year and are secured by all of the assets of the Company and its subsidiaries.
The new Renaissance promissory notes are convertible into the Company's Common
Stock at a conversion price of $0.20 per share. It is anticipated that as of
March 26, 2001, approximately $1,027,000 of principal and accrued unpaid
interest will be owed under the new Renaissance promissory notes.
Stock issued in connection with the conversion of the notes under the terms of a
registration rights agreement dated October 20, 2000.
The form of each of the new Renaissance notes is filed with the SEC as
an exhibit to the Company's Amendment No. 2 to Form 10-KSB for the fiscal year
ended June 30, 2000. The dates and amounts of these new Renaissance notes are
outlined in the table below.
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AMOUNT OF PROMISSORY NOTES ISSUED TO AMOUNT OF PROMISSORY NOTES ISSUED TO
RENAISSANCE CAPITAL GROWTH & INCOME RENAISSANCE US GROWTH & INCOME TRUST
DATE FUND III, INC.($) PLC($)
---- ----------------------------------- ------------------------------------
October 20, 2000 100,000 100,000
November 3, 2000 100,000 100,000
November 17, 2000 100,000 100,000
December 22, 2000 75,000 75,000
January 12, 2001 125,000 125,000
Registration Rights of Renaissance. The Renaissance convertible notes
provide that the Renaissance parties have registration rights under the
registration rights agreements dated February 22, 1999 and October 20, 2000.
Under these registration rights agreements, the holders have demand and
piggyback registration rights. Under the demand rights, the holders may request
two times that the Company register the registrable securities if the
registration would cover at least 25% of the then outstanding registrable
securities. Under the piggyback registration rights, the Company must give the
holders notice of other registration statements the Company may file and allow
the holders to participate in the registration by including their registrable
securities. Under the registration agreements, the Company also agreed to file a
"shelf" registration statement within 90 days of the notes. The Company has not
filed any registration statements pursuant to these registration rights
agreements.
Security for the Renaissance Notes. The Renaissance notes are secured
by (a) the Security Agreement, dated as of October 2, 1998, among the Company,
B&B Electromatic, Inc., Golston Company, Inc., Intelli-Site, Inc. and
Tri-Coastal Systems, Inc. and Renaissance Capital Growth & Income Fund III, Inc.
and Renaissance US Growth & Income Trust PLC, and (b) the Stock Pledge
Agreement, dated as of December 31, 1996, among the Company and Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust
PLC.
Rundell Promissory Notes.
Pre-existing Rundell Notes. On April 12, 2000, C. A. Rundell, Jr.,
currently Chairman of the board of directors and Chief Executive Officer of the
Company, loaned the Company $200,000 pursuant to a promissory note. In addition,
on June 28, 2000, The Rundell Foundation, a non-profit corporation, loaned the
Company $100,000 pursuant to a promissory note. Mr. Rundell is President, a
director and trustee of The Rundell Foundation. Both of these promissory notes
accrue interest at a rate of 9% a year and are due and payable on demand. The
Rundell promissory notes are secured by the accounts receivable of Intelli-Site,
Inc. due from Coken Company. It is anticipated that as of March 26, 2001, the
aggregate principal balance of and accrued unpaid interest on the pre-existing
Rundell notes will be approximately $324,000.
New Rundell Note. On November 17, 2000, Mr. Rundell loaned the Company
an additional $50,000 pursuant to a convertible promissory note at an interest
rate of 8% per year, due and payable on demand, with a conversion price of $0.20
per share. It is anticipated that as March 26, 2001, the aggregate principal
balance of and accrued unpaid interest on the new Rundell note will be
approximately $52,000.
Going Concern Audit Opinion.
The audit report, dated August 4, 2000, of Grant Thornton LLP, the
Company's independent auditors, states that the Company has suffered recurring
losses from operations, has an excess of liabilities over assets, and is in
default of certain debt covenants. The audit report further states that these
matters raise substantial doubt about the Company's ability to continue as a
going concern.
ACTION PLAN AND ALTERNATIVES CONSIDERED
In light of the lack of financial and stock performance over the last
few years, management has at various times considered the following options:
o Refinance the Renaissance debt;
o Sell one or both of the remaining subsidiaries;
o Seek protection under the bankruptcy laws;
o Merge with a competitor; or
o Raise a substantial equity investment in the Company.
The only significant secured debt that is not held by Renaissance, Mr.
Rundell or The Rundell Foundation is the mortgage on the B&B Electromatic, Inc.
facility. The Company refinanced this mortgage in 1999 for a cash contribution
of approximately $100,000. The proceeds from the refinancing were used for
operations and capital improvements at B&B Electromatic.
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The Company rejected the bankruptcy option because it believes that a
voluntary bankruptcy filing would likely not maximize a recovery for holders of
the unsecured indebtedness or holders of the capital stock. Management believes
that the most likely liquidation scenario would be a court-administered forced
sale of assets. Under this scenario, the Company believes the liquidation
proceeds might not be sufficient to satisfy even the claims of the Company's
creditors, which are approximately $9.0 million. Additionally, the holders of
Series A and Series D preferred stock have liquidation preferences over the
holders of Common Stock. Management is of the view that it is extremely unlikely
that sufficient value would be realized to satisfy the creditors and the holders
of stock having a liquidation preference over the holders of Common Stock.
Accordingly, the Common Stock holders would probably receive no value for their
shares in a bankruptcy scenario.
Management considered selling the Company through a merger or sale of
substantially all of the Company's assets. The Company contacted several
potential candidates in this regard. While the Company received some interest
in the purchase of B&B Electromatic, Inc., management felt the purchase price
offered by more than one candidate was significantly below the value of B&B
Electromatic, Inc. The Company's current capital structure makes it unlikely
that the Company can attract a merger partner on favorable terms.
The Company has contacted various institutional and individual
investors about making an equity investment in the Company. None have expressed
any willingness to invest given the Company's current capital structure and
market conditions.
THE PROPOSED FINANCIAL RESTRUCTURING
The Letter Agreement
General. On November 13, 2000, the Company entered into a letter
agreement with Renaissance, a copy of which is attached hereto as Appendix B.
The Company's board of directors approved the letter agreement, including the
financial restructuring proposal, on November 13, 2000. As required by the
letter agreement, the Company's board of directors is soliciting stockholder
approval of the financial restructuring proposal, which consists of the
following:
New Renaissance Promissory Notes. Pursuant to the terms of the letter
agreement, the Company issued an aggregate of $1.0 million of the Company's
secured convertible promissory notes to Renaissance. The funding of these new
Renaissance promissory notes was conditioned in part on the Company's board of
directors' approval of a proposed financial restructuring as set forth in the
letter agreement.
Amendment to Charter to Increase Number of Shares of Authorized Common
Stock. According to the terms of the letter agreement, the holders of Series F
preferred stock and Series G preferred stock will have the right to convert
their shares of preferred stock into shares of Common Stock. The Company's
current Restated Certificate of Incorporation does not authorize enough shares
of Common Stock to cover such a potential conversion. In order to effect the
financial restructuring proposal, the stockholders must also approve an
amendment to the Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock as set forth in proposal three in this proxy
statement.
Amendment to Series D Certificate of Designation, Preferences and
Rights. According to the terms of the letter agreement, before the issuance of
the Series F preferred stock and Series G
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preferred stock, the holders of Series D preferred stock must approve an
amendment to the Series D Certificate of Designation, Preferences and Rights to
provide for a reduction of the liquidation preference to $0.01 per share, until
the Series F preferred stock and Series G preferred stock have been converted or
redeemed, or until all of the holders of shares of Series F preferred stock and
Series G preferred stock have received an amount equal to the liquidation
preference of the Series F and Series G preferred stock. At that time, the
liquidation preference will revert to $20.00 per share plus any accrued and
unpaid dividends. The current liquidation preference of the Series D preferred
stock is $20.00 per share plus any accrued and unpaid dividends. The Company is
seeking the approval of the amendment to the Restated Certificate of
Incorporation to reduce the liquidation preference in proposal four set forth
in this proxy statement.
Registration Rights. The Company is required to file within 90 days of
the issuance of the Series F preferred stock and Series G preferred stock to
Renaissance a registration statement to permit resales by the holders of the
preferred stock of the shares of Common Stock that are issuable upon conversion
of the Series F preferred stock and Series G preferred stock. Additionally,
Renaissance will have one demand registration right and
unlimited piggyback registration rights. The Company must pay all expenses of
Renaissance in connection with such registrations, except underwriting discounts
and commissions.
Additional Financing. The letter agreement requires that as part of
the financial restructuring, the Company must receive a minimum investment of
$100,000 from sources other than Renaissance. To fulfill one-half of this
requirement, C. A. Rundell, Jr. lent the Company $50,000 pursuant to the
Rundell convertible promissory note. The Company expects to raise the remaining
required $50,000 by issuing a promissory note that is convertible into
approximately 2,000 shares of Series F preferred stock, which, on a
fully-diluted basis, is the equivalent of approximately 250,000 shares of
Common Stock.
Consequences if Restructuring Not Approved or Completed. If the
proposed financial restructuring is not effected by March 13, 2001, then the new
Renaissance promissory notes will be immediately due and payable. The Company
and Renaissance negotiated the financial restructuring so that the new
Renaissance promissory notes will be converted into Series F preferred stock
only if the Company's stockholders approve the financial restructuring proposal.
If the Company's stockholders do not approve the financial restructuring
proposal by March 13, 2001, then Renaissance would prefer to receive repayment
of the new Renaissance promissory notes than to own Series F preferred stock.
This is why, prior to stockholder approval, the financial restructuring proposal
contemplates the Company issuing the new Renaissance promissory notes rather
than shares of Series F preferred stock.
Exchange of New Renaissance Promissory Notes
As part of the proposed financial restructuring, Renaissance will
exchange all of the new Renaissance promissory notes and accrued interest into
an aggregate of approximately 41,000 shares of Series F preferred stock,
depending on the amount of accrued interest, at an exchange rate of $25.00 per
share of Series F preferred stock. It is anticipated that as of March 26, 2001,
the aggregate principal amount and accrued unpaid interest on these notes will
be approximately $1,027,000.
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Exchange of Other Indebtedness with Renaissance
As part of the proposed financial restructuring, Renaissance will
exchange all of the other Renaissance debentures and notes, including all
accrued interest, into an aggregate of approximately 254,000 shares of Series G
preferred stock, depending on the amount of accrued interest, at an exchange
rate of $25.00 per share. If the proposed financial restructuring is not
effected by March 13, 2001, then pursuant to the letter agreement all of this
indebtedness will be immediately due and payable. It is anticipated that as of
March 26, 2001, the aggregate principal amount and accrued unpaid interest on
the debentures and notes will be approximately $6.4 million.
Exchange of Indebtedness with C. A. Rundell, Jr. and The Rundell Foundation
As part of the proposed financial restructuring, Mr. Rundell and The
Rundell Foundation will exchange $300,000 principal amount of the pre-existing
Rundell notes, including all accrued interest, into approximately 13,000 shares
of Series G preferred stock, depending on the amount of accrued interest, at an
exchange rate of $25.00 per share. As of March 26, 2001, the aggregate principal
balance of and accrued unpaid interest on the pre-existing Rundell notes will be
approximately $324,000. In addition, Mr. Rundell will exchange the new Rundell
convertible promissory note in the principal amount of $50,000, including all
accrued interest, into approximately 2,000 shares of Series F preferred stock,
depending on the amount of accrued interest. It is anticipated that as of March
26, 2001, the aggregate principal balance of and accrued interest of the new
Rundell note will be approximately $52,000.
Terms of the Series F Preferred Stock
As part of the financial restructuring, the board of directors has
proposed to authorize 80,000 shares of a new series of preferred stock to be
designated Series F cumulative convertible preferred stock, par value $0.01 per
share. If the stockholders approve the financial restructuring proposal, then
the Company will issue approximately 44,000 shares of Series F preferred stock.
The Company is seeking stockholder approval for the authorization of 80,000
shares of Series F preferred stock instead of only the 44,000 shares required
for the financial restructuring because the Company hopes to issue additional
shares of Series F preferred stock to future investors. The Company does not
presently know of any future investors. The following is a summary description
of the material terms of the Series F preferred stock. You should read Exhibit D
to this proxy statement, which contains the full description of the rights,
terms and preferences of the Series F preferred stock.
Rank. The Series F preferred stock will rank on a parity with the
proposed Series G preferred stock and senior to the Common Stock, Series A
preferred stock, Series D preferred stock and Series E preferred stock. In
addition, the consent of the holders of 80% of the Series F preferred stock and
the Series G preferred stock, voting together as a single class, will be
required to authorize the issuance of any securities with rights on a parity
with, senior to or superior to the Series F preferred stock and Series G
preferred stock, other than securities to evidence bank debt or asset
securitization.
Liquidation. The Series F preferred stock shall have a liquidation
preference of $25.00 per share, plus an amount equal to all dividends, whether
or not earned or declared, accumulated, accrued and unpaid. A liquidation is
defined as a merger, consolidation, sale of voting control or sale of all or
substantially all of the assets of the Company in which the stockholders of the
Company immediately before the event do not own a majority of the outstanding
shares of voting power of the surviving corporation.
Conversion. The Series F preferred stock will be convertible, at the
option of the holder, into shares of the Company's Common Stock at an initial
conversion rate of 125 shares of Common Stock for each share of Series F
preferred stock, based on an initial conversion price of $0.20 per share.
Assuming that 267,150 shares of Series F preferred stock are issued in the
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financial restructuring, an aggregate of 33,393,750 shares of Common Stock would
be issuable upon conversion of the Series F preferred stock. The initial
conversion price may be adjusted to prevent dilution as a result of issuances of
Common Stock at a purchase price less than the conversion price then in effect.
The initial conversion price will not be adjusted for the issuance of Common
Stock pursuant to the conversion of Series F preferred stock or Series G
preferred stock, pursuant to outstanding employee stock options or warrants, or
the issuance of up to 1,500,000 shares of Common Stock upon exercise of future
employee stock options. If there is a stock dividend, stock split or subdivision
of shares of Common Stock into a greater number of shares, the conversion price
will be proportionately decreased. If there is a combination of shares of Common
Stock into a smaller number of shares, the conversion price will be
proportionately increased.
Redemption. The Series F preferred stock will not be redeemable.
Dividends. The Series F preferred stock will accrue cumulative
dividends payable in cash at a rate of $1.25 per share per year. The Company's
first payment of dividends will be on March 31, 2003 for dividends cumulative
from the date of issuance through payment, and thereafter the dividends will be
paid in quarterly installments each year.
Voting. Holders of Series F preferred stock will be entitled to vote
with the holders of Common Stock, the Series D preferred stock, the Series E
preferred stock, and the Series G preferred stock as a single class on all
matters on which stockholders are entitled to vote, including the election of
directors, except as otherwise required by law. Holders of Series F preferred
stock will also be entitled to vote with any other class of equity securities
which may vote with the holders of the Common Stock as a single class with
respect to any matter. Holders of Series F preferred stock are entitled to a
number of votes per share of Series F preferred stock equal to the number of
shares of Common Stock into which the shares of Series F preferred stock are
convertible on the record date of the determination of stockholders entitled to
receive notice of and to vote on such matter. As of the date of issuance,
assuming the shares of Series F preferred stock are issued on March 26, 2001,
the holders of Series F preferred stock will be entitled to approximately
33,393,750 votes. In addition, the consent of holders of 80% of the Series F
preferred stock and the Series G preferred stock, voting together as a single
class, will be required to (a) authorize, create or increase the authorized
amount of any class of senior stock or parity stock, other than preferred stock
of the same class or securities to evidence bank debt or asset securitizations
or (b) authorize a merger, consolidation or sale of assets, other than in the
ordinary course of business, of the Company, including the capital stock of the
Company's subsidiaries. The consent of holders of 80% of the Series F preferred
stock, voting as a single class, will be required to approve any action to amend
the Company's certificate of incorporation or bylaws that would materially and
adversely affect the rights of the Series F preferred stock.
Election of Directors. In addition to their right to vote with the
holders of Common Stock on the election of directors, the holders of the Series
F preferred stock and the holders of the Series G preferred stock, voting
together as a single class, will be entitled to elect two additional directors
to the Company's board of directors. If the financial restructuring is approved,
then the board of directors may be expanded from six to eight members, two of
whom may be elected by the holders of the Series F preferred stock and Series G
preferred stock. Renaissance has informed the Company that after the completion
of the financial restructuring, the holders of the Series F preferred stock and
Series G preferred stock will elect only one board member. Accordingly, the
board of directors will be expanded from six to seven members. The holders of
the Series F preferred stock and Series G preferred stock may choose to elect a
second board member in the future.
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Terms of the Series G Preferred Stock
In addition to the issuance of the Series F preferred stock, as part of
the financial restructuring, the board of directors has proposed to issue
300,000 shares of a new series of preferred stock to be designated Series G
cumulative convertible preferred stock, par value $0.01 per share. The following
is a summary description of the material terms of the Series G preferred stock.
You should read Exhibit E to this proxy statement, which contains the full
description of the rights, terms and preferences of the Series G preferred
stock.
Rank. The Series G preferred stock will rank on a parity with the
proposed Series F preferred stock and senior to the Common Stock, Series A
preferred stock, Series D preferred stock and Series E preferred stock. In
addition, the consent of the holders of 80% of the Series G preferred stock and
the Series F preferred stock, voting together as a single class, will be
required to authorize the issuance of any securities with rights on a parity
with, senior to or superior to the Series F preferred stock and Series G
preferred stock, other than securities to evidence bank debt or asset
securitization.
Liquidation. The Series G preferred stock shall have a liquidation
preference of $25.00 per share, plus an amount equal to all dividends, whether
or not earned or declared, accumulated, accrued and unpaid. A liquidation is
defined as a merger, consolidation, sale of voting control or sale of all or
substantially all of the assets of the Company in which the stockholders of the
Company immediately before the event do not own a majority of the outstanding
shares or voting power of the surviving corporation.
Conversion. The Series G preferred stock will be convertible, at the
option of the holder, into shares of the Company's Common Stock at an initial
conversion rate of 125 shares of Common Stock for each share of Series G
preferred stock, based on an initial conversion price of $0.20 per share.
Assuming that 45,159 shares of Series G preferred stock are issued in the
financial restructuring, an aggregate of 5,644,875 shares of Common Stock would
initially be issuable upon conversion of the Series G preferred stock. The
initial conversion price may be adjusted to prevent dilution as a result of
issuances of Common Stock at a purchase price less than the conversion price
then in effect. The initial conversion price will not be adjusted for the
issuance of Common Stock pursuant to the conversion of Series F preferred stock
or Series G preferred stock, pursuant to outstanding employee stock options or
warrants or the issuance of up to 1,500,000 shares of Common Stock upon exercise
of future employee stock options. If there is a stock dividend, stock split or
subdivision of shares of Common Stock into a greater number of shares, the
conversion price will be proportionately decreased. If there is a combination of
shares of Common Stock into a smaller number of shares, the conversion price
will be proportionately increased.
Redemption. The Company is required to redeem the Series G preferred
stock upon the earlier of (a) the sale of B&B Electromatic, Inc. to the extent
of the net proceeds to the Company from such sale or (b) two years after
issuance, in quarterly installments in accordance with a redemption schedule of
$1.0 million in the third year, $2.0 million in the fourth year and the balance
in quarterly installments beginning in the fifth year. The redemption price for
the Series G preferred stock is $25.00 per share plus accrued and unpaid
dividends.
Dividends. The Series G preferred stock will accrue cumulative
dividends payable in cash at a rate of $1.25 per share per year. The Company's
first payment of dividends will be on
26
30
March 31, 2003 for dividends cumulative from the date of issuance through
payment, and thereafter the dividends will be paid in quarterly installments
each year.
Voting. Holders of Series G preferred stock will be entitled to vote
with the holders of Common Stock, the Series D preferred stock, the Series E
preferred stock, and the Series F preferred stock as a single class on all
matters on which stockholders are entitled to vote, including the election of
directors, except as otherwise required by law. Holders of Series G preferred
stock will also be entitled to vote with any other class of equity securities
which may vote with the holders of the Common Stock as a single class with
respect to any matter. Holders of Series G preferred stock are entitled to a
number of votes per share of Series G preferred stock equal to the number of
shares of Common Stock into which the shares of Series G preferred stock are
convertible on the record date of the determination of stockholders entitled to
receive notice of and to vote on such matter. As of the date of issuance,
assuming the shares of Series G preferred stock are issued on March 26, 2001,
the holders of Series G preferred stock will be entitled to approximately
5,644,875 votes. In addition, the consent of holders of 80% of the Series G
preferred stock and the Series F preferred stock, voting together as a single
class, will be required (a) to authorize, create or increase the authorized
amount of any class of senior stock or parity stock, other than preferred stock
of the same class or securities to evidence bank debt or securitizations or (b)
authorize a merger, consolidation or sale of assets, other than in the ordinary
course of business, of the Company, including the capital stock of the Company's
subsidiaries. The consent of holders of 80% of the Series G preferred stock,
voting as a single class, will be required to approve any action to amend the
Company's certificate of incorporation or bylaws that would materially and
adversely affect the rights of the Series G preferred stock.
Election of Directors. In addition to their right to vote with the
holders of Common Stock on the election of directors, the holders of the Series
G preferred stock and the holders of the Series F preferred stock, voting
together as a single class, will be entitled to elect two additional directors
to the Company's board of directors. If the financial restructuring is approved,
then the board of directors may be expanded from six to eight members, two of
whom may be elected by the holders of the Series G preferred stock and Series F
preferred stock. Renaissance has informed the Company that after the completion
of the financial restructuring, the holders of the Series G preferred stock and
Series F preferred stock will elect only one board member. Accordingly, the
board of directors will be expanded from six to seven members. The holders of
the Series G preferred stock and Series F preferred stock may choose to elect a
second board member in the future.
Comparison of Material Terms of Existing Promissory Notes and Convertible Debt
and Shares of New Preferred Stock
The following is a brief comparison of the material differences among
the Company's currently outstanding promissory notes and convertible debentures
against the Series F preferred stock and Series G preferred stock that the
promissory notes and debentures will be convertible into. The rights of the
holders of Series F preferred stock and Series G preferred stock are identical
except for redemption rights. The following table summarizes all 22 of the
Company's promissory notes issued to Renaissance and all three of the notes
issued to C. A. Rundell, Jr. and The Rundell Foundation. The terms of the
convertible promissory notes are the same as the terms of the non-convertible
promissory notes, except as otherwise indicated in the footnotes, and except
that the non-convertible promissory notes do not have any conversion rights,
redemption rights, registration rights, rights to receive dividends, rights if
there is a stock split, subdivision or combination, or rights if there is a
merger, sale or consolidation.
27
31
CONVERTIBLE DEBENTURES PROMISSORY NOTES SERIES F AND G PREFERRED STOCK
- --------------------------------------------------------------------------------------------------------------------
INTEREST/DIVIDENDS
- --------------------------------------------------------------------------------------------------------------------
Annual interest rate of 9% of the Interest accrues on the unpaid The preferred stock will accrue
outstanding principal balance of and principal balance of the notes at an cumulative dividends payable in
accrued and unpaid interest on the annual rate equal to 8% or 9%, cash at a rate of $1.25 per share
debentures. Interest is payable in depending on the note. per year. The Company's first
monthly installments on the first day payment of dividends will be on
of each month until the principal For the Renaissance convertible March 31, 2003 for dividends
amount and all accrued and unpaid promissory notes only, interest is due cumulative from the date of
interest is paid in full. and payable monthly on the first day issuance through payment, and
of each month. thereafter the dividends will be
paid in quarterly installments
each year.
- --------------------------------------------------------------------------------------------------------------------
MATURITY
- --------------------------------------------------------------------------------------------------------------------
December 1, 2003. However, beginning Renaissance notes. The Renaissance Not applicable.
on December 1, 1999, the Company is promissory notes mature on March 13,
required to make mandatory principal 2001 pursuant to the letter
payments in an amount equal to $10 agreement. It is anticipated that as
per $1,000 of then outstanding of March 26, 2001, the aggregate principal
principal. The Company has not made balance of and accrued unpaid interest on
any of these mandatory principal the pre-existing Renaissance notes is
payments, which as of March 26, 2001 approximately $1.8 million and the
totaled approximately $619,154. aggregate principal balance of and
accrued unpaid interest on the new
Renaissance notes is approximately
$1,027,000.
Rundell notes. The Rundell
promissory notes are payable on
demand of the holder. It is anticipated
that as of March 26, 2001, the aggregate
principal balance of and accrued unpaid
interest on the pre-existing Rundell
notes will be approximately $324,000 and the
aggregate principal balance of and unpaid
accrued interest on the new Rundell note
will be approximately $52,000.
- --------------------------------------------------------------------------------------------------------------------
LIQUIDATION PREFERENCE
- --------------------------------------------------------------------------------------------------------------------
Not applicable. Not applicable. Liquidation preference of $25.00
per share, plus all dividends,
whether or not earned or declared,
accumulated, accrued and unpaid.
A merger, consolidation, sale of
voting control or sale of all or
substantially all of the assets of
the Company is deemed to be a
liquidation. As a result, holders of
preferred stock will be entitled to
the cash liquidation preference in
the event of a merger or sale of all
or substantially all of the assets
of the Company.
- --------------------------------------------------------------------------------------------------------------------
CONVERSION RIGHTS
- --------------------------------------------------------------------------------------------------------------------
The Renaissance entities have the Renaissance notes. The notes are The preferred stock will be
right, at their option, at any time, convertible, at a rate of $0.20 or convertible, at the option of the
to convert all, or in multiples of $0.549 per share, at the option of holder, into shares of the
$10,000, any part of the debentures payee in its sole and absolute Company's Common Stock at an
into shares of Common Stock, at an discretion, in whole or in part, and initial conversion rate of 125
initial conversion price of $1.05 per at any time or from time to time, shares of Common Stock for each
share. As a result of a provision in into shares of Common Stock. As of share of preferred stock, based on
the debenture, on March 26, 1998, the March 26, 2001, the principal amount an initial conversion price of
conversion rate on the debentures was of the convertible Renaissance notes $0.20 per share. Assuming that
reduced to $0.549 per share because would be convertible into an 267,150 shares of Series F
the Company failed to meet specified aggregate of 6,889,344 shares of preferred stock are issued in the
financial milestones in 1997. As of Common Stock and the accumulated and financial restructuring, an
March 26, 2001, the principal amount unpaid interest on the convertible aggregate of 33,393,750 shares of
of the debentures would be Renaissance notes would be Common Stock would initially be
convertible into an aggregate of convertible into an aggregate of issuable upon conversion of the
7,592,353 shares of Common Stock and 295,990 shares of Common Stock. The Series F preferred stock.
the accumulated and unpaid interest conversion price is subject to Assuming that 45,159 shares of
on the debentures would be further adjustment as described Series G preferred stock are
convertible into an aggregate of below in "Antidilution Provisions." issued in the financial
774,572 shares of Common Stock. The restructuring, an aggregate of
conversion price is subject to Rundell notes. The November 17, 2000 5,644,875 shares of Common Stock
further adjustment as described below convertible promissory note payable would initially be issuable upon
in "Antidilution Provisions." to Mr. Rundell is convertible at his conversion of the Series G
option into shares of Common Stock at preferred stock. The conversion
the initial conversion price of $.20 price is subject to further
per share. As of March 26, 2001, this adjustment as described below in
convertible note would be convertible "Antidilution Provisions."
into 250,000 shares of Common Stock.
The conversion price is subject to
further adjustment as described below
in "Antidilution Provisions."
2
32
- --------------------------------------------------------------------------------------------------------------------
ANTIDILUTION PROVISIONS
- --------------------------------------------------------------------------------------------------------------------
If there is a stock split or If the Company issues Common Stock The initial conversion price may
subdivision of shares of Common Stock for consideration per share less than be adjusted to prevent dilution as
into a greater number of shares, the the conversion rate, then the a result of issuances of Common
conversion price will be conversion rate will be reduced to Stock at a purchase price less
proportionately decreased. If there that lower price. This does not than the conversion price then in
is a combination of shares of Common apply to Common Stock issued upon (a) effect. The initial conversion
Stock into a smaller number of the conversion of a promissory notes, price will not be adjusted for the
shares, the conversion price will be (b) the exercise of any outstanding issuance of Common Stock pursuant
proportionately increased. warrants, options or convertible debt to the conversion of Series F
instruments, or (c) the exercise of preferred stock or Series G
outstanding employee stock options. preferred stock, pursuant to
outstanding employee stock options
If there is a stock split or or warrants, or the issuance of up
subdivision of shares of Common Stock to 1,500,000 shares of Common
into a greater number of shares, the Stock upon exercise of future
conversion price will be employee stock options.
proportionately decreased. If there
is a combination of shares of Common If there is a stock dividend,
Stock into a smaller number of stock split or subdivision of
shares, the conversion price will be shares of Common Stock into a
proportionately increased. greater number of shares, the
conversion price will be
proportionately decreased. If there
is a combination of shares of Common
Stock into a smaller number of
shares, the conversion price will be
proportionately increased.
- --------------------------------------------------------------------------------------------------------------------
MANDATORY REDEMPTION
- --------------------------------------------------------------------------------------------------------------------
If the Common Stock is not listed for None. The Series F preferred stock will
exchange on certain major exchanges, not be redeemable.
or any person acquires more than 50%
of the Common Stock, then the Company The Company is required to redeem
is required, if requested by the Series G preferred stock upon
Renaissance, to redeem the the earlier of (a) the sale of B&B
debentures at the greater of (a) the Electromatic, Inc. to the extent
market value of the debentures or (b) of the net proceeds to the Company
167% of par. Since March 24, 1999, from such sale or (b) two years
the Company's Common Stock has not been after issuance, in quarterly
listed on any permitted exchange. To installments in accordance with a
date, the Company has not received redemption schedule of $1.0
notice of the exercise of mandatory million in the third year, $2.0
redemption rights. million in the fourth year and the
balance in quarterly installments
beginning in the fifth year. The
redemption price for the Series G
preferred stock is $25.00 per share
plus accrued and unpaid dividends.
- --------------------------------------------------------------------------------------------------------------------
OPTIONAL REDEMPTION
- --------------------------------------------------------------------------------------------------------------------
On any interest payment date, and None. None.
after prior irrevocable notice, the
Company may redeem all of the
debentures, at 120% of par if: (a)
the closing bid price averages at
least $4.00 per share for 21
consecutive trading days, (b) the
$4.00 bid price is supported by a
minimum of 30 times fully diluted
net earnings per share in the
aggregate for the last four
consecutive fiscal quarters
preceding the date of notice of
redemption, (c) the average, over 20
days, of the daily trading volume
is not less than 10,000 shares, and
(d) the Company has filed a
registration statement covering
the shares of Common Stock issuable
upon conversion of the debentures.
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33
- --------------------------------------------------------------------------------------------------------------------
VOTING RIGHTS
- --------------------------------------------------------------------------------------------------------------------
Not applicable. Not applicable. Holders of Series F and Series G
vote with the holders of Common
Stock, the Series D preferred stock,
and other equity securities which
are generally entitled to vote, as a
single class on all matters on which
holders of Common Stock are entitled
to vote, including the election of
directors, except as otherwise
required by law. Holders of
preferred stock are entitled to a
number of votes per share of
preferred stock equal to the number
of shares of Common Stock into which
the shares of preferred stock are
convertible on the record date of
the determination of stockholders
entitled to receive notice of and to
vote on such matter. As of the date
of issuance, assuming the shares of
Series F and Series G preferred
stock are issued on March 26, 2001,
the holders of the Series F
preferred stock will be entitled to
approximately 33,393,750 votes, and
the holders of the Series G
preferred stock will be entitled to
approximately 5,644,875 votes.
In addition, the consent of holders
of 80% of the Series F preferred
stock and the Series G preferred
stock, voting together as a single
class, will be required to (a)
authorize, create or increase the
authorized amount of any class of
senior stock or parity stock, other
than preferred stock of the same
class or securities to evidence bank
debt or asset securitizations or (b)
authorize a merger, consolidation or
sale of assets, other than in the
ordinary course of business, of the
Company, including the capital stock
of the Company's subsidiaries. The
consent of holders of 80% of each of
the Series F preferred stock and
Series G preferred stock, voting as
a single class, will be required to
approve any action to amend the
Company's certificate of
incorporation or bylaws that would
materially and adversely affect the
rights of that series of preferred
stock.
- --------------------------------------------------------------------------------------------------------------------
30
34
RIGHT TO APPOINT DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
Pursuant to the loan agreement under Not applicable. In addition to their right to vote
which the debentures were issued, with the holders of Common Stock
Renaissance may designate a nominee to on the election of directors, the
the Company's board, subject to the holders of the Series F preferred
Company's written approval, which may stock and the holders of the
not be unreasonably withheld. If Series G preferred stock, voting
Renaissance does not request a board together as a single class, will
designee, then Renaissance may have a be entitled to elect two
representative attend board additional directors to the
meetings. The failure to submit Company's board of directors.
Renaissance's nominee, if any, for
election to the Company's board of If the financial restructuring is
directors for any reason other than approved, then the board of
good cause is an event of default directors may be expanded from six
under the debentures and the loan to eight members, two of whom may
agreement. be elected by the holders of the
Series F preferred stock and Series
G preferred stock. Renaissance has
informed the Company that after the
completion of the financial
restructuring, Renaissance (as the
holder of the Series F preferred stock
and Series G preferred stock) will
elect only one board member. Accordingly,
the board of directors will be expanded
from six to seven members. Renaissance
may choose to elect a second board member
in the future.
- --------------------------------------------------------------------------------------------------------------------
TRANSFER RESTRICTIONS
- --------------------------------------------------------------------------------------------------------------------
Shares issuable on conversion of the The shares of Common Stock issuable The shares of Series F preferred
debentures will be restricted from on conversion of the notes will be stock and Series G preferred will
transfer by the holder unless the restricted from transfer by the be restricted from transfer under
shares are duly registered for sale holder, unless the shares are duly the securities laws. The shares
pursuant to the Securities Act of registered for sale pursuant to the of Common Stock issuable upon
1933, or the transfer is exempt from Securities Act of 1933 or the conversion of the Series F
registration. transfer is exempt from registration. preferred stock and Series G
preferred stock will be restricted
from transfer by the holder,
unless the shares are duly
registered for sale pursuant to
the Securities Act of 1933, or the
transfer is exempt from
registration.
- --------------------------------------------------------------------------------------------------------------------
REGISTRATION RIGHTS
- --------------------------------------- --------------------------------------- ------------------------------------
The holders have registration rights Renaissance notes. The Renaissance Pursuant to the letter agreement,
under the loan agreement under which convertible notes provide that the the Company has agreed to file
the debentures were issued. The Renaissance parties have registration within 90 days of the issuance of
holders of at least 50% of the rights under the registration rights the Series F preferred stock and
registrable securities then agreements dated February 22, 1999 Series G preferred stock a
outstanding may demand that the and October 20, 2000. Under these registration statement to permit
Company file a registration statement registration rights agreements, the resales by the holders of the
and use the Company's best efforts to holders have demand and piggyback preferred stock of the shares of
register the securities within 150 registration rights. Under the Common Stock that are issuable
days of the registration request. demand rights, the holders may upon conversion of the Series F
The holders also have piggyback request two times that the Company preferred stock and Series G
registration rights. The register the registrable securities preferred stock. Also,
registration rights terminate on the if the registration would cover at Renaissance has one demand
earlier to occur of June 30, 2006 or least 25% of the then outstanding registration right and unlimited
after the holders have demanded two registrable securities. Under the piggyback registration rights.
registrations. piggyback registration rights, the
Company must give the holders notice
of other registration statements the
Company may file and allow the
holders to participate in the
registration by including their
registrable securities. Under the
registration agreements, the Company
also agreed to file a "shelf"
registration statement within 90 days
of the notes. The Company has not
filed any registration statements
pursuant to these registration rights
agreements.
Rundell notes. Neither C. A. Rundell,
Jr. nor The Rundell Foundation has
registration rights.
31
35
- --------------------------------------------------------------------------------------------------------------------
MERGERS, SALES AND CONSOLIDATIONS
- --------------------------------------------------------------------------------------------------------------------
If the Company issues shares of If there is a consolidation or merger If there is a distribution to all
Common Stock for consideration per of the Company with or into, or the Common Stock holders of any stock,
share less than the current sale of substantially all of the indebtedness or assets of the
conversion price, the conversion properties and assets of the Company, Company, then the shares of
price will be reduced to a new to any person and, in connection with preferred stock will be
conversion price equal to the such transaction, consideration is convertible into securities, cash
consideration per share received by payable to holders of Common Stock in and other property which the
the Company for the additional shares cash, securities or other property, holder of shares of preferred
of Common Stock and the number of then the payee will have the right to stock would have been entitled to
shares issuable to Renaissance will purchase the kind of receivable in receive if the holder owned Common
be proportionately increased. This connection with the transaction by a Stock issuable on conversion of
does not apply to Common Stock issued holder of the same number of shares the preferred stock, immediately
upon (a) the conversion of debentures of Common Stock as were exercisable prior to the occurrence of the
or exercise of options, (b) the by the payee immediately prior to the event. If there is a capital
issuance of Common Stock upon the transaction. Also, if there is such reorganization, the shares of
exercise of any warrants or stock a transaction, or in the event of the preferred stock will be
purchase options issued and dissolution, liquidation or winding convertible into the kind and
outstanding, and (c) the issuance of up of the Company, then the payee number of shares of stock or
the first 700,000 shares of Common will be entitled to receive property which the holder would
Stock sold or issued for less than distributions on the date of such have been entitled to receive if
the conversion price. event on an equal basis with holders the holder owned Common Stock
of Common Stock as if the note had issuable on the conversion of the
If (a) the Company distributes to all been converted immediately prior to preferred immediately before the
Common Stock holders indebtedness of such event, less the conversion price. event.
the Company or assets, excluding cash
dividends or distributions from In addition, the consent of
retained earnings, or other rights to holders of 80% of the Series F
purchase securities or assets, or (b) preferred stock and the Series G
there is a capital reorganization or preferred stock, voting together
reclassification of the Common Stock, as a single class, will be
then the debentures will be converted required to (a) authorize,
into the kind and amount of create or increase the authorized
securities, cash and other property amount of any class of senior
which Renaissance would have been stock or parity stock, other than
entitled to receive if Renaissance preferred stock of the same class
owned the Common Stock issuable upon or securities to evidence bank
conversion of the debentures debt or asset securitizations or
immediately before the occurrence of (b) authorize a merger,
the event. consolidation or sale of assets,
other than in the ordinary course of
business, of the Company, including
the capital stock of the Company's
subsidiaries. The consent of holders
of 80% of each of the Series F
preferred stock and Series G
preferred stock, voting as a single
class, will be required to approve
any action to amend the Company's
certificate of incorporation or
bylaws that would materially and
adversely affect the rights of that
series of preferred stock.
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36
- --------------------------------------------------------------------------------------------------------------------
SECURITY
- --------------------------------------------------------------------------------------------------------------------
The debentures are secured by all Renaissance notes. The Renaissance Not applicable.
outstanding shares of each of the notes are secured by (a) a Security
Company's subsidiaries and the Agreement, dated as of October 2,
trademarks, copyrights and software 1998, among the Company, B&B
technology relating to the Company's Electromatic, Inc., Golston Company,
Intelli-Site product and all Inc., Intelli-Site, Inc. and
machinery and equipment of the Tri-Coastal Systems, Inc. and
Company. Renaissance, and (b) a Stock Pledge
Agreement, dated as of December 31,
1996, among the Company and
Renaissance.
Rundell notes. The Rundell
promissory notes are secured by the
accounts receivable of Intelli-Site,
Inc. due from Coken Company.
- --------------------------------------------------------------------------------------------------------------------
EVENTS OF DEFAULT
- --------------------------------------------------------------------------------------------------------------------
The term "Events of Default" includes: Not defined. Not defined.
o the failure to pay, not later
than 10 days after the due date,
any interest or principal of the
debenture;
o any representation or warranty
under the loan documents is untrue
in any material respect as of the
date made;
o default in the performance of any
covenant under the loan
documents, after the expiration
of a 30-day cure period;
o default in the payment of any
Material Indebtedness, as defined
in the debenture;
o any of the loan documents ceases
to be enforceable or becomes
inoperative;
o bankruptcy events;
o any final judgment for the
payment of money in excess of
$250,000 is rendered against the
Company and not satisfied or
discharged at least 10 days
before assets could be sold to
pay the judgment;
o the failure of the Company to
deliver shares of Common Stock
upon conversion of the debenture;
or
o the failure to submit
Renaissance's nominee, if any,
for election to the Company's
board for any reason other than
good cause.
- --------------------------------------------------------------------------------------------------------------------
REMEDIES ON DEFAULT
- --------------------------------------------------------------------------------------------------------------------
Upon the occurrence of an Event of Upon default in payment of the notes, Not specified.
Default, the holder may: the payee may prove any and all
remedies to which payee is entitled.
o declare all principal and
interest due and payable;
o reduce any claim to judgment;
and/or
o pursue and enforce the holder's
rights and remedies.
In addition, the Company must pay all
costs and expenses reasonably incurred
by Renaissance in connection with
preserving its rights.
- --------------------------------------------------------------------------------------------------------------------
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37
EFFECT OF FINANCIAL RESTRUCTURING ON COMMON STOCK
General
The board of directors believes that the financial restructuring
proposal is in the best interests of the stockholders and has recommended that
the stockholders approve the financial restructuring proposal.
If approved, the board of directors believes the Company will be better
able to raise additional funds due to its improved capital structure. However,
although the financial restructuring will improve the Company's capital
structure, there can be no assurance that the Company will be able to raise
additional funds or that the terms of any additional funds will be favorable to
the Company.
The board of directors believes that the positive effects of the
financial restructuring proposal outweigh the negative effects as described
below.
Positive Effects of the Financial Restructuring
The Company believes the proposed financial restructuring will have the
following benefits if completed:
o It will reduce outstanding indebtedness from approximately $6.9
million to approximately $1.3 million;
o It will improve the ratio of profits before payment of interest and
income taxes to interest on contractual long-term debt, which is known
as interest coverage, from 5:1 to 16:1;
o It will decrease the Company's monthly cash requirements by over
$40,000; and
o As a result of an improved balance sheet, the Company believes it will
have improved access to additional capital.
Additionally, the Company believes the financial restructuring has the
following advantages over other strategic alternatives:
o The financial restructuring is immediately achievable, subject to
stockholder approval; and
o The financial restructuring maintains the Company's flexibility to
pursue a sale of the Company and preserve a greater share of Common
Stock holder value as compared to other alternatives.
34
38
The Company believes that its financial flexibility will be improved
significantly if the financial restructuring is completed. Therefore, the board
of directors has approved the financial restructuring and recommends that the
stockholders approve it.
Negative Effects of the Financial Restructuring
Control of the Company by Renaissance. After the proposed financial
restructuring, Renaissance will own approximately 60.2% of the voting stock of
the Company, assuming a March 26, 2001 exchange date. As a result, Renaissance
would be in a position to control the Company. However, if the financial
restructuring does not proceed and Renaissance decides to exercise its
conversion rights, Renaissance would own approximately 41.0% of the voting
stock, assuming a March 26, 2001 conversion date.
Change in Percentage Equity Interest. If the financial restructuring is
effected, then, assuming approximately 65.9 million fully diluted shares of
Common Stock outstanding as of March 26, 2001, the percentage equity ownership
of the current Common Stock holders will be approximately 17.4%. However, in the
absence of a financial restructuring, the percentage equity ownership of the
current Common Stock holders would be approximately 26.9%, on a fully diluted
basis, assuming that the holders of the Series A preferred stock, the Series D
preferred stock, warrants, options and Renaissance converted all their stock and
exercised all their rights as of March 26, 2001.
The following table shows the percentage of equity interest of the
Company's Common Stock holders on a fully diluted basis currently, and after the
financial restructuring.
PERCENTAGE EQUITY INTEREST
PERCENTAGE EQUITY INTEREST OF COMMON STOCK
HOLDERS, ON A FULLY DILUTED BASIS
-------------------------------------------------------------------
CURRENTLY, ASSUMING ALL ASSUMING THE FINANCIAL
OUTSTANDING CONVERTIBLE DEBT RESTRUCTURING IS APPROVED AND
AND PREFERRED STOCK IS ALL PREFERRED STOCK IS
PARTIES IN INTEREST CONVERTED INTO COMMON STOCK(1) CONVERTED INTO COMMON STOCK(2)
------------------- ------------------------------ ------------------------------
Current Common Stock Holders(3) 26.9% 17.4%
Current Warrant and Option Holders 25.8% 16.7%
Renaissance 41.0% 60.2%
Mr. C. A. Rundell, Jr. and The
Rundell Foundation 6.3% 5.6%
(1) Assumes all outstanding warrants, options, convertible promissory notes and
convertible debentures, Series A preferred stock and Series D preferred
stock as of January 31, 2001 are converted.
(2) Assumes that (a) the exchange of approximately $1.0 million of new
promissory notes and interest arrearages of the Company to Renaissance into
approximately 41,000 shares of Series F preferred stock, (b) exchange of a
$50,000 convertible note, (c) the exchange of approximately $6.4 million of
all other existing promissory notes, convertible debentures and interest
arrearages of the Company held by Renaissance for approximately 254,000
shares of Series G preferred stock, (d) the exchange of the Rundell
convertible promissory note for approximately 2,000 shares of Series F
preferred stock, and (e) the exchange of an aggregate of approximately
$324,000 in
35
39
indebtedness of the Company to C. A. Rundell, Jr. and The Rundell
Foundation for approximately 13,000 shares of Series G preferred stock,
all have occurred as of March 26, 2001.
(3) Includes (a) shares held by management, (b) shares of Common Stock
currently held by holders of the Company's Series A preferred stock and
Series D convertible preferred stock, and (c) shares of Common Stock
issuable upon conversion of a convertible promissory note to be issued upon
the receipt of an additional $50,000 that is required by the letter
agreement. More specifically, the terms of the letter agreement require
that before Renaissance invests $1,000,000 in the Company, the Company must
receive a minimum investment of $100,000 from sources other than
Renaissance. C. A. Rundell, Jr. has invested $50,000 pursuant to a
promissory note convertible into approximately 2,000 shares of Series F
preferred stock if the Company's stockholders approve of the financial
restructuring. The Company expects to raise the remaining required $50,000
by issuing a promissory note convertible into approximately 2,000 shares of
Series F, which, on a fully-diluted basis, is the equivalent of
approximately 250,000 shares of Common Stock.
CONVERSION OF SECURITIES INTO SHARES OF COMMON STOCK
The following table compares the number of shares of Common Stock that
could be issued under the outstanding convertible debentures and promissory
notes as compared to the number of shares of Common Stock that could be issued
under the convertible preferred stock issued in connection with the proposed
financial restructuring. As this table shows, approximately 39,038,666 shares of
Common Stock could be issued on conversion of the convertible preferred stock
issued in connection with the proposed financial restructuring, compared to
approximately 15,000,000 shares of Common Stock that could be issued on
conversion of the outstanding convertible debentures and promissory notes. In
the following table, the amount of accrued and unpaid interest is included in
the amount of the security.
CONVERSION OF SECURITY INTO SHARES OF COMMON STOCK
--------------------------------------------------
DOLLAR AMOUNT OF SECURITY AT THE CURRENT IF THE FINANCIAL
DESCRIPTION OF SECURITY CURRENTLY OUTSTANDING CONVERSION RATE RESTRUCTURING IS APPROVED
- ----------------------- ------------------------- --------------- -------------------------
Convertible Debentures(1) $ 4,593,442 8,366,925(1) 22,967,209(2)
Existing Convertible Promissory
Notes(3) 658,734 1,199,880(3) 3,293,671(2)
Existing Nonconvertible
Promissory Notes(4) 1,426,586 0(4) 7,132,930
New Promissory Notes(5) 1,128,971 5,644,856(5) 5,644,856(6)
Total $ 7,807,733 15,211,661 39,038,666
- ----------
(1) The Company's existing convertible debentures issued to Renaissance have a
conversion rate of $0.549.
(2) The conversion rate of $0.20 is used for this conversion pursuant to the
terms of the letter agreement that dictates the terms of the financial
restructuring.
(3) A total of $600,000 of the Company's existing promissory notes issued to
Renaissance have a conversion rate of $0.549.
(4) $1,030,000 of the Company's existing promissory notes issued to Renaissance
are not convertible.
(5) Renaissance loaned $1.0 million to the Company in connection with the
proposed financial restructuring. The promissory notes that the Company
issued in connection with this loan have a conversion rate of $0.20. At a
conversion rate of $0.20, this $1.0 million loan could be converted into
5,000,000 shares of Common Stock.
(6) As part of the proposed financial restructuring, Renaissance will exchange
the $1.0 million of promissory notes that the Company has issued to
Renaissance, together with accrued interest, for approximately 41,000
shares of
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Series F preferred stock. Such shares are convertible into approximately
5,000,000 shares of Common Stock, at a conversion rate of 125 shares of
Common Stock per share of Series F preferred stock.
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Unaudited Pro Forma Financial Statements
The following unaudited pro forma condensed consolidated financial
statements present the effects of:
(a) the authorization of 80,000 shares of a new series of
preferred stock, Series F cumulative convertible preferred
stock, and 300,000 shares of a new series of preferred stock,
Series G cumulative convertible preferred stock;
(b) the additional financing of approximately $1.0 million
provided by Renaissance and the exchange of such financing
and interest arrearages of the Company into approximately
41,000 shares of Series F preferred stock;
(c) the additional financing of approximately $100,000 and the
exchange of the financing for approximately 4,000 shares of
Series F preferred stock;
(d) the exchange of approximately $6.4 million of all other
existing promissory notes, convertible debentures and interest
arrearages of the Company to Renaissance
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& Income Fund III, Inc. and Renaissance US Growth & Income
Trust PLC into approximately 254,000 shares of Series G
preferred stock; and
(e) the exchange of an aggregate of approximately $324,000 in
indebtedness of the Company to C. A. Rundell, Jr. and The
Rundell Foundation into approximately 13,000 shares of Series
G preferred stock.
The unaudited pro forma condensed consolidated balance sheet presents
the financial position of the Company as of December 31, 2000 assuming the
proposed transactions had occurred as of December 31, 2000. This pro forma
information is based upon the historical December 31, 2000 balance sheet of the
Company included in the Quarterly Report on Form 10-QSB accompanying this proxy
statement.
The unaudited pro forma condensed consolidated statements of operations
for the three months ended December 31, 2000 and the year ended June 30, 2000
give effect to the proposed transactions as if such transactions had been
consummated as of July 1, 1999. This pro forma information is based upon the
historical results of operations of the Company for the six months ended
December 31, 2000, included in the Quarterly Report on Form 10-QSB and for the
year ended June 30, 2000, included in the Annual Report on Form 10-KSB/A
accompanying this proxy statement.
The unaudited pro forma condensed consolidated financial statements are
based upon available information and assumptions that the Company's management
believes are reasonable. The unaudited pro forma condensed consolidated
financial data does not purport to represent the financial position or results
of operations which would have occurred if these transactions had been completed
on the dates indicated or the Company's financial position or results of
operations for any future date or period. You should read this unaudited pro
forma condensed consolidated financial data together with the Company's
historical financial statements and the notes to those financial statements
included in Quarterly Report on Form 10-QSB/A and the Annual Report on Form
10-KSB/A accompanying this proxy statement.
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INTEGRATED SECURITY SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
Pro Forma
Historical Adjustments Pro Forma
------------ -------------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 150,722 $ 250,000 (A) $ 450,722
50,000 (B)
Accounts receivable 1,250,070 1,250,070
Inventories 596,631 596,631
Notes receivable 28,546 28,546
Unbilled revenue 66,361 66,361
Other current assets 109,895 109,895
------------ ------------ ------------
Total current assets 2,202,225 300,000 2,502,225
Property and equipment, net 852,689 852,689
Other assets 18,898 18,898
------------ ------------ ------------
Total assets $ 3,073,812 $ 300,000 $ 3,373,812
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 901,108 $ (425,663)(C) $ 475,445
Accrued liabilities 548,714 (18,185)(C) 530,529
Current portion of long-term debt and other
liabilities 7,540,943 (6,898,202)(A,B,C) 642,741
------------ ------------ ------------
Total current liabilities 8,990,765 (7,342,050) 1,648,715
------------ ------------ ------------
Long-Term debt and other liabilities 673,828 673,828
Preferred stock subject to redemption -- 6,533,736 (C) 6,542,050
Stockholders' equity (deficit):
Total stockholders' deficit (6,590,781) 1,108,314 (A,B) (5,490,781)
------------ ------------ ------------
Total liabilities and stockholders deficit $ 3,073,812 $ 300,000 $ 3,373,812
============ ============ ============
Share Information
Shares Authorized:
Preferred Stock 750,000 750,000
Common Stock 35,000,000 35,000,000 (D) 70,000,000
Shares Issued and Outstanding
Preferred Stock 102,250 312,310 (A,B) 414,560
Common Stock 10,782,417 10,572,545
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INTEGRATED SECURITY SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- ------------
Sales $ 2,561,853 $ -- $ 2,561,853
Cost of sales 1,789,770 -- 1,789,770
------------ -------------- ------------
Gross margin 772,083 -- 722,083
------------ -------------- ------------
Operating expenses:
Selling, general and administrative 2,097,898 -- 2,097,898
Research and product development 289,080 -- 289,080
------------ -------------- ------------
2,386,978 -- 2,386,978
------------ -------------- ------------
Loss from operations: (1,614,895) -- (1,614,895)
Other income (expense):
Interest income 139 -- 139
Interest expense (363,316) 248,188 (E) (79,128)
------------ -------------- ------------
Net Loss (1,978,072) 284,188 (1,693,884)
------------ -------------- ------------
Preferred dividends requirement (84,161) (179,955)(F) (5,877,876)
(5,613,760)(G)
------------ -------------- ------------
Net loss allocable to Common Stockholders
$ (2,062,233) $ (5,509,527) $ (7,571,760)
============ ============== ============
Weighted average common and
common equivalents outstanding -
basic and diluted 10,580,897 -- 10,580,897
Net loss per share - basic and diluted $ (0.19) $ -- $ (0.72)
============ ============== ============
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INTEGRATED SECURITY SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
Sales $ 6,561,359 $ -- $ 6,561,359
Cost of sales 4,369,262 -- 4,369,262
------------ ------------ ------------
Gross margin 2,192,097 -- 2,192,097
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 4,589,922 -- 4,589,922
Research and product development 386,899 -- 386,899
------------ ------------ ------------
4,976,821 -- 4,976,821
------------ ------------ ------------
Income (loss) from operations: (2,784,724) -- (2,784,724)
Other income (expense):
Interest income 33,690 -- 33,690
Interest expense (645,684) 460,865 (E) (184,819)
------------ ------------ ------------
Net loss (3,396,718) 460,865 (2,935,853)
------------ ------------ ------------
Preferred dividends requirement (107,467) (354,910)(F) (6,076,137)
(5,613,760)(G)
------------ ------------ ------------
Net loss allocable to Common Stockholders
$ (3,452,329) $ (5,507,806) $ (9,011,991)
============ ============ ============
Weighted average common and
common equivalents outstanding -
basic and diluted 10,508,510 -- 10,508,510
Basic and diluted loss per share $ (0.33) $ -- $ (0.86)
============ ============ ============
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INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. GENERAL
The proposed financial restructuring includes the following:
(a) the issuance of an aggregate of $1.0 million of the Company's
promissory notes to Renaissance which were issued from October
2000 to January 2001;
(b) the amendment of the Company's Restated Certificate of
Incorporation to authorize 80,000 shares of a new Series F
preferred stock and 300,000 of a new Series G preferred stock;
(c) the issuance to Renaissance of 41,000 shares of Series F
preferred stock in exchange for the promissory notes of the
Company held by Renaissance in the aggregate principal amount of
$1.0 million together with accrued interest;
(d) the issuance to Renaissance of 254,000 shares of Series G
preferred stock in exchange for all other promissory notes and
convertible debentures of the Company held by Renaissance
together with accrued interest (constituting approximately $6.4
million, including accrued interest);
(e) The issuance to C. A. Rundell, Jr. of 2,000 shares of Series F
preferred stock in exchange for the promissory note of the
Company held by Mr. Rundell in the principal amount of $50,000
together with accrued interest; and
(f) the issuance to C. A. Rundell, Jr. and The Rundell Foundation of
13,000 shares of Series G preferred stock in exchange for the
promissory notes of the Company held by them in the aggregate
principal amount of $300,000 together with accrued interest.
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The accompanying unaudited pro forma condensed consolidated balance
sheet assumes the transactions discussed in Note A were entered into on
December 31, 2000 and reflects the pro forma adjustments:
(A) to give effect to additional financing of $250,000 provided by
Renaissance and the exchange of such financing and $750,000 of
pre-existing convertible debt and interest arrearages of the Company
into 41,000 shares of Series F convertible preferred stock.
(B) to give effect to additional financing of $50,000 and the exchange of
such financing and $50,000 of pre-existing convertible debt and
interest arrearages of the Company into 4,000 shares of Series F
convertible preferred stock to an accredited investor.
(C) to give effect to the exchange of all promissory notes, convertible
debentures and related accrued interest owed to Renaissance, C. A.
Rundell, Jr. and the Rundell Foundation in the aggregate amount of
$6,533,736 into 261,349 shares of Series G preferred stock.
(D) to give effect to the authorization of an additional 35,000,000 shares
of Common Stock.
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NOTE C. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed consolidated statement
of operations assumes the transactions discussed in Note A were entered into on
July 1, 1999 and reflects the pro forma adjustments:
(E) to give effect to the reduction of interest expense as a result of the
exchange of promissory notes, convertible debentures and related
accrued interest into shares of Series F preferred stock and Series
G preferred stock.
(F) to give effect to the dividend requirements on the Series F preferred
stock and Series G preferred stock to be issued.
(G) to give effect to the amortization of the beneficial conversion
features of the Series F preferred stock and Series G preferred stock.
For pro forma purposes, the value of the beneficial conversion feature
was calculated based on the closing price of the Company's Common
Stock on February 22, 2001.
DILUTION
The net tangible book value per share of Common Stock as of December
31, 2000 was $(0.43) due to a shareholders' deficit of approximately $6.6
million. Net tangible book value per share represents the amount of the
Company's total tangible assets reduced by the amount of its total liabilities
and divided by the total number of shares of Common Stock outstanding. The
following table describes the effect of the financial restructuring by setting
forth as of December 31, 2000, (1) the net tangible book value per share, (2)
the pro forma net tangible book value per share assuming that all shares of
Series A preferred stock and Series D preferred stock are converted, all options
and warrants are exercised and all convertible promissory notes and convertible
debentures are converted and (3) the pro forma net tangible book value
per share assuming that the exchange of the new promissory notes issued to
Renaissance, the existing promissory notes issued to Renaissance, and the
promissory notes issued to C. A. Rundell, Jr. and The Rundell Foundation have
been effected:
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Common Stock. As part of the proposed financial restructuring, Mr. Rundell
loaned $50,000 to the Company pursuant to a promissory note. Mr. Rundell
will exchange this $50,000 promissory note and accrued interest thereon for
approximately 2,062 shares of Series F preferred stock. These 2,062 shares of
Series F preferred stock are convertible into approximately 257,705 shares of
Common Stock.
In addition, The Rundell Foundation, a non-profit corporation on which
Mr. Rundell serves as President, a director and trustee, will be exchanging a
$100,000 promissory note and accrued interest thereon for approximately 4,273
shares of Series G preferred stock. These 4,273 shares of Series G preferred
stock are convertible into approximately 534,151 shares of Common Stock.
Moreover, Mr. Rundell serves as a director of Renaissance US Growth &
Income Trust PLC and served as a director of Renaissance Capital Growth &
Income Fund III, Inc. until October 12, 2000. Renaissance will exchange the new
Renaissance promissory notes for shares of Series F preferred stock and the
existing indebtedness issued to Renaissance for shares of Series G preferred
stock as part of the proposed financial restructuring.
NO DISSENTER'S RIGHTS
The Delaware General Corporation Law does not grant stockholders of a
Delaware corporation with dissenter's rights with respect to the financial
restructuring proposal.
APPROVAL
According to the Delaware General Corporation Law, the
Company's Restated Certificate of Incorporation and the Company's bylaws,
approval of the holders of Common Stock and Series D preferred stock, voting
together as a class, is not required to effect the financial restructuring
proposal. However, in accordance with the terms of the letter agreement the
board of directors believes that it is in the best interests of the Company to
seek stockholder approval of the financial restructuring proposal. As a result,
the affirmative vote of the holders of a majority of the shares of Common Stock
and Series D preferred stock, voting together as a class, entitled to vote on
the record date is required to approve the financial restructuring proposal. In
addition, under the Delaware General Corporation Law, the holders of Series D
preferred stock are entitled to vote separately as a class on the financial
restructuring proposal. If the stockholders do not approve the financial
restructuring proposal then the board of directors will not complete the
financial restructuring pursuant to the terms set forth in the letter
agreement.
THE EFFECTIVENESS OF THE FINANCIAL RESTRUCTURING PROPOSAL IS
CONTINGENT ON THE APPROVAL OF THE FINANCIAL RESTRUCTURING PROPOSAL AND THE
AMENDMENTS TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION SET FORTH IN
PROPOSALS THREE AND FOUR. AS A RESULT, IF THE STOCKHOLDERS DO NOT APPROVE
PROPOSALS THREE AND FOUR, THEN THE COMPANY CANNOT COMPLETE THE FINANCIAL
RESTRUCTURING EVEN IF THE STOCKHOLDERS APPROVE THE FINANCIAL RESTRUCTURING
PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE FINANCIAL
RESTRUCTURING PROPOSAL.
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PROPOSAL THREE
PROPOSED AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
BACKGROUND
Currently, the Company's Restated Certificate of Incorporation
authorizes the issuance of up to 35,000,000 shares of Common Stock. On the
record date, 10,782,417 shares of Common Stock were outstanding and an
additional 31,881,547 shares were subject to future issuance pursuant to
outstanding convertible debentures, convertible notes, convertible preferred
stock, warrants and options. As of the record date, the Company had a deficit of
7,663,961 in authorized shares. Therefore, there were no shares of Common Stock
available for future issuance.
The board of directors has unanimously adopted resolutions approving
and recommending that the stockholders adopt an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 35,000,000 to 70,000,000 to have enough shares of Common Stock
to issue in order to remedy the current deficit as well as upon conversion of
the Company's preferred stock to be issued under the financial restructuring
proposal.
If the stockholders approve the amendment to the Restated Certificate
of Incorporation, then the Restated Certificate of Incorporation would be
amended to effect the increase in authorized shares of Common Stock as soon as
practicable following such stockholder approval. If the amendment to the
Restated Certificate of Incorporation is not approved by the stockholders, the
existing Restated Certificate of Incorporation will continue in effect.
If the stockholders approve the financial restructuring proposal, then
after the financial restructuring is complete, 17,964,141 shares of Common Stock
will be available for issuance, not including shares of Common Stock reserved
for conversion of any other securities of the Company or the exercise of the
Company's outstanding options and warrants. Other than in connection with the
financial restructuring proposal, or to employees exercising stock options under
the Company's stock option plans, the Company does not have any plans to issue
shares of Common Stock.
REASONS FOR AND EFFECT OF THE AMENDMENT
Pursuant to the financial restructuring proposal, the Company proposes
to issue Series F and Series G preferred stock. If such preferred stock is
converted into Common Stock, and assuming full conversion of all the Company's
outstanding convertible securities and full exercise of all options and warrants
to purchase the Company's Common Stock, the Company would not have sufficient
authorized Common Stock for debt retirement. Therefore, additional shares of
authorized Common Stock are necessary in order to assure the proper conversion
of preferred stock and the exercise of options and warrants. Holders of the
Company's Common Stock have no preemptive rights to purchase additional shares
of Common Stock, or securities convertible into Common Stock, issued by the
Company. The Common
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Stock will be available for issuance without further action of the stockholders,
unless required by the Company's Restated Certificate of Incorporation or
bylaws, applicable laws, or the policy of any stock exchange or registered
securities association on which the shares of stock of the Company are listed,
if any.
NO DISSENTER'S RIGHTS
The Delaware General Corporation Law does not grant stockholders of a
Delaware corporation with dissenter's rights with respect to the amendment to
the Restated Certificate of Incorporation.
ANTI-TAKEOVER EFFECT
The increase in the authorized but unissued shares of Common Stock
which would result from adoption of the proposed amendment to the Restated
Certificate of Incorporation could have a potential anti-takeover effect with
respect to the Company. For example, the amendment could render more difficult
or discourage an attempt to obtain a controlling interest in the Company or the
removal of the incumbent board of directors and may discourage unsolicited
takeover attempts which might be desirable to the Company's stockholders. The
potential anit-takeover effect of the proposed amendment arises because it would
enable the Company to issue additional shares of Common Stock up to the total
authorized number, with the consequence that the shareholdings and related
voting rights of then-existing stockholders would be diluted to an extent
proportionate to the number of additional shares issued.
The board of directors is not proposing the amendment to the Restated
Certificate of Incorporation in response to any effort to accumulate the
Company's Common Stock or to obtain control of the Company by means of a merger,
tender offer or solicitation in opposition to management. In addition, the
amendment is not part of any plan by management to recommend a series of similar
amendments to the board of directors and the stockholders. Finally, the board of
directors does not currently contemplate recommending the adoption of any other
amendments to the Restated Certificate of Incorporation which could be construed
to affect the liability of third parties to take over or change control of the
Company.
AMENDMENT
If the amendment is approved, the Restated Certificate of Incorporation
will be amended by deleting of Article FOURTH in its entirety and inserting in
its place the following:
"FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 70,750,000 shares, of which 70,000,000 shares
shall be Common Stock, par value $0.01 per share ("Common Stock") and 750,000
shares shall be Preferred Stock, par value $0.01 per share ("Preferred Stock")."
APPROVAL
The affirmative vote of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote on the record date and Series D
preferred stock, voting together as a class, is required to approve the
amendment to the Restated Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK.
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PROPOSAL FOUR
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
TO REDUCE THE LIQUIDATION PREFERENCE OF THE SERIES D PREFERRED STOCK
BACKGROUND; REASONS FOR AND EFFECT OF THE AMENDMENT
Currently the Company's Restated Certificate of Incorporation provides
that the liquidation preference of the Series D preferred stock is $20.00 per
share plus any accrued and unpaid dividends. Pursuant to the letter agreement
that the Company entered into in connection with the proposed financial
restructuring, one of the conditions to the issuance of the Series F preferred
stock and the Series G preferred stock is that the holders of the Series D
preferred stock must approve the amendment to the liquidation preference of the
Series D preferred stock set forth on Exhibit C attached to this proxy
statement. The amendment provides that the liquidation preference of the Series
D preferred stock will be $0.01 per share until either all shares of Series F
preferred stock and Series G preferred stock have been converted or redeemed or
the holders of the Series F preferred stock and Series G preferred stock have
received an amount equal to the liquidation preference of the Series F and
Series G preferred stock, at which time the liquidation preference would revert
back to an amount equal to $20.00 per share plus any accrued and unpaid
dividends.
Under the terms of the letter agreement, the Company cannot complete
the financial restructuring proposal unless the stockholders approve the
amendment reducing the liquidation preference of the Series D preferred stock.
If the financial restructuring proposal is approved, then, in the event of a
liquidation of the Company, the ranking order of distributions of the Company's
assets would be first to its debt holders, second to the holders of Series F and
Series G preferred stock, third to the holders of Series D preferred stock, and
finally to the Common Stock holders. If the liquidation preference of the Series
D preferred stock is decreased to $0.01, then in the event of a liquidation,
holders of the Series D preferred stock will not receive nearly as much of the
Company's assets as if the liquidation preference remained at $20.00.
Accordingly, if the Series D preferred stock liquidation preference is reduced
to $0.01, and the Company liquidates, then there will be more assets remaining
for the holders of the Company's Common Stock, who rank beneath the holders of
Series D preferred stock in order of liquidation preference.
As detailed in "Security Ownership of Certain Beneficial Owners and
Management" above, as of January 31, 2001, Renaissance owned 15,000 shares of
Series D preferred stock, out of 92,750 shares of Series D preferred stock then
outstanding. As a percentage, Renaissance owned approximately 16% of the then
outstanding shares of Series D preferred stock. Also as of January 31, 2001,
Renaissance beneficially owned 16,094,684 shares of Common Stock, including the
conversion of warrants, convertible promissory notes and convertible debentures
within 60 days. As of January 31, 2001, all of the other persons and entities
listed in the table in the "Security Ownership of Certain Beneficial Owners and
Management" above beneficially owned an aggregate of 4,864,532 shares of Common
Stock. Renaissance owned an aggregate of approximately 77% of the total
beneficial ownership on January 31, 2001, based on that table. Considering that
Renaissance owns a much larger percentage of outstanding Common Stock than of
Series D preferred stock, Renaissance negotiated with the Company that a
requirement of the financial restructuring is that the liquidation preference of
the Series D preferred stock holders be reduced to $0.01. As an extremely large
beneficial holder of Common Stock, Renaissance would prefer to maximize the
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52
amount of assets that the holders of Common Stock could receive in the event of
a liquidation than to maximize the amount of assets received by the holders of
Series D preferred stock.
The board of directors has unanimously adopted resolutions approving
and recommending that the stockholders adopt an amendment to the Company's
Restated Certificate of Incorporation to reduce the liquidation preference of
the Series D preferred stock as set forth in Exhibit C.
If the stockholders approve the amendment to the Restated Certificate
of Incorporation, then the Restated Certificate of Incorporation would be
amended as soon as practicable following stockholder approval. If the amendment
is not approved by the stockholders, then the existing Restated Certificate of
Incorporation will continue in effect, and the Company will not be able to
complete the proposed financial restructuring.
NO DISSENTER'S RIGHTS
The Delaware general Corporation Law does not grant stockholders of a
Delaware corporation with dissenter's rights with respect to the amendment to
the Restated Certificate of Incorporation.
AMENDMENT
If the amendment is approved, then the Restated Certificate of
Incorporation will be amended as set forth on Exhibit C.
APPROVAL
To approve the amendment to the Restated Certificate of Incorporation,
(a) the affirmative vote of the holders of a majority of the shares of Common
Stock outstanding and entitled to vote on the record date and Series D preferred
stock, voting together as a class, and (b) the affirmative vote of the holders
of the Series D preferred stock, voting separately as a class, are required.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION TO REDUCE THE LIQUIDATION
PREFERENCE OF THE SERIES D PREFERRED STOCK AS SET FORTH IN EXHIBIT C.
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PROPOSAL FIVE
PROPOSED AMENDMENT TO THE COMPANY'S 1997 OMNIBUS LONG-TERM
INCENTIVE PLAN
SUMMARY OF STOCK OPTION PLAN
The purpose of the Company's 1997 Omnibus Long-Term Incentive Plan is
to provide a means whereby the Company and its subsidiaries may attract able
persons to enter the employ of the Company and to provide a means whereby those
key employees upon whom the responsibilities of the successful administration
and management of the Company rest, and whose present and potential
contributions to the welfare of the Company are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the long-term
welfare of the Company and their desire to remain in its employ. A further
purpose of the plan is to provide such key employees with additional incentive
and reward opportunities designed to enhance the profitable growth of the
Company over the long term. Accordingly, the plan provides for granting
incentive stock options, options which do not constitute incentive stock
options, stock appreciation rights, restricted stock awards, performance share
awards, stock value equivalent awards, or any combination of the foregoing.
PARTICIPANTS
At December 31, 2000, the Company had 63 employees and non-employee
directors eligible to participate in the plan.
PLAN BENEFITS OUTSTANDING
Of the total 2,000,000 shares for which options may be granted under
the plan, options to purchase 5,065,177 shares of Common Stock were outstanding
as of December 31, 2000. As of December 31, 2000, the market value of all shares
of Common Stock subject to outstanding options was $712,164, based upon the
closing sale price of the Common Stock as reported on the Nasdaq
Over-the-Counter Bulletin Board on such date.
AMENDMENTS TO INCREASE OPTIONS UNDER PLAN
The board of directors is seeking stockholder approval of an amendment
to the plan that would increase the number of shares of Common Stock which may
be issued pursuant to the plan from 2,000,000 shares to 7,500,000 subject to
adjustments to reflect possible future stock splits, stock dividends,
combinations or exchange of shares, or similar transactions.
The board of directors is seeking stockholder approval of the amendment
to the plan because it believes that the Company will require additional options
to attract and retain persons of ability as officers, directors and employees.
The board of directors believes that it is prudent to seek stockholder approval
of the increase at the present time in order to assure that in the future the
Company has sufficient options available for issuance under the plan to avoid
granting options that are subject to subsequent stockholder approval.
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54
If the amendment is approved, the plan will be amended by deleting
Article V of the plan in its entirety and inserting in its place the following:
"V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS,
RESTRICTED STOCK AWARDS, PERFORMANCE SHARE AWARDS AND
STOCK VALUE EQUIVALENT AWARDS, SHARES SUBJECT TO THE PLAN
(a) Award Limits. The Committee may from time to time grant
Awards to one or more employees determined by it to be eligible for
participation in the Plan in accordance with the provisions of Article
VI. The aggregate number of shares of Common Stock that may be issued
under the Plan shall not exceed 7,500,000 shares. Any of such shares
which remain unissued and which are not subject to outstanding Options
or Awards at the termination of the Plan shall cease to be subject to
the Plan but, until termination of the Plan, the Company shall at all
times reserve a sufficient number of shares to meet the requirements of
the Plan. Shares shall be deemed to have been issued under the Plan
only to the extent actually issued and delivered pursuant to an Award.
To the extent that an Award lapses or the rights of its Holder
terminate or the Award is paid in cash, any shares of Common Stock
subject to such Award shall again be available for the grant of an
Award. The aggregate number of shares which may be issued under the
Plan shall be subject to adjustment in the same manner as provided in
Article XII with respect to shares of Common Stock subject to Options
then outstanding. Separate stock certificates shall be issued by the
Company for those shares acquired pursuant to the exercise of an
Incentive Stock Option and for those shares acquired pursuant to the
exercise of any Option which does not constitute an Incentive Stock
Option.
(b) Stock Offered. The stock to be offered pursuant to the
grant of an Award may be authorized but unissued Common Stock or Common
Stock previously issued and outstanding and reacquired by the Company."
APPROVAL
The affirmative vote of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote on the record date and Series D
preferred stock, voting together as a class, is required to approve the
amendment to the plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE AMENDMENT TO THE COMPANY'S 1997 OMNIBUS LONG-TERM INCENTIVE PLAN.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Such persons are
required by SEC regulations to furnish the Company with copies of all Section
16(a) reports they file. Based solely upon a review of Forms 3, 4 and 5 and
amendments thereto provided to the Company pursuant to Rule 16a-3(e), Messrs.
Rundell, Arsht, Caldwell, Galecke, Jack, and Marlow and Ms. Burlage had late
filings during the fiscal year ending June 30, 2000.
52
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INDEPENDENT ACCOUNTANTS
The board of directors, upon recommendation of the audit committee, has
appointed Grant Thornton LLP as the independent accountants of the Company for
the fiscal year ending June 30, 2001.
Representatives of Grant Thornton LLP are expected to be present at the
annual meeting with the opportunity to make a statement if they desire to do so
and to be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
In order for stockholder proposals to receive consideration for
inclusion in the proxy statement for the Company's 2001 annual meeting of
stockholders, such proposals must be received by August 15, 2001, at the
Company's offices at 8200 Springwood Drive, Suite 230, Irving, Texas 75063,
Attention: Secretary.
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 intention to make such nomination has been given to
the Secretary of the Company not earlier than 60 days nor later than 30 days
prior to a meeting of stockholders. However, in the event that notice or public
disclosure of a meeting of stockholders is first given or made to the
stockholders less than 40 days prior to such meeting, then notice of a
stockholder's intention to nominate a person for election as a director will be
timely if given in writing to the Secretary before the close of business on the
tenth day following the date on which the notice of the meeting was mailed or
the public disclosure of the meeting was made. The bylaws also require that the
notice set forth, among other things, a description of all arrangements or
understandings between the nominating stockholder and the nominee pursuant to
which the nomination is to be made or the nominee is to be elected 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 SEC had the nominee
been nominated by the Company's board of directors. This provision is intended
to give the Company the opportunity to obtain all relevant information regarding
persons nominated for director. The board may disqualify any nominee who fails
to provide the Company with complete and accurate information as required by
this provision.
SOLICITATION OF PROXIES
The Company will pay the expenses of this proxy solicitation. In
addition to solicitation by mail, some of the officers and regular employees of
the Company may solicit proxies personally or by telephone, if deemed necessary.
The Company will request brokers and other fiduciaries to forward proxy
soliciting material to the beneficial owners of shares which are held of record
by the brokers and fiduciaries, and the Company may reimburse them for
reasonable out-of-pocket expenses incurred by them in connection therewith.
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56
OTHER MATTERS
The board of directors is not aware of any matter, other than the
matters described above, to be presented for action at the annual meeting.
However, if any other proper items of business should come before the annual
meeting, it is the intention of the person or persons acting under the enclosed
form of proxy to vote in accordance with their best judgment on such matters.
The Securities and Exchange Commission allows the Company to
"incorporate by reference" certain information into this proxy statement. This
means that the Company can disclose important information to its stockholders by
referring the stockholders to other documents and those other documents are
considered to be a part of this proxy statement, except for information
superseded by information in this proxy statement. The Company is incorporating
by reference, and delivering to its stockholders in connection with this proxy
statement, the Company's Annual Report on Form 10-KSB/A for the fiscal year
ended June 30, 2000 and the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2000.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED POSTAGE PAID RETURN ENVELOPE. A PROMPT RETURN OF
YOUR PROXY CARD WILL BE APPRECIATED, AS IT WILL SAVE THE EXPENSE OF FURTHER
MAILINGS.
By Order of the Board of Directors,
C. A. Rundell, Jr.
Chairman of the Board and Chief Executive Officer
Irving, Texas
February __, 2001
54
57
EXHIBIT A
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the audit committee of Integrated
Security Systems, Inc. The audit committee shall review and reassess this
charter on at least an annual basis and obtain the approval of the board of
directors. The audit committee shall be appointed by the board of directors and
shall consist of at least two directors, each of whom is independent of
management and the Company. Members of the audit committee shall be considered
independent if they have no relationship that may interfere with the exercise of
their independence from management and the Company and meet the standards of
independence required by the Stock Exchange or any other exchange on which the
Common Stock of Integrated Security Systems, Inc. is traded. All audit committee
members shall be financially literate, or shall become financially literate
within a reasonable period of time after appointment to the audit committee, and
at least one member shall have accounting or related financial management
expertise as required by the rules of the Stock Exchange or any other exchange
on which the Common Stock of Integrated Security Systems, Inc. is traded.
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and financial reporting process, the systems of internal
accounting and financial controls, the internal audit function, the annual
independent audit of the Company's financial statements, and the legal
compliance and ethics programs as established by management and the board of
directors. In doing so, it is the responsibility of the audit committee to
maintain free and open communication between the audit committee, independent
auditors, the internal auditors and management of the Company. In discharging
its oversight role, the audit committee is empowered to investigate any matter
brought to its attention with full access to all books, records, facilities, and
personnel of the Company and the power to retain outside counsel or other
experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the audit committee is to oversee the Company's
financial reporting process on behalf of the board and report the results of
their activities to the board. Management is responsible for preparing the
Company's financial statements and the independent auditors are responsible for
auditing those financial statements. The audit committee in carrying out its
responsibilities believes its policies and procedures should remain flexible, in
order to best react to changing conditions and circumstances. The audit
committee should take the appropriate actions to set the overall corporate
"tone" for quality financial reporting, sound business risk practices and
ethical behavior.
The following shall be the principal recurring processes of the audit committee
in carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the audit committee may supplement them as
appropriate.
o The audit committee shall have a clear understanding with management
and the independent auditors that the independent auditors are
ultimately accountable to the board and the audit committee, as
representatives of the of the Company's shareholders. The audit
committee and the board shall have the ultimate authority and
responsibility to evaluate and, where appropriate, replace the
independent auditors. The audit committee shall discuss with the
auditors their independence from management and the Company and the
matters included in the written disclosure required by the Independence
Standards Board. Annually, the audit committee shall review and
recommend to the board the selection of the Company's independent
auditors.
1
58
o The audit committee shall discuss with the internal auditors and
independent auditors the overall scope and plans for their respective
audits including the adequacy of staffing and compensation. As to the
Company's internal auditors, the audit committee shall review the
quality and staffing of the department. Also, the audit committee
shall discuss with management, the internal auditors and the
independent auditors the adequacy and effectiveness of the accounting
and financial controls, including the Company's system to monitor and
manage business risk, and legal and ethical compliance programs.
Further, the audit committee shall meet, separately with the internal
auditors and the independent auditors, with and without management
present, to discuss the results of their examinations.
o The audit committee shall review the interim financial statements
prior to the filing of the Company's Quarterly Reports on Form
10-QSB. The chair of the audit committee may represent the entire
committee for the purpose of this review.
o The audit committee shall review with management and the independent
auditors the financial statements to be included in the Company's
Annual Report 10-KSB (or the annual reports to shareholders if
distributed prior to the filling of 10-KSB), including their judgment
about the quality, not just acceptability, of accounting principles,
the reasonableness of significant judgments, and the clarity of the
disclosures in the financial statement. Also, the audit committee
shall discuss the results of the annual audit and any other matters
required to be communicated to the audit committee by the independent
auditors under generally accepted auditing standards.
RESOLVED FURTHER, that the President, Secretary and Assistant Secretary of the
Company are authorized to execute any documents and certificates necessary or
advisable to establish the Company's compliance with the audit committee
charter.
RESOLVED FURTHER, that the proper officers of the Company be, and they hereby
are, authorized and directed, on behalf of the Company, to do or cause to be
done any and all things to take all further actions and to execute, deliver and
cause the performance of all other agreements, documents, instruments, filings,
applications and certificates as may be deemed necessary or appropriate to
affect the purpose and intent of the foregoing resolutions related to the
adoption and implementation of the charter for the Company's audit committee.
2
59
EXHIBIT B
LETTER AGREEMENT
[LETTERHEAD OF INTEGRATED SECURITY SYSTEMS, INC.]
WEBSITE: http//www.integratedsecurity.com
8200 SPRINGWOOD DRIVE
SUITE 230
IRVING, TX 75063
PHONE (972) 444-8280
FAX (972) 869-3843
November 13, 2000
Mr. Robert C. Pearson
Senior Vice President
Renaissance Capital Group, Inc.
8080 North Central Expressway, Suite 210-LB-59
Dallas, Texas 75206-1857
Dear Bob:
This letter sets forth the agreement of Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC to invest up
to $1,000,000 in secured convertible promissory notes (the "New Renaissance
Notes") of Integrated Security Systems, Inc. ("ISSI"). The New Renaissance Notes
shall be due and payable in 120 days, will bear interest at 8% per annum, be
secured by all of the assets of ISSI and its subsidiaries, and be convertible
into the Company's common stock at $.20 per share.
The funding of the New Renaissance Notes is conditioned upon (i) a
minimum investment of $100,000 in new cash in ISSI from other sources, and (ii)
the approval of the board of directors of ISSI of a plan of recapitalization
with the following elements.
1. ISSI shall issue up to 80,000 shares of Series F Cumulative Convertible
Preferred Stock ("Series F Preferred Stock") for the price of $25.00
per share, $1,000,000 of which will be paid by the exchange of the New
Renaissance Notes for 40,000 shares of Series F Preferred Stock. The
Series F Preferred Stock is not redeemable, but in all other respects
will be identical to the Series G Cumulative Convertible Preferred
Stock ("Series G Preferred Stock") of ISSI.
2. ISSI will issue Series G Preferred Stock in exchange for all existing
promissory notes (other than the New Renaissance Notes), convertible
debt and interest arrearages of ISSI to the Renaissance Funds, together
with all indebtedness of ISSI to C. A. Rundell, Jr., at the price of
$25.00 per share. The Series G Preferred Stock is redeemable at any
time upon the sale of B&B Electromatic, Inc., to the extent of the net
proceeds to ISSI, and shall be redeemed in quarterly installments
commencing 24 months after issuance in accordance with a redemption
schedule of $1,000,000 in the third year, $2,000,000 in the fourth year
and the balance in the fifth year.
3. The Series F Preferred Stock and the Series G Preferred Stock
(collectively, the "Renaissance Preferred Stock") will have a
liquidation preference of $25.00 per share, shall accrue dividends at
5% per annum, initially payable 2 years after issuance and quarterly
60
Mr. Robert C. Pearson
November 13, 2000
Page 2
thereafter. Each share of Renaissance Preferred Stock is initially
convertible into 125 shares of Common Stock based on a conversion price
of $.20 per share, subject to adjustment. For purposes of the
liquidation preference, a merger, consolidation, sale of voting control
or sale of all or substantially all of the assets of the Company in
which the stockholders of the Company immediately before such event do
not own a majority of the outstanding shares or voting power of the
surviving corporation will be deemed to be a liquidation. The
conversion price shall be subject to adjustment for issuances of Common
Stock at a purchase price less than the conversion price then in
effect, except for the issuance of Common Stock pursuant to outstanding
options or warrants at the date of this letter agreement and up to
1,500,000 shares of Common Stock upon exercise of stock options to be
granted in the future. The Renaissance Preferred Stock will also be
subject to anti-dilution protection in the event of stock splits or
dividends, mergers and other similar events.
4. The Renaissance Preferred Stock will vote together with the Common
Stock and not as a separate class on all matters, including the
election of directors, except as specifically provided herein or as
otherwise required by law. Each share of Renaissance Preferred Stock
shall have a number of votes equal to the number of shares of Common
Stock then issuable upon conversion of such share of preferred stock.
At closing, the board of directors of ISSI shall consist of six
members. The holders of the Renaissance Preferred Stock, voting as a
separate class will be entitled to elect two directors.
5. ISSI shall file within 90 days of issuance of the Renaissance Preferred
Stock an SB-2 (or, when applicable, an S-3) registration statement to
permit sales by the Renaissance Funds of the shares of Common Stock
issuable upon conversion of the Renaissance Preferred Stock.
Additionally, the Renaissance Funds shall have one (1) demand
registration right and unlimited "piggyback" registration rights. All
expenses of the Renaissance Funds in connection with such registrations
shall be paid by ISSI, except underwriting discounts and commissions.
6. The consent of holders of 80% of the Renaissance Preferred Stock,
voting separately as a class, will be required to authorize the
issuance of any securities with rights pari passu, senior or superior
to the Renaissance Preferred Stock (other than securities to evidence
bank debt or asset securitizations), the merger, consolidation or sale
of assets (other than in the ordinary course) of ISSI, including the
capital stock of its subsidiaries, or to approve any action that would
materially and adversely affect the rights of the Series A Preferred
Stock.
7. At the date of this letter agreement, there are 10,572,545 shares of
ISSI Common Stock issued and outstanding and 22,943,623 shares of ISSI
Common Stock issuable upon exercise or conversion of ISSI securities.
ISSI represents and warrants to the Renaissance Funds that at the date
of this letter agreement and at the date of issuance of the Renaissance
Preferred Stock, (i) ISSI is not insolvent, as defined under the U.S.
Bankruptcy Code, and (ii) ISSI shall have no pending or threatened
material litigation, loss contingencies or material undisclosed
liabilities.
8. Prior to the issuance of the Renaissance Preferred Stock, the
certificates of designation for the Series D Convertible Preferred
Stock shall have been amended to reduce the liquidation preference to
$.01 per share, until the Renaissance Preferred Stock has been
converted, redeemed or otherwise recovered the full amount of its
investment, at which time the liquidation preference reverts to $20.00
per share. At the date of this letter agreement, there are no other
classes or series of preferred stock outstanding (other than the Series
A Convertible Preferred Stock), nor are there any debt securities
outstanding, other than those issued to the Renaissance Funds and C. A.
Rundell, Jr., or disclosed in ISSI's SEC filings.
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Mr. Robert C. Pearson
November 13, 2000
Page 3
9. ISSI shall reserve for issuance the shares of ISSI Common Stock
issuable upon conversion of the Renaissance Preferred Stock. ISSI shall
authorize an additional 30,000,000 shares of Common Stock.
10. ISSI shall use its best efforts to secure shareholder approval of the
foregoing plan of recapitalization, which shall be recommended by the
ISSI board of directors. In the event that this plan of
recapitalization is not effected within 120 days of the date of this
letter agreement, then all outstanding indebtedness of ISSI to the
Renaissance Funds shall be immediately due and payable, without notice,
demand, or presentment, and ISSI shall pay all costs of collection. All
evidences of such indebtedness to the Renaissance Funds are amended
hereby.
11. No representations, warranties or statements of ISSI in this letter
agreement and no statement in any registration statement, report or
proxy statement of ISSI filed with the SEC contains at the date of this
letter agreement or will contain at the date of issuance of the
Renaissance Preferred Stock any untrue statement of material fact or
omits or will omit to state any material fact necessary, in light of
the circumstances under which it was made, to make the statements made
not misleading.
12. This letter agreement shall be valid, binding and enforceable on the
parties. This letter agreement shall be governed by the laws of the
State of Texas, without regard for conflicts of law principles. Venue
shall lie in the federal or state courts of Dallas County, Texas.
If the foregoing accurately sets forth your intention, please indicate
the concurrence of the Renaissance Fund therewith by executing this letter (and
the enclosed counterpart) where indicated and returning one fully executed copy
to the undersigned.
Sincerely,
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ C. A. RUNDELL, JR.
------------------------------------
C. A. Rundell, Jr.
Chairman and Chief Executive Officer
ACCEPTED AND AGREED to as of this
13th day of November, 2000.
RENAISSANCE FUNDS:
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
By: /s/ RUSSELL L. CLEVELAND
------------------------------------
RENAISSANCE US GROWTH & INCOME TRUST PLC
By: Renaissance Capital Group, Inc.
Investment Manager
By: /s/ RUSSELL L. CLEVELAND
------------------------------------
62
EXHIBIT C
[FORM OF]
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES D $20 CONVERTIBLE PREFERRED STOCK
OF
INTEGRATED SECURITY SYSTEMS, INC.
Integrated Security Systems, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: The name of the Corporation is Integrated Security Systems, Inc.
SECOND: The Board of Directors of the Corporation, by the unanimous written
consent of its members, adopted a resolution proposing and declaring advisable
that the liquidation amount set forth in the Certificate of Designation,
Preferences and Rights of Series D Convertible Preferred Stock of the
Corporation should be modified by adopting the following amendment to the
Certificate of Designation, Preferences and Rights of Series D Convertible
Preferred Stock of the Corporation:
Paragraph (1) of Section 7 shall be amended in its entirety as follows:
"(1) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series D $20 Convertible
Preferred Stock unless, prior thereto, the holders of shares of Series D
$20 Convertible Preferred Stock shall have received the Liquidation Amount
with respect to such shares. Until (a) all of the shares of Series F
Cumulative Convertible Preferred Stock and Series G Cumulative Convertible
Preferred Stock have been converted and/or redeemed, or (b) all of the
holders of shares of Series F Cumulative Convertible Preferred Stock and
Series G Cumulative Convertible Preferred Stock have received dividends
and/or other distributions with respect to the Series F preferred stock and
Series G preferred stock in an aggregate amount equal to the Liquidation
Preference for such shares as set forth in this Restated Certificate of
Incorporation. "Liquidation Amount" with respect to any share of Series D
$20 Convertible Preferred Stock shall mean $0.01. After all of the shares
of Series F Cumulative Convertible Preferred Stock and Series G Cumulative
Convertible Preferred Stock have been converted or redeemed, or after all
of the holders of shares of Series F Cumulative Convertible Preferred Stock
and Series G Cumulative Convertible Preferred Stock have received dividends
and/or other distributions with respect to the Series F preferred stock and
Series G preferred stock in an aggregate amount equal to the Liquidation
Preference for such shares as set forth in this Restated Certificate of
Incorporation, "Liquidation Amount"
63
with respect to any share of Series D $20 Convertible Preferred Stock shall
mean the sum of (i) $20 and (ii) the amount of any accrued and unpaid
dividends with respect to such share on such date. Following the payment of
the full amount of the Liquidation Amount, no additional distributions
shall be made to the holders of shares of Series D $20 Convertible
Preferred Stock."
THIRD: The resolution adopted by the Board of Directors has been duly
adopted by (a) the affirmative vote of the holders of a majority of the shares
of Common Stock outstanding and entitled to vote on the record date and Series D
preferred stock, voting together as a class, and (b) the affirmative vote of the
holders of the Series D preferred stock, voting separately as a class, in
accordance with the provisions of the General Corporation Law of the State of
Delaware.
* * * * *
64
IN WITNESS WHEREOF, Integrated Security Systems, Inc. has caused this
certificate to be signed by its Chief Executive Officer as of
______________________, 2001.
INTEGRATED SECURITY SYSTEMS, INC.
By:
----------------------------------------
C. A. Rundell, Jr.
Chief Executive Officer
65
EXHIBIT D
INTEGRATED SECURITY SYSTEMS, INC.
----------
[FORM OF]
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK
----------
DATED AS OF ____________, 2001
66
INTEGRATED SECURITY SYSTEMS, INC.
----------
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK
----------
INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation, having its
principal office in Dallas, Texas (the "Corporation"), hereby certifies to the
Secretary of State of the State of Delaware that:
Pursuant to authority expressly vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), the Board of Directors has duly adopted
resolutions authorizing the creation and issuance of up to Eighty Thousand
(80,000) shares of Series F Cumulative Convertible Preferred Stock, $.01 par
value, with a liquidation preference of Twenty-Five Dollars ($25.00) per share,
and determining the preferences, rights, powers, limitations, qualifications and
restrictions, as follows:
SECTION 1. NUMBER OF SHARES AND DESIGNATION. This series of Preferred
Stock, $.01 par value, shall be designated as Series F Cumulative Convertible
Preferred Stock (the "Series F Preferred Stock"), and the number of shares which
shall constitute such series shall be _________ shares.
SECTION 2. DEFINITIONS. For purposes of the Series F Preferred Stock,
the following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series F
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New
York, New York are not required to be open.
67
"Common Stock" shall mean the common stock, $.01 par value, of the
Corporation or such shares of the Corporation's capital stock into
which such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the
Corporation or of any similar security of any other issuer for any day
shall mean the last reported sale price, regular way on such day, or,
if no sale takes place on such day, the reported closing bid price,
regular way on such day, in either case as reported on the NASDAQ
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") or, if not quoted on NASDAQ, on
the principal national securities exchange on which such security is
listed or admitted for trading or, if such security is not listed or
admitted for trading on a national securities exchange or quoted on the
NASDAQ National Market, the closing bid price on such day as reported
on the NASDAQ SmallCap Market, or, if the bid price for such security
on such day shall not have been reported on the NASDAQ SmallCap Market,
the bid price on such day as reported on the OTC Electronic Bulletin
Board or, if the bid price for such security on such day shall not have
been reported on the OTC Electronic Bulletin Board, the price on such
day, furnished by any NYSE member firm regularly making a market in
such security selected for such purpose by the Chief Executive Officer
or the Board of Directors or if any class or series of securities are
not publicly traded, the fair value of the shares of such class as
determined reasonably and in good faith by the Board of Directors of
the Corporation or other issuer.
"Dividend Payment Date" shall mean, with respect to each Dividend
Period, the last day of March, June, September and December, in each
year, commencing on March 31, 2001; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period, which shall
commence on the Issue Date and end on and include the day immediately
preceding the Dividend Payment Date which immediately follows the Issue
Date.)
"Fair Market Value" on any date shall mean the average of the daily
Current Market Price of a share of Common Stock during five (5)
consecutive Trading Days ending on the day before such date.
"Funds Available for Distribution" shall mean funds from operations
(net income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization) minus
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non-revenue generated capital expenditures and debt principal
amortization, as determined by the Board of Directors on a basis
consistent with the policies and practices adopted by the Corporation
for reporting publicly its results of operations and financial
condition.
"Issue Date" shall mean the date upon which shares of Series F
Preferred Stock are issued.
"Junior Stock" shall have the mean any class or series of capital stock
of the Corporation which is junior to the Series F Preferred Stock as
to the payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up of if the holders of Series F
Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up in preference
or priority to the holders of shares of such class or series.
"NYSE" shall mean the New York Stock Exchange.
"Parity Stock" shall mean any class or series of capital stock of the
Corporation on a parity with the Series F Preferred Stock or any other
capital stock designated as Parity Stock as to the payment of dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates
or redemption or liquidation prices per share thereof be different from
those of the Series F Preferred Stock, if the holders of such class of
stock or series and the Series F Preferred Stock shall be entitled to
the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation preferences,
without preference or priority of one over the other, including,
without limitation, the Series G Preferred Stock.
"Permitted Common Stock Cash Distributions" means cash dividends and
cash distributions paid on Common Stock after December 31, 2000 not in
excess of the sum of the Corporation's cumulative undistributed net
earnings at December 31, 2000, plus the cumulative amount of Funds
Available for Distribution after December 31, 2000, minus the
cumulative amount of dividends accumulated, accrued or paid on the
Series F Preferred Stock or any other class of Preferred Stock after
January 1, 2001.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Senior Stock" shall mean any class or series of capital stock of the
Corporation which is prior or senior to the Series F Preferred Stock,
as to the payment of dividends and as to distribution of assets upon
liquidation, dissolution or winding up, if the holders of such class or
series shall be entitled to the receipt of dividends or of amounts
distributable upon
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liquidation, dissolution or winding up in preference or priority to the
holders of Series F Preferred Stock.
"Series F Preferred Stock" shall have the meaning set forth in Section
1 hereof.
"Series G Preferred Stock" shall have the meaning set forth in Section
5(d)(v) hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of capital stock of the Corporation; provided, however,
that if any funds for any class or series of Junior Stock or any class
or series of Parity Stock are placed in a separate account of the
Corporation or delivered to a disbursing, paying or other similar
agent, then "set apart for payment" with respect to the Series F
Preferred Stock shall mean placing such funds in a separate account or
delivering such funds to a disbursing, paying or other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the NYSE or, if such securities are not listed
or admitted for trading on the NYSE, on the principal national
securities exchange on which such securities are listed or admitted or,
if such securities are not listed or admitted for trading on any
national securities exchange, on the NASDAQ National Market or, if such
securities are not quoted on the NASDAQ National Market, in the
securities market in which such securities are traded.
SECTION 3. DIVIDENDS.
(a) The holders of Series F Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Series F Preferred Stock equal to $1.25 per annum. Such dividends
shall be cumulative from the Issue Date, whether or not in any Dividend Period
or Periods such dividends shall be declared or there shall be funds of the
Corporation legally available for the payment of such dividends, and shall be
payable quarterly on the Dividend Payment Dates, commencing on the ninth
Dividend Payment Date after the Issue Date. Each such dividend shall be payable
to the holders of record of the Series F Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on a record date which
shall be not more than sixty (60) days prior to the applicable Dividend Payment
Date. Accumulated, accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to holders of record on such date, which date shall not precede by
more than forty-five (45) days the payment date thereof, as may be fixed by the
Board of Directors. The amount of accumulated, accrued and unpaid dividends on
any share of Series F Preferred Stock, or fraction thereof, at any date shall be
the amount of any dividends thereon
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calculated at the applicable rate to and including such date, whether or not
earned or declared, which have not been paid in cash.
(b) The amount of dividends payable per share of Series F
Preferred Stock for each Dividend Period shall be computed by dividing the
annual dividend by four (4). The amount of dividends payable per share of Series
F Preferred Stock for the initial Dividend Period, or any other period shorter
or longer than a full Dividend Period, shall be computed ratably on the basis of
twelve (12) 30-day months and a 360-day year. Holders of Series F Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or stock, in excess of cumulative dividends, as herein provided on the Series F
Preferred Stock. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series F Preferred
Stock that may be in arrears.
(c) So long as any of the shares of Series F Preferred Stock
are outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set apart for payment by the Corporation,
or other distribution of cash or other property declared or made directly or
indirectly by the Corporation or any affiliate or any person acting on behalf of
the Corporation or any of its affiliates with respect to any class or series of
Parity Stock for any period, unless dividends equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof have
been or contemporaneously are set apart for such payment on the Series F
Preferred Stock for all Dividend Periods terminating on or prior to the Dividend
Payment Date with respect to such class or series of Parity Stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, all dividends declared upon the Series F Preferred Stock
and all dividends declared upon any other class or series of Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated, accrued and unpaid on the Series F Preferred Stock and accumulated,
accrued and unpaid on such Parity Stock.
(d) So long as any of the shares of Series F Preferred Stock
are outstanding, no dividends (other than dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Junior Stock) shall be declared or paid or set apart for payment by the
Corporation, or other distribution of cash or other property declared or made
directly or indirectly by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates with respect to any shares
of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition of
Common Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be paid to
or made available for a sinking- fund for the redemption of any shares of any
such stock) directly or indirectly by the Corporation or any affiliate or any
person acting on behalf of the Corporation or any of its affiliates (except by
conversion into or exchange for Junior Stock), nor shall any other cash or other
property otherwise be paid or distributed to or for the benefit of any holder of
shares of Junior Stock in respect thereof,
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directly or indirectly, by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates, unless in each case (i)
the full cumulative dividends (including all accumulated, accrued and unpaid
dividends) on all outstanding shares of Series F Preferred Stock and any other
Parity Stock of the Corporation shall have been paid or such dividends have been
declared and set apart for payment for all past Dividend Periods with respect to
the Series F Preferred Stock and all past Dividend Periods with respect to such
Parity Stock, and (ii) sufficient funds shall have been paid or set apart for
the payment of the full dividend for the current Dividend Period with respect to
the Series F Preferred Stock and the current Dividend Period with respect to
such Parity Stock.
SECTION 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Stock, the holders of shares
of Series F Preferred Stock shall be entitled to receive Twenty-Five Dollars
($25.00) per share of Series F Preferred Stock, plus an amount equal to all
dividends (whether or not earned or declared) accumulated, accrued and unpaid
thereon to the date of final distribution to such holders. Until the holders of
the Series F Preferred Stock have been paid the liquidation preference in full,
no payment will be made to any holder of Junior Stock upon the liquidation,
dissolution or winding up of the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of Series F Preferred Stock
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares of any class or series of Parity Stock,
then such assets, or the proceeds thereof, shall be distributed among the
holders of Series F Preferred Stock and any such other Parity Stock ratably in
the same proportion as the respective amounts that would be payable on such
Series F Preferred Stock and any such other Parity Stock if all amounts payable
thereon were paid in full.
(b) Subject to the rights of the holders of any shares of
Parity Stock, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of Series
F Preferred Stock and any Parity Stock, as provided in this Section 4, any other
series or class or classes of Junior Stock shall, subject to the respective
terms thereof, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series F Preferred Stock and any Parity
Stock shall not be entitled to share therein.
(c) For purposes of this Section 4, a merger, consolidation,
sale of voting control or sale of all or substantially all of the assets of the
Corporation in which the holders of Common Stock of the Corporation immediately
before such event do not own a majority of the outstanding shares or voting
power of the surviving corporation shall be deemed to be a liquidation and
dissolution of the Corporation.
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SECTION 5. CONVERSION RIGHTS. The holders of shares of Series F
Preferred Stock shall have the right, at their option, to convert such shares
into shares of Common Stock of the Corporation at any time on and subject to the
following terms and conditions:
(a) The shares of Series F Preferred Stock shall be
convertible at the office of the transfer agent for the Common Stock or the
principal executive office of the Corporation, into fully paid and
non-assessable shares (calculated as to each conversion to the nearest 1/100th
of a share) of Common Stock of the Corporation, at the conversion price,
determined as hereinafter provided, in effect at the time of conversion, each
share of Series F Preferred Stock being taken at $25.00 for the purpose of such
conversion. The price at which shares of Common Stock shall be delivered upon
conversion (the "Conversion Price") shall initially be $.20 per share of Common
Stock, and the number of shares initially issuable upon conversion of each share
of Series F Preferred Stock is 125. The conversion price shall be adjusted in
certain instances as provided below.
(b) In order to convert shares of Series F Preferred Stock
into Common Stock, the holder thereof shall surrender at the office or offices
herein above mentioned the certificate or certificates therefor, duly endorsed
or assigned to the Corporation or in blank, and give written notice to the
Corporation at said office or offices that such holder elects to convert such
shares. Shares of Series F Preferred Stock surrendered for conversion during the
period from the close of business on any record date for the payment of a
dividend on the shares of Series F Preferred Stock to the opening of business on
the date for payment of such dividend shall be accompanied by a payment of an
amount equal to the dividend declared and payable on such dividend payment date
on the shares of Series F Preferred Stock being surrendered for conversion.
Except as provided in the preceding sentence, no payment or adjustment shall be
made upon any conversion on account of any unpaid or accrued dividends on the
shares of Series F Preferred Stock surrendered for conversion or on account of
any dividends on the Common Stock issued upon conversion.
Shares of Series F Preferred Stock shall be deemed to have
been converted immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in accordance with
the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable upon such conversion, together with payment
in lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same. In case shares of Series F Preferred Stock
are called for redemption, the right to convert such shares shall cease and
terminate at the close of business on the date fixed for redemption, unless
default shall be made in payment of the redemption price.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series F Preferred Stock, but, instead of any fraction
of a share which would otherwise be
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issuable, the Corporation shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the Closing Price (as
hereinafter defined) on the date on which the certificate or certificates for
such shares were duly surrendered for conversion, or, if such date is not a
Trading Day (as hereinafter defined), on the next Trading Day.
(d) The Conversion Price shall be adjusted from time to time
as follows:
(i) Adjustment for Issuance of Shares at Less Than
the Conversion Price. If at any time after the date of the first
issuance of Series F Preferred Stock, the Corporation shall issue any
shares of Common Stock, Convertible Securities (as hereinafter
defined), Rights (as hereinafter defined) or Related Rights (as
hereinafter defined; any such shares, Convertible Securities, Rights or
Related Rights, "Securities") without consideration or for a
consideration per share or unit less than the Conversion Price in
effect immediately prior to the issuance of such Securities, then the
Conversion Price in effect immediately prior to each such issuance
shall forthwith be reduced to the quotient obtained by dividing:
(A) an amount equal to the sum of (1) the
total number of shares of Common Stock outstanding immediately
prior to such issuance (including for this purpose the number
of shares of Common Stock into which the shares of Series F
Preferred Stock outstanding immediately prior to such issuance
are convertible on the date of such issuance in accordance
with Subsection 5(a) (without regard to Subsection 5(c)),
without giving effect to such issuance) multiplied by the
Conversion Price in effect immediately prior to such issuance,
and (2) the amount of consideration, if any, received by the
Corporation upon such issuance, by
(B) the total number of shares of Common
Stock (1) outstanding immediately after such issuance
(including the number of shares of Common Stock into which the
shares of Series F Preferred Stock outstanding immediately
prior to such issuance are convertible on the date of such
issuance in accordance with Subsection 5(a) (without regard to
Subsection 5(c)), without giving effect to such issuance) or
(2) into or for which any such newly issued Convertible
Securities are then convertible or exchangeable or (3)
issuable upon the exercise of any such Rights or Related
Rights).
(C) For the purpose of this Subsection 5(d),
the following definitions and procedures shall be applicable:
(1) In the case of the issuance of
options, warrants or other rights to purchase or
otherwise acquire Common Stock, whether or not at the
time exercisable ("Rights"), the total number of
shares of Common Stock issuable upon exercise of such
Rights shall be deemed to have been issued at
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the time such Rights are issued, for a consideration
equal to the sum of the consideration, if any,
received by the Corporation upon the issuance of such
rights and the minimum purchase or exercise price
payable upon the exercise of such Rights for the
Common Stock to be issued upon the exercise thereof.
(2) In the case of the issuance of
any class or series of stock or any bonds,
debentures, notes or other securities or obligations
convertible into or exchangeable for Common Stock,
whether or not then convertible or exchangeable
("Convertible Securities"), or options, warrants or
other rights to purchase or otherwise acquire
Convertible Securities ("Related Rights"), the total
number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities
or exercise of such Related Rights shall be deemed to
have been issued at the time such Convertible
Securities or Related Rights are issued, for a
consideration equal to the sum of (I) the
consideration, if any, received by the Corporation
upon issuance of such Convertible Securities or
Related Rights (excluding any cash received on
account of accrued interest or dividends) and (II)
(A) in the case of Convertible Securities, the
minimum additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such Convertible Securities or (B) in the
case of Related Rights, the sum of (x) the minimum
purchase or exercise price payable upon the exercise
of such Related Rights for Convertible Securities and
(y) the minimum additional consideration, if any, to
be received by the Corporation upon the conversion or
exchange of the Convertible Securities issued upon
the exercise of such Related Rights.
(3) On any change in the number of
shares of Common Stock issuable upon the exercise of
Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change
in the minimum purchase or exercise price of Rights,
Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the
anti-dilution provisions of such Rights, Related
Rights or Convertible Securities, the Conversion
Price to the extent in any way affected by such
Rights, Related Rights or Convertible Securities
shall forthwith be readjusted to be thereafter the
Conversion Price that would have been obtained had
the adjustment which was made upon the issuance of
such Rights, Related Rights or Convertible Securities
been made after giving effect to such change. No
further adjustment shall be made in respect of such
change upon the actual issuance of Common Stock or
any payment of consideration upon the exercise of any
such Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
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(4) On the expiration or
cancellation of any such Rights, Related Rights or
Convertible Securities, if the Conversion Price shall
have been adjusted upon the issuance thereof, the
Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had
the adjustment made upon the issuance of such Rights,
Related Rights or Convertible Securities been made
upon the basis of the issuance of only the number of
shares of Common Stock actually issued upon the
exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible
Securities.
(ii) Sale of Shares. In case of the issuance of
Securities for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the
gross amount of the cash paid to Corporation for such shares, before
deducting any underwriting compensation or discount in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any Securities for a
consideration part or all of which shall be other than cash, the amount
of the consideration therefor, other than cash, shall be deemed to be
the then fair market value of the property received.
(iii) Reclassification of Shares. In case of the
reclassification of securities into shares of Common Stock, the shares
of Common Stock issued in such reclassification shall be deemed to have
been issued for a consideration other than cash. Securities issued by
way of dividend or other distribution on any class of stock of
Corporation shall be deemed to have been issued without consideration.
(iv) Stock Dividends, Stock Splits, Subdivisions or
Combinations. In the event of a stock dividend, stock split or
subdivision of shares of Common Stock into a greater number of shares,
the Conversion Price shall be proportionately decreased, and in the
event of a combination of shares of Common Stock into a smaller number
of shares, the Conversion Price shall be proportionately increased,
such increase or decrease, as the case may be, becoming effective at
the record date.
(v) Exceptions. The adjustments provided in
Subsection 5(d)(i) shall not apply to any (A) Common Stock issued upon
the conversion of any of the Series F Preferred Stock or the Series G
Cumulative Convertible Preferred Stock, $.01 par value (the "Series G
Preferred Stock"); (B) Common Stock issued upon exercise of any
outstanding warrants; (C) Common Stock issued upon exercise of
outstanding employee stock options; and (D) up to 1,500,000 shares of
Common Stock issuable upon exercise of employee stock options to be
granted subsequent to the date hereof.
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(vi) Adjustment for Mergers and Consolidations.
(A) In the event of distribution to all
Common Stock holders of any stock, indebtedness of the
Corporation or assets (excluding cash dividends or
distributions from retained earnings) or other rights to
purchase securities or assets, then, after such event, the
shares of Series F Preferred Stock will be convertible into
the kind and amount of securities, cash and other property
which the holder of the shares of Series F Preferred Stock
would have been entitled to receive if the holder owned the
Common Stock issuable upon conversion of the shares of Series
F Preferred Stock immediately prior to the occurrence of such
event.
(B) In case of any capital reorganization,
reclassification of the stock of the Corporation (other than a
change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), the shares of
Series F Preferred Stock shall be convertible into the kind
and number of shares of stock or other securities or property
of the Corporation to which the holder of the shares of Series
F Preferred Stock would have been entitled to receive if the
holder owned the Common Stock issuable upon conversion of the
shares of Series F Preferred Stock immediately prior to the
occurrence of such event. The provisions of the immediately
foregoing sentence shall similarly apply to successive
reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share
exchanges.
(C) The term "Fair Market Value," as used
herein, is the value ascribed to consideration other than cash
as determined by the Board of Directors of the Corporation in
good faith, which determination shall be final, conclusive and
binding. If the Board of Directors shall be unable to agree as
to such fair market value, then the issue of fair market value
shall be submitted to arbitration under and pursuant to the
rules and regulations of the American Arbitration Association,
and the decision of the arbitrators shall be final, conclusive
and binding, and a final judgment may be entered thereon;
provided, however, that such arbitration shall be limited to
determination of the fair market value of assets tendered in
consideration for the issue of Common Stock.
(e) Whenever the conversion price is adjusted as herein
provided:
(i) The Corporation shall compute the adjusted
conversion price in accordance with this Section 5 and shall cause to
be prepared a certificate signed by the Corporation's treasurer setting
forth the adjusted conversion price and showing in reasonable detail
the fact upon which such adjustment is based; and
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(ii) A notice stating that the conversion price has
been adjusted and setting forth the adjusted conversion price shall, as
soon as practicable, be mailed to the holders of record of outstanding
shares of Series F Preferred Stock.
(f) In case:
(i) The Corporation shall declare a dividend or other
distribution on its Common Stock payable otherwise than in cash out of
retained earnings;
(ii) The Corporation shall authorize the issuance to
the holders of its Common Stock of rights or warrants entitling them to
subscribe for or purchase any shares of capital stock of any class or
any other subscription rights or warrants; or
(iii) Of any reclassification of the capital stock of
the Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation or merger
to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or of the sale, transfer
or other disposition of all or substantially all of the assets of the
Corporation; or
(iv) Of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
then the Corporation shall cause to be mailed to the holders
of record of the outstanding shares of Series F Preferred Stock, at least 20
days (or 10 days in any case specified in clause (i) or (ii) above) prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date as of which the holders of record of Common Stock to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
disposition, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
Common Stock shall be entitled to exchange their shares for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, disposition, liquidation, dissolution or winding up, or the vote
on any action authorizing such.
(g) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series F
Preferred Stock, the full number of shares of Common Stock then deliverable upon
the conversion of all shares of Series F Preferred Stock then outstanding.
(h) The Corporation will pay any and all taxes that may be
payable in respect of the issuance of delivery of shares of Common Stock on
conversion of shares of Series F Preferred
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Stock pursuant thereto. The Corporation shall not, however, be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of shares of Common Stock in a name other than that in which the
shares of Series F Preferred Stock so converted were registered, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has been paid.
(i) The certificate of any independent firm of public
accountants of nationally recognized standing selected by the Board of Directors
shall be presumptive evidence of the correctness of any computation made under
this Section 5.
SECTION 6. SERIES F PREFERRED STOCK TO BE RETIRED. All shares of Series
F Preferred Stock which shall have been issued and reacquired in any manner by
the Corporation shall be restored to the status of authorized, but unissued
shares of Preferred Stock, without designation as to series. The Corporation may
also retire any unissued shares of Series F Preferred Stock, and such shares
shall then be restored to the status of authorized but unissued shares of
Preferred Stock, without designation as to series.
SECTION 7. RANKING. No class or series of capital stock of the
Corporation shall rank senior to the Series F Preferred Stock, and the Series G
Preferred Stock shall be Parity Stock.
SECTION 8. VOTING.
(a) The holders of Series F Preferred Stock shall be entitled
to a number of votes equal to the number of shares of Common Stock into which
the shares of Series F Preferred Stock are convertible on the record date of the
determination of stockholders entitled to receive notice of and to vote on any
matter submitted to a vote of stockholders of the Corporation. The holders of
Series F Preferred Stock will vote together with holders of the Common Stock,
the Series G Preferred Stock and any other class of equity securities which may
vote with the holders of Common Stock as a single class on all matters upon
which stockholders are entitled to vote, including the election of directors,
except as specifically provided herein or as otherwise required by law.
(b) The affirmative vote or consent of the holders of 80% of
the votes entitled to be cast by holders of the Series F Preferred Stock then
outstanding, voting as a single class, in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, will be
required in order to amend the Certificate of Incorporation or Bylaws to affect
materially and adversely the rights, preferences or voting power of the holders
of the Series F Preferred Stock. The affirmative vote or consent of the holders
of 80% of the votes entitled to be cast by holders of the Series F Preferred
Stock and Series G Preferred Stock then outstanding, voting as a single class,
in person or by proxy, either in writing without a meeting or by vote at any
meeting called for the purpose, will be required in order to authorize, create
or increase the authorized amount of any class
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of Senior Stock or Parity Stock (other than the Series G Preferred Stock or
securities to evidence bank debt or asset securitizations) or the merger,
consolidation or sale of assets (other than in the ordinary course) of the
Corporation, including the capital stock of its subsidiaries. However, the
Corporation may create classes or series of Junior Stock or increase the
authorized number of shares of Junior Stock, without the consent of any holder
of Series F Preferred Stock.
(c) The holders of shares of Series F Preferred Stock and
Series G Preferred Stock shall be entitled to designate or elect two (2)
directors to serve on the Board of Directors, by the vote of a plurality of the
votes cast by the holders of the Series F Preferred Stock and Series G Preferred
Stock, voting together as a single class, at an annual meeting of stockholders
or special meeting held in place thereof, or at a special meeting of the holders
of the Series F Preferred Stock and Series G Preferred Stock called from time to
time for the election of directors. If the Board of Directors fails to appoint
the two designees of the holders of the Series F Preferred Stock and Series G
Preferred Stock, as herein above provided, the Secretary of the Corporation
shall, upon the written request of any holder of Series F Preferred Stock and
Series G Preferred Stock (addressed to the Secretary at the principal office of
the Corporation), call a special meeting of the holders of the Series F
Preferred Stock and Series G Preferred Stock for the election of the two (2)
directors to be elected by them as herein provided, such call to be made by
notice similar to that provided in the Bylaws of the Corporation for a special
meeting of the stockholders or as required by law. If any such special meeting
required to be called, as above provided, shall not be called by the Secretary
within twenty (20) days after receipt of any such request, then any holder of
Series F Preferred Stock and Series G Preferred Stock may call such meeting,
upon the notice above provided, and for that purpose shall have access to the
stock books of the Corporation. The directors elected at any such special
meeting shall hold office until the next annual meeting of the stockholders or
special meeting held in lieu thereof if such office shall not have previously
terminated as above provided. If any vacancy shall occur among the directors
elected by the holders of the Series F Preferred Stock and Series G Preferred
Stock, a successor shall be elected by the Board of Directors, upon the
nomination of the then remaining directors elected by the holders of the Series
F Preferred Stock and Series G Preferred Stock or the successors of such
remaining directors, to serve until the next annual meeting of the stockholders
or special meeting held in place thereof if such office shall not have
previously terminated as above provided.
So long as any shares of Series F Preferred Stock and Series G
Preferred Stock are outstanding, the number of directors of the Corporation
shall at all times be such that the exercise by the holders of shares of Series
F Preferred Stock and Series G Preferred Stock of the right to designate or
elect directors under the circumstance provided in this Section 8(c) will not
contravene any provisions of the Corporation's Certificate of Incorporation or
Bylaws.
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SECTION 9. REDEMPTION. The Series F Preferred Stock shall not be
redeemable.
SECTION 10. RECORD HOLDERS. The Corporation may deem and treat the
record holder of any share of Series F Preferred Stock as the true and lawful
owner thereof for all purposes, and neither the Corporation nor the Transfer
Agent shall be affected by any notice to the contrary.
[The remainder of this page has been intentionally left blank;
signature page to follow.]
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed as of _____________, 2001.
INTEGRATED SECURITY SYSTEMS, INC.
By:
---------------------------------------
C. A. Rundell, Jr.
Chairman and Chief Executive Officer
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EXHIBIT E
INTEGRATED SECURITY SYSTEMS, INC.
----------
[FORM OF]
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES G CUMULATIVE CONVERTIBLE PREFERRED STOCK
----------
DATED AS OF ____________, 2001
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INTEGRATED SECURITY SYSTEMS, INC.
----------
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES G CUMULATIVE CONVERTIBLE PREFERRED STOCK
----------
INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation, having its
principal office in Dallas, Texas (the "Corporation"), hereby certifies to the
Secretary of State of the State of Delaware that:
Pursuant to authority expressly vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), the Board of Directors has duly adopted
resolutions authorizing the creation and issuance of up to Eighty Thousand
(80,000) shares of Series G Cumulative Convertible Preferred Stock, $.01 par
value, with a liquidation preference of Twenty-Five Dollars ($25.00) per share,
and determining the preferences, rights, powers, limitations, qualifications and
restrictions, as follows:
SECTION 1. NUMBER OF SHARES AND DESIGNATION. This series of Preferred
Stock, $.01 par value, shall be designated as Series G Cumulative Convertible
Preferred Stock (the "Series G Preferred Stock"), and the number of shares which
shall constitute such series shall be ________ shares.
SECTION 2. DEFINITIONS. For purposes of the Series G Preferred Stock,
the following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series G
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New
York, New York are not required to be open.
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"Common Stock" shall mean the common stock, $.01 par value, of the
Corporation or such shares of the Corporation's capital stock into
which such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the
Corporation or of any similar security of any other issuer for any day
shall mean the last reported sale price, regular way on such day, or,
if no sale takes place on such day, the reported closing bid price,
regular way on such day, in either case as reported on the NASDAQ
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") or, if not quoted on NASDAQ, on
the principal national securities exchange on which such security is
listed or admitted for trading or, if such security is not listed or
admitted for trading on a national securities exchange or quoted on the
NASDAQ National Market, the closing bid price on such day as reported
on the NASDAQ SmallCap Market, or, if the bid price for such security
on such day shall not have been reported on the NASDAQ SmallCap Market,
the bid price on such day as reported on the OTC Electronic Bulletin
Board or, if the bid price for such security on such day shall not have
been reported on the OTC Electronic Bulletin Board, the price on such
day, furnished by any NYSE member firm regularly making a market in
such security selected for such purpose by the Chief Executive Officer
or the Board of Directors or if any class or series of securities are
not publicly traded, the fair value of the shares of such class as
determined reasonably and in good faith by the Board of Directors of
the Corporation or other issuer.
"Dividend Payment Date" shall mean, with respect to each Dividend
Period, the last day of March, June, September and December, in each
year, commencing on March 31, 2001; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period, which shall
commence on the Issue Date and end on and include the day immediately
preceding the Dividend Payment Date which immediately follows the Issue
Date.)
"Fair Market Value" on any date shall mean the average of the daily
Current Market Price of a share of Common Stock during five (5)
consecutive Trading Days ending on the day before such date.
"Funds Available for Distribution" shall mean funds from operations
(net income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization) minus non-revenue
generated capital expenditures and debt principal amortization, as
determined
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by the Board of Directors on a basis consistent with the policies and
practices adopted by the Corporation for reporting publicly its results
of operations and financial condition.
"Issue Date" shall mean the date upon which shares of Series G
Preferred Stock are issued.
"Junior Stock" shall have the mean any class or series of capital stock
of the Corporation which is junior to the Series G Preferred Stock as
to the payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up of if the holders of Series G
Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up in preference
or priority to the holders of shares of such class or series.
"NYSE" shall mean the New York Stock Exchange.
"Parity Stock" shall mean any class or series of capital stock of the
Corporation on a parity with the Series G Preferred Stock or any other
capital stock designated as Parity Stock as to the payment of dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates
or redemption or liquidation prices per share thereof be different from
those of the Series G Preferred Stock, if the holders of such class of
stock or series and the Series G Preferred Stock shall be entitled to
the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation preferences,
without preference or priority of one over the other, including,
without limitation, the Series F Preferred Stock.
"Permitted Common Stock Cash Distributions" means cash dividends and
cash distributions paid on Common Stock after December 31, 2000 not in
excess of the sum of the Corporation's cumulative undistributed net
earnings at December 31, 2000, plus the cumulative amount of Funds
Available for Distribution after December 31, 2000, minus the
cumulative amount of dividends accumulated, accrued or paid on the
Series G Preferred Stock or any other class of Preferred Stock after
January 1, 2001.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Senior Stock" shall mean any class or series of capital stock of the
Corporation which is prior or senior to the Series G Preferred Stock,
as to the payment of dividends and as to distribution of assets upon
liquidation, dissolution or winding up, if the holders of such class or
series shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up in preference
or priority to the holders of Series G Preferred Stock.
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"Series F Preferred Stock" shall have the meaning set forth in Section
5(d)(v) hereof.
"Series G Preferred Stock" shall have the meaning set forth in Section
1 hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of capital stock of the Corporation; provided, however,
that if any funds for any class or series of Junior Stock or any class
or series of Parity Stock are placed in a separate account of the
Corporation or delivered to a disbursing, paying or other similar
agent, then "set apart for payment" with respect to the Series G
Preferred Stock shall mean placing such funds in a separate account or
delivering such funds to a disbursing, paying or other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the NYSE or, if such securities are not listed
or admitted for trading on the NYSE, on the principal national
securities exchange on which such securities are listed or admitted or,
if such securities are not listed or admitted for trading on any
national securities exchange, on the NASDAQ National Market or, if such
securities are not quoted on the NASDAQ National Market, in the
securities market in which such securities are traded.
SECTION 3. DIVIDENDS.
(a) The holders of Series G Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Series G Preferred Stock equal to $1.25 per annum. Such dividends
shall be cumulative from the Issue Date, whether or not in any Dividend Period
or Periods such dividends shall be declared or there shall be funds of the
Corporation legally available for the payment of such dividends, and shall be
payable quarterly on the Dividend Payment Dates, commencing on the ninth
Dividend Payment Date after the Issue Date. Each such dividend shall be payable
to the holders of record of the Series G Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on a record date which
shall be not more than sixty (60) days prior to the applicable Dividend Payment
Date. Accumulated, accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to holders of record on such date, which date shall not precede by
more than forty-five (45) days the payment date thereof, as may be fixed by the
Board of Directors. The amount of accumulated, accrued and unpaid dividends on
any share of Series G Preferred Stock, or fraction thereof, at any date shall be
the amount of any dividends thereon calculated at the applicable rate to and
including such date, whether or not earned or declared, which have not been paid
in cash.
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(b) The amount of dividends payable per share of Series G
Preferred Stock for each Dividend Period shall be computed by dividing the
annual dividend by four (4). The amount of dividends payable per share of Series
G Preferred Stock for the initial Dividend Period, or any other period shorter
or longer than a full Dividend Period, shall be computed ratably on the basis of
twelve (12) 30-day months and a 360-day year. Holders of Series G Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or stock, in excess of cumulative dividends, as herein provided on the Series G
Preferred Stock. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series G Preferred
Stock that may be in arrears.
(c) So long as any of the shares of Series G Preferred Stock
are outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set apart for payment by the Corporation,
or other distribution of cash or other property declared or made directly or
indirectly by the Corporation or any affiliate or any person acting on behalf of
the Corporation or any of its affiliates with respect to any class or series of
Parity Stock for any period, unless dividends equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof have
been or contemporaneously are set apart for such payment on the Series G
Preferred Stock for all Dividend Periods terminating on or prior to the Dividend
Payment Date with respect to such class or series of Parity Stock. When
dividends are not paid in full or a sum sufficient for such payment is not set
apart, as aforesaid, all dividends declared upon the Series G Preferred Stock
and all dividends declared upon any other class or series of Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated, accrued and unpaid on the Series G Preferred Stock and accumulated,
accrued and unpaid on such Parity Stock.
(d) So long as any of the shares of Series G Preferred Stock
are outstanding, no dividends (other than dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Junior Stock) shall be declared or paid or set apart for payment by the
Corporation, or other distribution of cash or other property declared or made
directly or indirectly by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates with respect to any shares
of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition of
Common Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be paid to
or made available for a sinking- fund for the redemption of any shares of any
such stock) directly or indirectly by the Corporation or any affiliate or any
person acting on behalf of the Corporation or any of its affiliates (except by
conversion into or exchange for Junior Stock), nor shall any other cash or other
property otherwise be paid or distributed to or for the benefit of any holder of
shares of Junior Stock in respect thereof, directly or indirectly, by the
Corporation or any affiliate or any person acting on behalf of the Corporation
or any of its affiliates, unless in each case (i) the full cumulative dividends
(including all accumulated, accrued and unpaid dividends) on all outstanding
shares of Series G Preferred Stock and any other Parity Stock of the Corporation
shall have been paid or such dividends have been
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declared and set apart for payment for all past Dividend Periods with respect to
the Series G Preferred Stock and all past Dividend Periods with respect to such
Parity Stock, and (ii) sufficient funds shall have been paid or set apart for
the payment of the full dividend for the current Dividend Period with respect to
the Series G Preferred Stock and the current Dividend Period with respect to
such Parity Stock.
SECTION 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Stock, the holders of shares
of Series G Preferred Stock shall be entitled to receive Twenty-Five Dollars
($25.00) per share of Series G Preferred Stock, plus an amount equal to all
dividends (whether or not earned or declared) accumulated, accrued and unpaid
thereon to the date of final distribution to such holders. Until the holders of
the Series G Preferred Stock have been paid the liquidation preference in full,
no payment will be made to any holder of Junior Stock upon the liquidation,
dissolution or winding up of the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of Series G Preferred Stock
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares of any class or series of Parity Stock,
then such assets, or the proceeds thereof, shall be distributed among the
holders of Series G Preferred Stock and any such other Parity Stock ratably in
the same proportion as the respective amounts that would be payable on such
Series G Preferred Stock and any such other Parity Stock if all amounts payable
thereon were paid in full.
(b) Subject to the rights of the holders of any shares of
Parity Stock, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of Series
G Preferred Stock and any Parity Stock, as provided in this Section 4, any other
series or class or classes of Junior Stock shall, subject to the respective
terms thereof, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series G Preferred Stock and any Parity
Stock shall not be entitled to share therein.
(c) For purposes of this Section 4, a merger, consolidation,
sale of voting control or sale of all or substantially all of the assets of the
Corporation in which the holders of Common Stock of the Corporation immediately
before such event do not own a majority of the outstanding shares or voting
power of the surviving corporation shall be deemed to be a liquidation and
dissolution of the Corporation.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series G
Preferred Stock shall have the right, at their option, to convert such shares
into shares of Common Stock of the Corporation at any time on and subject to the
following terms and conditions:
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(a) The shares of Series G Preferred Stock shall be
convertible at the office of the transfer agent for the Common Stock or the
principal executive office of the Corporation, into fully paid and
non-assessable shares (calculated as to each conversion to the nearest 1/100th
of a share) of Common Stock of the Corporation, at the conversion price,
determined as hereinafter provided, in effect at the time of conversion, each
share of Series G Preferred Stock being taken at $25.00 for the purpose of such
conversion. The price at which shares of Common Stock shall be delivered upon
conversion (the "Conversion Price") shall initially be $.20 per share of Common
Stock, and the number of shares initially issuable upon conversion of each share
of Series G Preferred Stock is 125. The conversion price shall be adjusted in
certain instances as provided below.
(b) In order to convert shares of Series G Preferred Stock
into Common Stock, the holder thereof shall surrender at the office or offices
herein above mentioned the certificate or certificates therefor, duly endorsed
or assigned to the Corporation or in blank, and give written notice to the
Corporation at said office or offices that such holder elects to convert such
shares. Shares of Series G Preferred Stock surrendered for conversion during the
period from the close of business on any record date for the payment of a
dividend on the shares of Series G Preferred Stock to the opening of business on
the date for payment of such dividend shall be accompanied by a payment of an
amount equal to the dividend declared and payable on such dividend payment date
on the shares of Series G Preferred Stock being surrendered for conversion.
Except as provided in the preceding sentence, no payment or adjustment shall be
made upon any conversion on account of any unpaid or accrued dividends on the
shares of Series G Preferred Stock surrendered for conversion or on account of
any dividends on the Common Stock issued upon conversion.
Shares of Series G Preferred Stock shall be deemed to have
been converted immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in accordance with
the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable upon such conversion, together with payment
in lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same. In case shares of Series G Preferred Stock
are called for redemption, the right to convert such shares shall cease and
terminate at the close of business on the date fixed for redemption, unless
default shall be made in payment of the redemption price.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series G Preferred Stock, but, instead of any fraction
of a share which would otherwise be issuable, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the Closing Price (as hereinafter defined) on the date on which the
certificate or certificates for such shares were duly surrendered for
conversion, or, if such date is not a Trading Day (as hereinafter defined), on
the next Trading Day.
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(d) The Conversion Price shall be adjusted from time to time
as follows:
(i) Adjustment for Issuance of Shares at Less Than
the Conversion Price. If at any time after the date of the first
issuance of Series G Preferred Stock, the Corporation shall issue any
shares of Common Stock, Convertible Securities (as hereinafter
defined), Rights (as hereinafter defined) or Related Rights (as
hereinafter defined; any such shares, Convertible Securities, Rights or
Related Rights, "Securities") without consideration or for a
consideration per share or unit less than the Conversion Price in
effect immediately prior to the issuance of such Securities, then the
Conversion Price in effect immediately prior to each such issuance
shall forthwith be reduced to the quotient obtained by dividing:
(A) an amount equal to the sum of (1) the
total number of shares of Common Stock outstanding immediately
prior to such issuance (including for this purpose the number
of shares of Common Stock into which the shares of Series G
Preferred Stock outstanding immediately prior to such issuance
are convertible on the date of such issuance in accordance
with Subsection 5(a) (without regard to Subsection 5(c)),
without giving effect to such issuance) multiplied by the
Conversion Price in effect immediately prior to such issuance,
and (2) the amount of consideration, if any, received by the
Corporation upon such issuance, by
(B) the total number of shares of Common
Stock (1) outstanding immediately after such issuance
(including the number of shares of Common Stock into which the
shares of Series G Preferred Stock outstanding immediately
prior to such issuance are convertible on the date of such
issuance in accordance with Subsection 5(a) (without regard to
Subsection 5(c)), without giving effect to such issuance) or
(2) into or for which any such newly issued Convertible
Securities are then convertible or exchangeable or (3)
issuable upon the exercise of any such Rights or Related
Rights).
(C) For the purpose of this Subsection 5(d),
the following definitions and procedures shall be applicable:
(1) In the case of the issuance of
options, warrants or other rights to purchase or
otherwise acquire Common Stock, whether or not at the
time exercisable ("Rights"), the total number of
shares of Common Stock issuable upon exercise of such
Rights shall be deemed to have been issued at the
time such Rights are issued, for a consideration
equal to the sum of the consideration, if any,
received by the Corporation upon the issuance of such
rights and the minimum purchase or exercise price
payable upon the exercise of such Rights for the
Common Stock to be issued upon the exercise thereof.
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(2) In the case of the issuance of
any class or series of stock or any bonds,
debentures, notes or other securities or obligations
convertible into or exchangeable for Common Stock,
whether or not then convertible or exchangeable
("Convertible Securities"), or options, warrants or
other rights to purchase or otherwise acquire
Convertible Securities ("Related Rights"), the total
number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities
or exercise of such Related Rights shall be deemed to
have been issued at the time such Convertible
Securities or Related Rights are issued, for a
consideration equal to the sum of (I) the
consideration, if any, received by the Corporation
upon issuance of such Convertible Securities or
Related Rights (excluding any cash received on
account of accrued interest or dividends) and (II)
(A) in the case of Convertible Securities, the
minimum additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such Convertible Securities or (B) in the
case of Related Rights, the sum of (x) the minimum
purchase or exercise price payable upon the exercise
of such Related Rights for Convertible Securities and
(y) the minimum additional consideration, if any, to
be received by the Corporation upon the conversion or
exchange of the Convertible Securities issued upon
the exercise of such Related Rights.
(3) On any change in the number of
shares of Common Stock issuable upon the exercise of
Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change
in the minimum purchase or exercise price of Rights,
Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the
anti-dilution provisions of such Rights, Related
Rights or Convertible Securities, the Conversion
Price to the extent in any way affected by such
Rights, Related Rights or Convertible Securities
shall forthwith be readjusted to be thereafter the
Conversion Price that would have been obtained had
the adjustment which was made upon the issuance of
such Rights, Related Rights or Convertible Securities
been made after giving effect to such change. No
further adjustment shall be made in respect of such
change upon the actual issuance of Common Stock or
any payment of consideration upon the exercise of any
such Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
(4) On the expiration or
cancellation of any such Rights, Related Rights or
Convertible Securities, if the Conversion Price shall
have been adjusted upon the issuance thereof, the
Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had
the adjustment made upon the issuance of such Rights,
Related Rights or
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Convertible Securities been made upon the basis of
the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
(ii) Sale of Shares. In case of the issuance of
Securities for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the
gross amount of the cash paid to Corporation for such shares, before
deducting any underwriting compensation or discount in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any Securities for a
consideration part or all of which shall be other than cash, the amount
of the consideration therefor, other than cash, shall be deemed to be
the then fair market value of the property received.
(iii) Reclassification of Shares. In case of the
reclassification of securities into shares of Common Stock, the shares
of Common Stock issued in such reclassification shall be deemed to have
been issued for a consideration other than cash. Securities issued by
way of dividend or other distribution on any class of stock of
Corporation shall be deemed to have been issued without consideration.
(iv) Stock Dividends, Stock Splits, Subdivisions or
Combinations. In the event of a stock dividend, stock split or
subdivision of shares of Common Stock into a greater number of shares,
the Conversion Price shall be proportionately decreased, and in the
event of a combination of shares of Common Stock into a smaller number
of shares, the Conversion Price shall be proportionately increased,
such increase or decrease, as the case may be, becoming effective at
the record date.
(v) Exceptions. The adjustments provided in
Subsection 5(d)(i) shall not apply to any (A) Common Stock issued upon
the conversion of any of the Series G Preferred Stock or the Series F
Cumulative Convertible Preferred Stock, $.01 par value (the "Series F
Preferred Stock"); (B) Common Stock issued upon exercise of any
outstanding warrants; (C) Common Stock issued upon exercise of
outstanding employee stock options; and (D) up to 1,500,000 shares of
Common Stock issuable upon exercise of employee stock options to be
granted subsequent to the date hereof.
(vi) Adjustment for Mergers and Consolidations.
(A) In the event of distribution to all
Common Stock holders of any stock, indebtedness of the
Corporation or assets (excluding cash dividends or
distributions from retained earnings) or other rights to
purchase securities or assets, then, after such event, the
shares of Series G Preferred Stock will be convertible into
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the kind and amount of securities, cash and other property
which the holder of the shares of Series G Preferred Stock
would have been entitled to receive if the holder owned the
Common Stock issuable upon conversion of the shares of Series
G Preferred Stock immediately prior to the occurrence of such
event.
(B) In case of any capital reorganization,
reclassification of the stock of the Corporation (other than a
change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), the shares of
Series G Preferred Stock shall be convertible into the kind
and number of shares of stock or other securities or property
of the Corporation to which the holder of the shares of Series
G Preferred Stock would have been entitled to receive if the
holder owned the Common Stock issuable upon conversion of the
shares of Series G Preferred Stock immediately prior to the
occurrence of such event. The provisions of the immediately
foregoing sentence shall similarly apply to successive
reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share
exchanges.
(C) The term "Fair Market Value," as used
herein, is the value ascribed to consideration other than cash
as determined by the Board of Directors of the Corporation in
good faith, which determination shall be final, conclusive and
binding. If the Board of Directors shall be unable to agree as
to such fair market value, then the issue of fair market value
shall be submitted to arbitration under and pursuant to the
rules and regulations of the American Arbitration Association,
and the decision of the arbitrators shall be final, conclusive
and binding, and a final judgment may be entered thereon;
provided, however, that such arbitration shall be limited to
determination of the fair market value of assets tendered in
consideration for the issue of Common Stock.
(e) Whenever the conversion price is adjusted as herein
provided:
(i) The Corporation shall compute the adjusted
conversion price in accordance with this Section 5 and shall cause to
be prepared a certificate signed by the Corporation's treasurer setting
forth the adjusted conversion price and showing in reasonable detail
the fact upon which such adjustment is based; and
(ii) A notice stating that the conversion price has
been adjusted and setting forth the adjusted conversion price shall, as
soon as practicable, be mailed to the holders of record of outstanding
shares of Series G Preferred Stock.
(f) In case:
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(i) The Corporation shall declare a dividend or other
distribution on its Common Stock payable otherwise than in cash out of
retained earnings;
(ii) The Corporation shall authorize the issuance to
the holders of its Common Stock of rights or warrants entitling them to
subscribe for or purchase any shares of capital stock of any class or
any other subscription rights or warrants; or
(iii) Of any reclassification of the capital stock of
the Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation or merger
to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or of the sale, transfer
or other disposition of all or substantially all of the assets of the
Corporation; or
(iv) Of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
then the Corporation shall cause to be mailed to the holders
of record of the outstanding shares of Series G Preferred Stock, at least 20
days (or 10 days in any case specified in clause (i) or (ii) above) prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date as of which the holders of record of Common Stock to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
disposition, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
Common Stock shall be entitled to exchange their shares for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, disposition, liquidation, dissolution or winding up, or the vote
on any action authorizing such.
(g) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series G
Preferred Stock, the full number of shares of Common Stock then deliverable upon
the conversion of all shares of Series G Preferred Stock then outstanding.
(h) The Corporation will pay any and all taxes that may be
payable in respect of the issuance of delivery of shares of Common Stock on
conversion of shares of Series G Preferred Stock pursuant thereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of Series G Preferred
Stock so converted were registered, and no such issuance or delivery shall be
made unless and until the person requesting such issuance has paid to the
Corporation the amount of any such tax or has established to the satisfaction of
the Corporation that such tax has been paid.
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(i) The certificate of any independent firm of public
accountants of nationally recognized standing selected by the Board of Directors
shall be presumptive evidence of the correctness of any computation made under
this Section 5.
SECTION 6. SERIES G PREFERRED STOCK TO BE RETIRED. All shares of Series
G Preferred Stock which shall have been issued and reacquired in any manner by
the Corporation shall be restored to the status of authorized, but unissued
shares of Preferred Stock, without designation as to series. The Corporation may
also retire any unissued shares of Series G Preferred Stock, and such shares
shall then be restored to the status of authorized but unissued shares of
Preferred Stock, without designation as to series.
SECTION 7. RANKING. No class or series of capital stock of the
Corporation shall rank senior to the Series G Preferred Stock, and the Series F
Preferred Stock shall be Parity Stock.
SECTION 8. VOTING.
(a) The holders of Series G Preferred Stock shall be entitled
to a number of votes equal to the number of shares of Common Stock into which
the shares of Series G Preferred Stock are convertible on the record date of the
determination of stockholders entitled to receive notice of and to vote on any
matter submitted to a vote of stockholders of the Corporation. The holders of
Series G Preferred Stock will vote together with holders of the Common Stock,
the Series F Preferred Stock and any other class of equity securities which may
vote with the holders of Common Stock as a single class on all matters upon
which stockholders are entitled to vote, including the election of directors,
except as specifically provided herein or as otherwise required by law.
(b) The affirmative vote or consent of the holders of 80% of
the votes entitled to be cast by holders of the Series G Preferred Stock then
outstanding, voting as a single class, in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, will be
required in order to amend the Certificate of Incorporation or Bylaws to affect
materially and adversely the rights, preferences or voting power of the holders
of the Series G Preferred Stock. The affirmative vote or consent of the holders
of 80% of the votes entitled to be cast by holders of the Series G Preferred
Stock and Series F Preferred Stock then outstanding, voting as a single class,
in person or by proxy, either in writing without a meeting or by vote at any
meeting called for the purpose, will be required in order to authorize, create
or increase the authorized amount of any class of Senior Stock or Parity Stock
(other than the Series F Preferred Stock or securities to evidence bank debt or
asset securitizations) or the merger, consolidation or sale of assets (other
than in the ordinary course) of the Corporation, including the capital stock of
its subsidiaries. However, the Corporation may create classes or series of
Junior Stock or increase the authorized number of shares of Junior Stock,
without the consent of any holder of Series G Preferred Stock.
(c) The holders of shares of Series G Preferred Stock and
Series F Preferred Stock shall be entitled to designate or elect two (2)
directors to serve on the Board of Directors, by the vote
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96
of a plurality of the votes cast by the holders of the Series G Preferred Stock
and Series F Preferred Stock, voting together as a single class, at an annual
meeting of stockholders or special meeting held in place thereof, or at a
special meeting of the holders of the Series G Preferred Stock and Series F
Preferred Stock called from time to time for the election of directors. If the
Board of Directors fails to appoint the two designees of the holders of the
Series G Preferred Stock and Series F Preferred Stock, as herein above provided,
the Secretary of the Corporation shall, upon the written request of any holder
of Series G Preferred Stock and Series F Preferred Stock (addressed to the
Secretary at the principal office of the Corporation), call a special meeting of
the holders of the Series G Preferred Stock and Series F Preferred Stock for the
election of the two (2) directors to be elected by them as herein provided, such
call to be made by notice similar to that provided in the Bylaws of the
Corporation for a special meeting of the stockholders or as required by law. If
any such special meeting required to be called, as above provided, shall not be
called by the Secretary within twenty (20) days after receipt of any such
request, then any holder of Series G Preferred Stock and Series F Preferred
Stock may call such meeting, upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation. The directors
elected at any such special meeting shall hold office until the next annual
meeting of the stockholders or special meeting held in lieu thereof if such
office shall not have previously terminated as above provided. If any vacancy
shall occur among the directors elected by the holders of the Series G Preferred
Stock and Series F Preferred Stock, a successor shall be elected by the Board of
Directors, upon the nomination of the then remaining directors elected by the
holders of the Series G Preferred Stock and Series F Preferred Stock or the
successors of such remaining directors, to serve until the next annual meeting
of the stockholders or special meeting held in place thereof if such office
shall not have previously terminated as above provided.
So long as any shares of Series G Preferred Stock and Series F
Preferred Stock are outstanding, the number of directors of the Corporation
shall at all times be such that the exercise by the holders of shares of Series
G Preferred Stock and Series F Preferred Stock of the right to designate or
elect directors under the circumstance provided in this Section 8(c) will not
contravene any provisions of the Corporation's Certificate of Incorporation or
Bylaws.
SECTION 9. REDEMPTION.
(a) The Corporation shall redeem, from any source of funds
legally available therefor, shares of the Series G Preferred Stock upon the
earlier of (i) the sale of B & B Electromatic, Inc., to the extent of the net
proceeds to the Corporation, and/or (ii) in quarterly installments (each a
"Series G Redemption Date") of $250,000 each beginning on the second anniversary
of the date the Series G Preferred Stock was originally issued (the "Original
Issue Date"), $500,000 each beginning on the third anniversary of the Original
Issue Date, and, beginning on the fourth anniversary of the Original Issue Date,
in quarterly installments, the remaining Series G Preferred Stock outstanding.
The Corporation shall effect such redemptions on the applicable Series G
Redemption Dates by paying in cash in exchange for the shares of Series G
Preferred Stock to be redeemed a sum equal to $25.00 per share of Series G
Preferred Stock (as adjusted for any stock
14
97
dividends, combinations or splits with respect to such shares) plus, on each
Series G Redemption Date (as defined below), any accrued and unpaid dividends
from the Original Issue Date (the "Series G Redemption Price").
(b) As used herein and in Section 9(c) and Section 9(d) below,
the term "Redemption Date" shall refer to each "Series G Redemption Date" and
the term "Redemption Price" shall refer to each "Series G Redemption Price." At
least 15 but no more than 30 days prior to each Redemption Date, written notice
shall be mailed, first class postage prepaid, to each holder of record (at the
close of business on the business day next preceding the day on which notice is
given) of the Series G Preferred Stock to be redeemed, at the address last shown
on the records of the Corporation for such holder, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the Redemption Price, the place at which
payment may be obtained and calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, the certificate or
certificates representing the shares to be redeemed (the "Redemption Notice").
Except as provided in Section 9(b), on or after the Redemption Date, each holder
of Series G Preferred Stock to be redeemed shall surrender to the Corporation
the certificate or certificates representing such shares, in the manner and at
the place designated in the Redemption Notice, and thereupon the Redemption
Price of such shares shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof and each
surrendered certificate shall be cancelled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall
have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series G Preferred Stock designated for redemption in the
Redemption Notice as holders of Series G Preferred Stock (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of shares of Series G Preferred
Stock on any Redemption Date are insufficient to redeem the total number of
shares of Series G Preferred Stock to be redeemed on such date, those funds
which are legally available will be used to redeem the maximum possible number
of such shares ratably among the holders of such shares to be redeemed based
upon their holdings of Series G Preferred Stock. The shares of Series G
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences proved herein. At any time thereafter when additional
funds of the Corporation are legally available for the redemption of shares of
Series G Preferred Stock such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obliged to redeem on any
Redemption Date, but which it has not redeemed.
(d) On or prior to each Redemption Date, the Corporation shall deposit
the Redemption Price of all shares of Series G Preferred Stock designated for
redemption in the Redemption Notice
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98
and not yet redeemed with a bank or trust corporation having aggregate capital
and surplus in excess of $100,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for redemption and not yet redeemed,
with irrevocable instructions and authority to the bank or trust corporation to
pay the Redemption Price for such shares to their respective holders on or after
the Redemption Date upon receipt of notification from the Corporation that such
holder has surrendered his share certificate to the Corporation pursuant to
Section 9(b) above. As of the Redemption Date, the deposit shall constitute full
payment of the shares to their holders, and from and after the Redemption Date
the shares so called for redemption shall be redeemed and shall be deemed to be
no longer outstanding, and the holders thereof shall cease to be stockholders
with respect to such shares and shall have no rights with respect thereto except
the right to receive from the bank or trust corporation payment of the
Redemption Price of the shares, without interest, upon surrender of their
certificates therefor. Such instructions shall also provide that any moneys
deposited by the Corporation pursuant to this Section 9(d) for the redemption of
shares thereafter converted into shares of the Corporation's Common Stock
pursuant to Section 5.2 hereof prior to the Redemption Date shall be returned to
the Corporation forthwith upon such conversion. The balance of any moneys
deposited by the Corporation pursuant to this Section 9(d) remaining unclaimed
at the expiration of two (2) years following the Redemption Date shall
thereafter be returned to the Corporation upon its request expressed in a
resolution of its Board of Directors.
SECTION 10. RECORD HOLDERS. The Corporation may deem and treat the
record holder of any share of Series G Preferred Stock as the true and lawful
owner thereof for all purposes, and neither the Corporation nor the Transfer
Agent shall be affected by any notice to the contrary.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed as of _____________, 2001.
INTEGRATED SECURITY SYSTEMS, INC.
By:
------------------------------------
C. A. Rundell, Jr.
Chairman and Chief Executive Officer
100
APPENDIX A
PROXY CARD FOR HOLDERS OF SERIES D PREFERRED STOCK
Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230, Irving, TX 75063
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned stockholder of Integrated Security Systems, Inc. hereby
appoints C. A. Rundell, Jr. and Holly J. Burlage, as proxies, each with the
power to appoint his substitute, and hereby authorizes them, to represent and
vote, as designated, all shares of Series D $20 Convertible Preferred Stock of
Integrated Security Systems, Inc. held of record by the undersigned on February
13, 2001, at the Annual Meeting of Stockholders to be held on March 26, 2001 or
any adjournment thereof.
FOR all nominees WITHHOLD
listed to right Authority to
(Except as marked to vote for nominees
the contrary) listed
1. Election of
Directors [ ] [ ] Nominees: C. A. Rundell, Jr.
Alan A. Arsht
William D. Breedlove
Robert M. Galecke
John P. Jenkins
Frank R. Marlow
For, except vote withheld from this following nominee:
- ------------------------------------------------------------------
2. To approve the financial restructuring. For Against Abstain
[ ] [ ] [ ]
3. To approve the amendment to the Company's For Against Abstain
Restated Certificate of Incorporation to [ ] [ ] [ ]
increase the number of authorized shares
of Common Stock
4. To approve the amendment to the Company's For Against Abstain
Restated Certificate of Incorporation to [ ] [ ] [ ]
reduce the liquidation preference of the
Series D preferred stock
5. To approve the amendment of the Company's For Against Abstain
1997 Omnibus Long-Term Incentive Plan to [ ] [ ] [ ]
increase the number of shares of Common
Stock which may be issued under the
1997 Omnibus Long-Term Incentive Plan
THE EFFECTIVENESS OF PROPOSAL (2), THE FINANCIAL RESTRUCTURING, IS CONTINGENT ON
THE APPROVAL OF PROPOSALS (2), (3), AND (4). AS A RESULT, IF
101
PROPOSALS (3) AND (4), THE AMENDMENTS TO THE RESTATED CERTIFICATE OF
INCORPORATION ARE NOT APPROVED BY THE STOCKHOLDERS, THEN WE CANNOT COMPLETE THE
FINANCIAL RESTRUCTURING EVEN IF THE STOCKHOLDERS APPROVE PROPOSAL (2).
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS
WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE LISTED NOMINEES
AS DIRECTORS, FOR THE FINANCIAL RESTRUCTURING, FOR THE AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF
COMMON STOCK, FOR THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO
REDUCE THE LIQUIDATION PREFERENCE OF THE SERIES D PREFERRED STOCK, AND FOR THE
AMENDMENT TO THE 1997 OMNIBUS LONG-TERM INCENTIVE PLAN.
PLEASE CHECK HERE IF YOU PLAN TO ATTEND THE ANNUAL MEETING OF STOCKHOLDERS OF
MARCH 2, 2001. [ ]
SIGNATURE DATE
-----------------------------------
SIGNATURE DATE
-----------------------------------
Signature if held jointly
Note: Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
102
APPENDIX B
PROXY CARD FOR HOLDERS OF COMMON STOCK
Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230, Irving, TX 75063
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned stockholder of Integrated Security Systems, Inc. hereby
appoints C. A. Rundell, Jr. and Holly J. Burlage, as proxies, each with the
power to appoint his substitute, and hereby authorizes them, to represent and
vote, as designated, all shares of Common Stock of Integrated Security Systems,
Inc. held of record by the undersigned on February 13, 2001, at the Annual
Meeting of Stockholders to be held on March 26, 2001 or any adjournment
thereof.
FOR all nominees WITHHOLD
listed to right Authority to
(Except as marked to vote for nominees
the contrary) listed
1. Election of
Directors [ ] [ ] Nominees: C. A. Rundell, Jr.
Alan A. Arsht
William D. Breedlove
Robert M. Galecke
John P. Jenkins
Frank R. Marlow
For, except vote withheld from this following nominee:
- ------------------------------------------------------------------
2. To approve the financial restructuring. For Against Abstain
[ ] [ ] [ ]
3. To approve the amendment to the Company's For Against Abstain
Restated Certificate of Incorporation to [ ] [ ] [ ]
increase the number of authorized shares
of Common Stock
4. To approve the amendment to the Company's For Against Abstain
Restated Certificate of Incorporation to [ ] [ ] [ ]
reduce the liquidation preference of the
Series D preferred stock
5. To approve the amendment of the Company's For Against Abstain
1997 Omnibus Long-Term Incentive Plan to [ ] [ ] [ ]
increase the number of shares of Common
Stock which may be issued under the
1997 Omnibus Long-Term Incentive Plan
THE EFFECTIVENESS OF PROPOSAL (2), THE FINANCIAL RESTRUCTURING, IS CONTINGENT ON
THE APPROVAL OF PROPOSALS (2), (3) AND (4). AS A RESULT, IF
103
PROPOSALS (3) AND (4), THE AMENDMENTS TO THE RESTATED CERTIFICATE OF
INCORPORATION ARE NOT APPROVED BY THE STOCKHOLDERS, THEN WE CANNOT COMPLETE THE
FINANCIAL RESTRUCTURING EVEN IF THE STOCKHOLDERS APPROVE PROPOSAL (2).
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS
WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE LISTED NOMINEES
AS DIRECTORS, FOR THE FINANCIAL RESTRUCTURING, FOR THE AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF
COMMON STOCK, FOR THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO
REDUCE THE LIQUIDATION PREFERENCE OF THE SERIES D PREFERRED STOCK, AND FOR THE
AMENDMENT TO THE 1997 OMNIBUS LONG-TERM INCENTIVE PLAN.
PLEASE CHECK HERE IF YOU PLAN TO ATTEND THE ANNUAL MEETING OF STOCKHOLDERS OF
MARCH 2, 2001. [ ]
SIGNATURE DATE
-----------------------------------
SIGNATURE DATE
-----------------------------------
Signature if held jointly
Note: Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.