-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CeVtVH1Zniu9NKVgGukxSxKH7NKUp45JnbfZo/RY0qrATtlYKvgQFBxk0WleUQQZ VGJ/iALHFWJlF/a4Z1elTQ== /in/edgar/work/0000950134-00-010108/0000950134-00-010108.txt : 20001123 0000950134-00-010108.hdr.sgml : 20001123 ACCESSION NUMBER: 0000950134-00-010108 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010119 FILED AS OF DATE: 20001122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: [3669 ] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: PRE 14A SEC ACT: SEC FILE NUMBER: 001-11900 FILM NUMBER: 775774 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 STREET 2: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 PRE 14A 1 d82248ppre14a.txt PRELIMINARY PROXY STATEMENT 1 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. ) 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. - -------------------------------------------------------------------------------- (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: ----------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ----------------------------------------------------------------------- (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): ----------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ----------------------------------------------------------------------- (5) Total fee paid: ----------------------------------------------------------------------- [ ] 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: ----------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ----------------------------------------------------------------------- (3) Filing Party: ----------------------------------------------------------------------- (4) Date Filed: ----------------------------------------------------------------------- 2 INTEGRATED SECURITY SYSTEMS, INC. 8200 SPRINGWOOD DRIVE, SUITE 230 IRVING, TEXAS 75063 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 19, 2001 The 2000 Annual Meeting of Stockholders of Integrated Security Systems, Inc., a Delaware corporation (the "Company"), will be held at the Company's executive offices, 8200 Springwood Drive, Suite 230, Irving, Texas 75063, on Friday, January 19, 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 2001 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 (the "Financial Restructuring Proposal"): (i) the issuance of 80,000 shares of a new series of preferred stock, Series F cumulative convertible preferred stock (the "Series F preferred stock") and 270,000 shares of a new series of preferred stock, Series G cumulative convertible preferred stock (the "Series G preferred stock"); (ii) the exchange of certain secured convertible promissory notes with Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC (together, the "Renaissance Funds") into 40,000 shares of Series F preferred stock; (iii) the exchange of all other existing promissory notes, convertible debt and accrued interest of the Company to the Renaissance Funds into shares of Series G preferred stock; (iv) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock; (v) the approval of additional terms of the letter agreement; and (vi) the ratification, confirmation and approval of any and all actions taken by the Company's Board of Directors and officers for and on behalf of the Company with regard to the Financial Restructuring Proposal, prior to the annual meeting. (3) To consider and act upon a proposal to amend the Company's Restated Certificate of Incorporation, as amended, 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 1997 Omnibus Long-Term Incentive Plan (the "Incentive Plan") to increase the number of shares of Common Stock which may be issued pursuant to the provisions and the amendments of the Incentive Plan from 2,000,000 to 5,500,000; and (5) To transact any other business properly brought before the meeting or any adjournments or postponements thereof. i 3 The Board of Directors has fixed Friday, December 8, 2000, 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 our Common Stock, par value $0.01 per share, on that date and holders of our Series D $20 convertible preferred stock, par value $0.01 per share (the "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 our offices at 8200 Springwood Drive, Suite 230, Irving, Texas 75063, for the ten days prior to the meeting. Please advise our 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 AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION, AS WELL AS THE APPROVAL BY THE HOLDERS OF SERIES D PREFERRED STOCK OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF THE SERIES D PREFERRED STOCK (THE "SERIES D CERTIFICATE"). AS A RESULT, IF THE AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION IS NOT APPROVED BY THE STOCKHOLDERS AND THE AMENDMENT TO THE SERIES D CERTIFICATE IS NOT APPROVED BY THE HOLDERS OF SERIES D PREFERRED STOCK, 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 December ___, 2000 ii 4 INTEGRATED SECURITY SYSTEMS, INC. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 ------------------------------------ PROXY STATEMENT ------------------------------------ PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 19, 2001 This proxy statement and the accompanying proxy are being mailed on or about December ___, 2000 in connection with a solicitation of proxies by the Board of Directors of Integrated Security Systems, Inc. (the "Company") to holders of the Company's Common Stock, par value $0.01 per share and holders of the Company's Series D $20 convertible preferred stock, $0.01 par value (the "Series D preferred stock"). The proxies are to be used at the annual meeting of stockholders to be held on January 19, 2001. At our 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 December 8, 2000 are entitled to notice of and to vote at the annual meeting. On the record date, the Company had outstanding ______ shares of Common Stock and _____ 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 our 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 ____ votes. 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 our 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 stockholders' own names. The street name holder should provide to you, along with these proxy solicitation materials that we have 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 1 5 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 (i) FOR the election as directors of the nominees named in this proxy statement, (ii) FOR the Financial Restructuring Proposal, (ii) FOR the proposal to amend the Restated Certificate of Incorporation, and (iv) FOR the proposal to amend the 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 appendixes. 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: (i) the issuance of 80,000 shares of a new series of preferred stock, Series F cumulative convertible preferred stock (the "Series F preferred stock") and 270,000 shares of a new series of preferred stock, Series G cumulative convertible preferred stock (the "Series G preferred stock"); (ii) the conversion of certain secured convertible promissory notes with Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC (together, the "Renaissance Funds") into 40,000 shares of Series F preferred stock; (iii) the exchange of all other existing promissory notes, convertible debt and accrued interest of the Company to the Renaissance Funds into shares of Series G preferred stock; (iv) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock; (v) the approval of additional terms of the letter agreement; and (vi) the ratification, confirmation and approval of any and all actions taken by the Company's Board of Directors and officers for and on behalf of the Company with regard to the Financial Restructuring Proposal, prior to annual meeting. 2 6 To be adopted, the Financial Restructuring Proposal must receive 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. 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 AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION, AS WELL AS THE APPROVAL BY THE HOLDERS OF SERIES D PREFERRED STOCK OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF THE SERIES D PREFERRED STOCK (THE "SERIES D CERTIFICATE"). AS A RESULT, IF THE AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION IS NOT APPROVED BY THE STOCKHOLDERS AND THE AMENDMENT TO THE SERIES D CERTIFICATE IS NOT APPROVED BY THE HOLDERS OF SERIES D PREFERRED STOCK, THEN WE CANNOT COMPLETE THE FINANCIAL RESTRUCTURING EVEN IF THE STOCKHOLDERS APPROVE THE FINANCIAL RESTRUCTURING PROPOSAL. Proposal 3. Amendment to Restated Certificate of Incorporation. Stockholders are being asked to approve an amendment to our Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 35,000,000 to 70,000,000. 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 Incentive Plan. Stockholders are being asked to approve an amendment to our Incentive Plan to increase the number of shares of Common Stock which may be issued pursuant to the provisions and the amendments of the Incentive Plan from 2,000,000 to 5,500,000. 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. 3 7 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number and percentage of outstanding shares of Common Stock and voting stock (including Series D preferred stock which is entitled to vote on all matters submitted to a vote by the holders of Common Stock) beneficially owned as of September 30, 2000, by (i) each director and named executive officer of the Company, (ii) all officers and directors of the Company as a group, and (iii) 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.
Pro Forma Amount and Pro Forma Amount Approximate Nature of Approximate and Nature of Percentage of Beneficial Percentage Beneficial Voting Stock Ownership of Voting Ownership After Owned After the Before the Stock Owned the Financial Financial Financial Before the Restructuring Restructuring Name of Beneficial Owner Restructuring(1) Meeting(1) (1)(2) (1)(2) ------------------------ ---------------- ----------- ---------------- --------------- Renaissance Capital Growth & Income Fund III, Inc. 5,783,220 36.2% 24,335,021 70.5% (5) Renaissance US Growth & Income Trust PLC (6) 5,686,462 35.8% 23,433,232 69.7% C. A. Rundell, Jr. (3) (4) (7) 1,764,190 15.0% 3,359,368 25.1% Phillip R. Thomas (8) 1,490,942 14.0% 1,490,942 14.0% Gerald K. Beckmannn (9) 1,063,166 9.6% 1,063,166 9.6% ProFutures Bridge Capital Fund LP (10) 585,000 5.5% 585,000 5.5% Alan M. Arsht (3) (4) (11) 316,955 2.9% 316,955 2.9% Frank R. Marlow (3) (4) (12) 188,911 1.8% 188,911 1.8% Holly J. Burlage (3) (4) (13) 168,619 1.6% 168,619 1.6% Jack Caldwell (3) (4) (14) 101,343 0.9% 101,343 0.9% James E. Jack (3) (4) (15) 93,575 0.9% 93,575 0.9% Robert M. Galecke (3) (4) (16) 46,081 0.4% 46,081 0.4% John P. Jenkins (3) (4) -- -- -- -- All current directors and executive officers as a group (8 persons) 2,679,674 23.5% 4,274,852 33.6%
- ---------- (1) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. (2) Assumes that the financial restructuring has occurred as described in proposal two in this proxy statement. (3) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX 75063. (4) Mr. Rundell is a Director, Chairman of the Board and Chief Executive Officer of the Company. Mr. Arsht, Mr. Marlow, Mr. Jack, Mr. Galecke, and Mr. Jenkins are Directors of the Company. Mr. Caldwell is President of a subsidiary of the Company. Ms. Burlage is Executive Vice President, Chief Financial Officer and Secretary of the Company. (5) Based on a 13(g) filing dated November 10, 1999, Renaissance Capital Growth & Income Fund III, Inc. is deemed the beneficial owner of 5,874,295 shares of Common Stock. The Company's records differ from this figure and have been used for this presentation. The address for Renaissance Capital Growth & Income Fund III, Inc. is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (6) Based on a 13(g) filing dated November 12, 1999, Renaissance US Growth & Income Trust PLC is deemed the beneficial owner of 5,595,388 shares of Common Stock. The Company's records differ from this figure and have been used for this presentation. The address for Renaissance US Growth & Income Trust PLC is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (7) Includes 164,126 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 705,971 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 331,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (8) Includes 108,418 shares of Common Stock issuable upon the exercise of warrants within 60 days. The address for Mr. Thomas is 3510 Turtle Creek Boulevard, Ph-A, Dallas, TX 75219-5542. 4 8 (9) Includes 409,473 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; and 128,021 shares of Common Stock issuable upon the exercise of warrants within 60 days. The address for Mr. Beckmann is 1017 Diamond Boulevard, Southlake, TX 76092. (10) Based on a 13(d) filing dated July 17, 1997, ProFutures Bridge Capital Fund, LP is deemed the beneficial owner of 585,000 shares of Common Stock. The address for this Company is 1720 South Bellaire Street, Suite 500, Denver, CO 80222. (11) Includes 4,455 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 125,000 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 187,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (12) Includes 79,879 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 35,167 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 31,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (13) Includes 95,625 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 26,240 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 37,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (14) Includes 101,343 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days. (15) Includes 21,492 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 20,833 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 31,250 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. (16) Includes 25,248 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 8,333 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 12,500 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. 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 2001 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., 69 Director, Chairman of the Board and 1999 Chief Executive Officer Alan M. Arsht, 57 Director 1999 Robert M. Galecke, 59 Director 1996 James E. Jack, 60 Director 1997 John P. Jenkins, 50 Director 2000 Frank R. Marlow, 62 Director 1995
While it is not anticipated that any of the nominees will be unable to serve, if any nominee should decline or become unable to serve as a director for any reason, votes will be cast instead for a substitute nominee designated by the Board of Directors or, if none is so designated, will be cast according to the judgment of the person or persons voting the proxy. 5 9 DIRECTORS AND NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS C. A. RUNDELL, 69, Director and Chairman of the Board, has been a director of the Company since March 1999. Mr. Rundell was appointed Chief Executive Officer of the Company upon Gerald K. Beckmannn's resignation as President, Chief Executive Officer and director on August 31, 2000. Also since 1989, Mr. Rundell has owned and operated Rundell Enterprises, a sole proprietorship engaged in providing acquisitions and financial consulting services to various business enterprises. Mr. Rundell is a director and member of the executive committee of Tyler Technologies, Inc., a provider of information management systems and services for county governments and other enterprises. Mr. Rundell was the President and Chief Executive Officer of Tyler Technologies, Inc. from 1997 to 1998, Chairman of the Board from 1996 to 1997, and temporary Chief Executive Officer from 1996 to 1997. Mr. Rundell is also a director of Renaissance US Growth & Income Trust, PLC, a director of Dain Rauscher Corporation, a holding Company for a full-service regional brokerage and investment banking Company and Tandy Brands Accessories, Inc., a manufacturer of accessories for men, women and boys. Mr. Rundell earned an M.B.A. with Distinction from Harvard University and a B.S. in Chemical Engineering from The University of Texas at Austin. ALAN M. ARSHT, 57, Director has been a director of the Company since 1999. Mr. Arsht has been President of Arsht & Company, Inc., a New York based investment banking firm established in 1986. From 1977 to 1986, Mr. Arsht was Senior Vice President and Managing Director of Thomson McKinnon Securities, Inc. He also served as Vice President, Corporate Finance at Wertheim & Company, Inc. and was Special Assistant to the Deputy Secretary of the US Treasury Department. Mr. Arsht also held positions at the United States Securities and Exchange Commission. Mr. Arsht earned a BA in History from East Texas State University and an MBA in Finance from American 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 BS in Economics from the University of Wisconsin Stevens Point. JAMES E. JACK, 60, Director, has been a director of the Company since May 1997. Mr. Jack is currently Executive Vice President and Chief Financial Officer of Coachmen Industries, Inc. From 1996 to 1999, Mr. Jack was Director, Global Financial Services Product for TowersPerrin. From 1991 to 1996 Mr. Jack was Senior Executive Vice President and Chief Financial Officer of Associates First Capital Corporation, a publicly traded consumer and commercial finance organization. Prior to that, Mr. Jack was Director, Executive Vice President and Chief Financial Officer from 1981 to 1993 of the same Company. Mr. Jack received a graduate degree from the Southern Methodist University School of Business and a B.B.A. from the University of Notre Dame. JOHN P. JENKINS, 50, Director, has been a director of the Company since September 2000. Mr. Jenkins served as Chairman, Chief Executive Officer and President of TAVA Technologies, Inc., a systems integrator providing sophisticated IT solutions to manufacturing and process industries from 16 locations across the U.S. In July 1999, Real Software, a Belgian IT service and software provider, acquired TAVA. Mr. Jenkins continued as CEO and President of the U.S. operations, Real Enterprise Solutions, until June 2000. Prior to TAVA Technologies, Inc., Mr. Jenkins was President of Morgan Technical Ceramics, Inc., and Vice President and General Manager of the Structural Ceramic Division of Coors Ceramic Company, a subsidiary of Adolph Coors Company. Mr. Jenkins holds a BS degree in Mechanical Engineering from the University of Washington and a Juris Doctor degree from the University of Denver. 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 6 10 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. 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. Though Mr. Rundell was independent based on such definition during the fiscal year ended June 30, 2000, Mr. Rundell 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 Appendix 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 Appendix 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. 7 11 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 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. 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. OFFICERS The following table sets forth the officers of the Company.
NAME AGE CURRENT POSITION ---- --- ---------------- C.A. Rundell, Jr. 69 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.
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." HOLLY J. BURLAGE, 37, Executive Vice President, Chief Financial Officer, Secretary and Treasurer, joined the Company in February 1994 as Accounting Manager, became Controller in 1995, became Vice President, Secretary and Treasurer in May 1997, and became Chief Financial Officer in July 1999. Prior to joining the Company, Ms. Burlage was Controller of Signature Home Care Group, Inc., a home health care Company, from 1993 to 1994, and Controller and Chief Accounting Officer of National Heritage, Inc., a publicly-traded long-term care Company, from 1989 to 1993. Ms. Burlage holds a B.B.A. from Baylor University. JACK G. CALDWELL, 63, President, B&B Electromatic, Inc., joined the Company in January 1998. Prior to joining the Company, Mr. Caldwell was a Results Manager for Thomas Group, Inc. from 1992 to 1998. From 1986 to 1992, Mr. Caldwell served as the European Operations Manager for 8 12 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. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows the compensation of the Chief Executive Officer and the two executive officers of the Company whose compensation exceeded $100,000 for the fiscal years ended June 30, 2000, 1999 and 1998.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS -------------------------------------- ------------------------------------------------- Other Annual Restricted Option/ Name and Principal Position Year Salary Bonus Compensation Stock Awards SARS - ---------------------------- ------ ----------- ----------- ----------------- ------------ -------------- Gerald K. Beckmann 2000 $ 277,078 -- -- -- 100,000 Chief Executive Officer 1999 296,393 -- -- -- -- and President (Resigned 1998 289,425 -- -- -- 200,000 as of August 31, 2000) 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
No other executive officer's salary and bonus exceed $100,000 annually and no executive had any form of long-term incentive plan compensation arrangement with the Company during any of the indicated periods. STOCK OPTION GRANTS The following table provides information concerning the grant of stock options during the twelve months ended June 30, 2000 to the named executive officers:
Number of Securities % of Total Options Underlying Options Granted to Employees Exercise Expiration Granted(1) in Fiscal Year Price Date --------------------- -------------------- ---------- ---------- For the twelve months ended 6/30/00 Gerald K. Beckmann 50,000 11.1% $0.563 08/23/09 Gerald K. Beckmann 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. 9 13 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On April 12, 2000, Mr. Rundell, Chairman of the Board of Directors, Chief Executive Officer and a shareholder of the Company, loaned the Company approximately $200,000 at 9% interest. On June 28, 2000, The Rundell Foundation, an affiliate of Mr. Rundell, loaned the Company approximately $100,000 at 9% interest. To date, both of the loans remain outstanding. 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. If the Financial Restructuring Proposal is approved, the indebtedness will be converted into shares of Series G preferred stock. On December 31, 1996, the Renaissance Funds, together, loaned the Company $4,600,000 at a 9% interest rate. The Renaissance Funds currently are shareholders of the Company. In addition, during 1999 and 2000, the Renaissance Funds loaned the Company approximately $1,630,000 at 9% interest rate in exchange for promissory notes. Pursuant to the terms of a letter agreement dated as of November 13, 2000 with the Company, the Company issued secured convertible promissory notes to Renaissance Capital Growth & Income Fund III, Inc. for an aggregate of $500,000 and a secured convertible promissory note to Renaissance US Growth & Income Trust PLC for an aggregate of $500,000 with an 8% interest rate. If the Financial Restructuring Proposal is approved, the New Renaissance Notes will be converted into 40,000 shares of Series F preferred stock and all other convertible debt, interest arrearages and promissory notes with the Renaissance Funds will be converted into shares of Series G preferred stock. Mr. Jenkins joined the Board in September 2000. In addition to his Board duties, Mr. Jenkins currently serves as a consultant to the Company's subsidiary, Intelli-Site, Inc. Mr. Beckmann, the Company's former Chief Executive Officer, President and director and current shareholder of the Company, is a consultant to the Company. 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. 10 14 PROPOSAL TWO PROPOSED FINANCIAL RESTRUCTURING INTRODUCTION On November 13, 2000, we entered into a letter agreement with Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC (together, the "Renaissance Funds"), a copy of which is attached hereto as Appendix B. Pursuant to the terms of the letter agreement, the Company agreed to a private placement of an aggregate of $1,000,000 of the Company's secured convertible promissory notes to the Renaissance Funds (the "New Renaissance Notes"). The funding of the New Promissory Notes was conditioned in part on our Board of Directors' approval of a proposed financial restructuring as set forth in the letter agreement. Our 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 Notes, our Board of Directors is soliciting stockholder approval of the Financial Restructuring Proposal, which consists of the following: (i) the issuance of 80,000 shares of a new series of preferred stock, Series F preferred stock and 270,000 shares of a new series of preferred stock, Series G preferred stock; (ii) the exchange of the New Renaissance Notes with the Renaissance Funds into an aggregate of 40,000 shares of Series F preferred stock; (iii) the exchange of all other existing promissory notes, convertible debt and interest arrearages of the Company to the Renaissance Funds into shares of Series G preferred stock; (iv) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock; (v) the approval of additional terms of the letter agreement; and (vi) the ratification, confirmation and approval of any and all actions taken by the Company's Board of Directors and officers for and on behalf of the Company with regard to the Financial Restructuring Proposal, prior to the annual meeting. 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 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. 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's Certificate of Designation, Preferences and Rights of the Series D preferred stock (the "Series D Certificate") must be amended to modify the liquidation preference amount. If the holders of Series D preferred stock do not approve the amendment to the Series D Certificate, then the Financial Restructuring Proposal cannot be completed. Though 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, 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. 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. 11 15 BACKGROUND AND REASONS FOR FINANCIAL RESTRUCTURING The Company was initially formed with a business plan to be a single source supplier for all hardware and software needs for the security industry. When the Company made its initial public offering in April 1993, the Company consisted of AAC, a distribution company for security hardware, B&B, a manufacturer of security gate operators and road and bridge barriers and IST (currently Intelli-Site) a start-up software company focused on the development of a QNX based security integration software. The business model misjudged the level of competition in the security hardware distribution business and by mid-1995 revenues and margins fell far short of plan and the Company required additional cash funding. A decision was made to dispose of the distribution company due to its cash requirements and to focus on B&B and Intelli-Site. Management developed a plan to stabilize the remaining companies. That plan included the acquisition of a systems integration company. Tri-Coastal Systems, Inc was acquired in September 1995. In April 1996, a convertible preferred private placement was successfully completed. This allowed the Company to fund current operations and to look for one or two acquisitions that would complement the existing companies and enhance the ongoing operations. In September 1996, an unrelated limited partnership was formed to fund the sales, engineering and order fulfillment costs of the Intelli-Site product. In December 1996, the Company acquired a vertically integrated manufacturer of specialty products for the financial and healthcare industries, Golston Company. In the fall of 1998, the Company was in need of additional funding as a result of continuing operating losses. The systems integration subsidiary was creating significant cash deficits due to the progress payment nature of the business and B&B was undergoing a downturn in the road and bridge market. Renaissance Funds, who had originally financed the Golston acquisition, loaned the Company additional funds in exchange for convertible debt instruments. During 1998 the Company began development of the new NT based Intelli-Site product since Intelli-Site was not achieving market acceptance as anticipated. The Company purchased an unrelated company, GFM, in late 1998 that had completed extensive development of a product similar to Intelli-Site on the NT platform. When the new Intelli-Site product was introduced in 1999 the market appeared receptive to the NT based product. Also in early 1999, the Company refinanced existing loans and secured a $3 million lending agreement. During the spring of 1999 the operating cash deficit was increasing as a result of lower revenues and higher than budgeted development costs. Management made a decision to re-focus the Company on two subsidiaries, B&B and Intelli-Site and dispose of Golston and Tri-Coastal. Golston was sold in May of 1999 and Tri-Coastal Systems was disposed of in August 1999. Also during May, the Company acquired the interests of the unrelated limited partnership for 1.2 million shares of the Company's Common Stock plus warrants. When the decision was made in 1999 to shift the focus of the Company, the assumption was made that the development of the software product was complete. However, due to unanticipated delays in the completion of the product the anticipated sales levels for the product were not met and the Company was once again experiencing operating cash shortfalls. The Company was successful in raising $1.8 million in the fall of 1999 through a private placement. B&B in late 1999 experienced a significant downturn in perimeter security sales due to the new requirement in the spring of 2000 for UL325 listing for gate operators and B&B also experienced a much lower sales volume than anticipated for the new railroad barrier product. These factors negatively affected the Company in two major ways. First the stock price was depressed and second the liquidity was further impaired. NEGATIVE EFFECTS Depressed Stock Price Led to Further Dilution In December 1996 the Common Stock of the Company was trading at approximately $3.00 and the Company entered into a convertible debenture financing with Renaissance Funds to finance the purchase of Golston Company. The Company borrowed $4.6 million at a conversion price of $1.05. 12 16 During July 1997 a large brokerage firm acquired over one million shares of the Company's Common Stock through the private purchase of an investment funds portfolio. The brokerage firm held the majority of this block of shares of Common Stock through 1997, but proceeded to sell off partial blocks of the Company's stock sporadically during 1998 which caused large swings in the volume of trading and the stock price. This coupled with poor operating results likely led to the Common Stock of the Company to be trading at under $1.00 by the end of January 1998. The decline in the Company's Common Stock price reduced the per share amount at which the convertible debentures that were issued in 1996 could be converted into common stock from $1.05 per share to $.549 per share causing a significant increase in the number of shares of Common Stock that could be issued upon conversion. Impaired Liquidity The second major effect was to impair the liquidity and the ability to raise additional capital. The Company was forced to raise capital on unfavorable terms due to the presence of the Renaissance Funds convertible debentures and continued poor operating performance. The Company tried to market a private placement in late summer 2000, but was unsuccessful due to market conditions and poor financial performance. ACTION PLAN AND ALTERNATIVES CONSIDERED In order to adjust to the lack of financial and stock performance over the last few years, management has at various times considered the following options: o Refinance the secured 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 with Renaissance Funds is the mortgage on the B&B facility. This has been refinanced twice, most recently in 1999, contributing approximately $100,000 each time. These funds were used for operations and capital improvements at B&B. The Company disposed of two subsidiaries over the course of the last two years. The sale of Golston generated net cash of $1 million that was used to fund on-going operations and the sale of Tri-Coastal generated a nominal cash amount. The bankruptcy option was rejected because the Company believes that a voluntary bankruptcy filing would likely not have maximized 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 in excess of $9 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 liquidation preference over the holders of Common Stock and, accordingly, the Common Stockholders would receive no value for their shares in a bankruptcy scenario. 13 17 Management considered selling the Company through a merger or sale of substantially all of our assets. The Company has contacted several potential candidates in this regard. While the Company did receive some interest in the purchase of B&B, management felt the purchase price offered by more than one candidate was significantly below the value of the Company. The 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 investment in the Company. None have expressed any willingness to invest given our current capital structure and market conditions. STRATEGIC BENEFITS OF THE PROPOSED FINANCIAL RESTRUCTURING After due consideration of the Company's current position and prospects, the Board of Directors has concluded that a financial restructuring of the Company is the best alternative to attempt to preserve stockholder value. Although the proposed financial restructuring will have a negative effect on the current Common stockholders, as discussed in more detail below, the Board of Directors believes that this negative effect is less than would occur under any other viable alternative and as a result the financial restructuring provides the best prospects of preserving and, in time, enhancing Common stockholder value. The financial restructuring can be completed only if the stockholders approve the financial restructuring proposal. However, even if the stockholders approve the financial restructuring proposal, we may not be able to complete the financial restructuring if our stockholders do not approve the issuance of additional shares of Common Stock or if the other conditions to the financial restructuring agreement are not met. 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 interest coverage from 5:1 to 16:1; and o It will decrease the Company's monthly cash requirements by over $40,000. 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 our flexibility to pursue a sale of the Company and preserve a greater share of Common Stockholder value as compared to other alternatives. The Company believes that our 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. THE PROPOSED FINANCIAL RESTRUCTURING A summary of the Financial Restructuring Proposal follows, but this summary is qualified in its entirety by reference to the full text of the letter agreement, which is attached hereto as Appendix B to this proxy statement. The Financial Restructuring Proposal involves the following elements: (i) the issuance of 80,000 shares of a new series of preferred stock, Series F preferred stock and 270,000 shares of a new series of preferred stock, Series G preferred stock; 14 18 (ii) the exchange of the New Renaissance Notes with Renaissance Funds into 40,000 shares of Series F preferred stock; (iii) the exchange of all other existing promissory notes, convertible debt and interest arrearages of the Company to the Renaissance Funds into shares of Series G preferred stock; (iv) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock; (v) the approval of additional terms of the letter agreement; and (vi) the ratification, confirmation and approval of any and all actions taken by the Company's Board of Directors and officers for and on behalf of the Company with regard to the Financial Restructuring Proposal, prior to the annual meeting. Even if our stockholders approve the Financial Restructuring Proposal, we will be able to implement the Financial Restructuring Proposal only if our stockholders approve the amendment to the Restated Certificate of Incorporation as set forth in proposal three described in this proxy statement and if the holders of Series D preferred stock approve an amendment to the Series D Certificate. We cannot assure you that we will be able to satisfy these conditions. Issuance of Series F Preferred Stock As part of the financial restructuring, the Board of Directors has proposed to issue 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. A summary description of the material terms of the Series F preferred stock follows: Rank. The Series F preferred stock will rank pari passu to the proposed Series G preferred stock and senior to the Common Stock, Series A $20 convertible preferred stock, Series D convertible preferred stock and Series E $20 convertible preferred stock. In addition, the consent of the holders of 80% of the Series F preferred stock and the Series G preferred stock (together, the "Renaissance Preferred Stock"), voting together as a class, shall be required to authorize the issuance of any securities with rights pari passu, senior to or superior to the Renaissance 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. 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 shall be deemed to be a liquidation. 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 $.20 per share. The initial conversion price may be adjusted from time to time in order to prevent dilution as a result of 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 granted prior to or on September 30, 2000 and the issuance of up to 1,500,000 shares of Common Stock upon exercise of future stock options. In addition, the Series F preferred stock will also be subject to anti-dilution protection in the event of stock splits, dividends, mergers and other similar events. Redemption. The Series F preferred stock will not be redeemable. 15 19 Dividends. The Series F preferred stock shall accrue dividends at a rate of 5% per year, initially payable two years after issuance. After the initial payment, such dividends shall 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 and the Series G preferred stock (and any other class of equity securities which may similarly vote with the holders of the Common Stock as a single class with respect to any matter) upon all matters upon which stockholders are entitled to vote, including the election of directors, except as otherwise required by law. 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. In addition, the consent of holders of 80% of the Series F preferred stock and the Series G preferred stock, voting together as a class, shall be required to 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, or to approve any action that would materially and adversely affect the rights of the Renaissance 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 class, will be entitled to elect two additional directors to the Company's Board of Directors. Upon completion of the financial restructuring the Board of Directors will be expanded to seven members, one of whom will be elected by the holders of the Renaissance Preferred Stock. Issuance of 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 268,000 shares of a new series of preferred stock to be designated Series G cumulative convertible preferred stock, par value $0.01 per share. A summary description of the material terms of the Series G preferred stock follows. Rank. The Series G preferred stock will rank pari passu to the proposed Series F preferred stock and senior to the Common Stock, Series A $20 convertible preferred stock, Series D convertible preferred stock and Series E $20 convertible 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 class, shall be required to authorize the issuance of any securities with rights pari passu, senior to or superior to the Renaissance 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. 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 shall be deemed to be a liquidation. 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 $.20 per share. The initial conversion price may be adjusted from time to time in order to prevent dilution as a result of 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 granted prior to or on September 30, 2000 and the issuance of up to 1,500,000 shares of Common Stock upon exercise of future stock options. In addition, the Series G preferred stock will also be subject to anti-dilution protection in the event of stock splits, dividends, mergers and other similar events. Redemption. The Series G preferred stock will be redeemable upon the earlier of (i) the sale of the Company's subsidiary, B&B Electromatic, Inc., to the extent of the net proceeds of the Company 16 20 from such sale or (ii) two years after issuance in quarterly installments 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. Dividends. The Series G preferred stock shall accrue dividends at a rate of 5% per year, initially payable two years after issuance. After the initial payment, such dividends shall 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 and the Series F preferred stock (and any other class of equity securities which may similarly vote with the holders of the Common Stock as a single class with respect to any matter) upon all matters upon which stockholders are entitled to vote, including the election of directors, except as otherwise required by law. 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 are convertible on the record date of the determination of stockholders entitled to receive notice of and to vote on such matter. In addition, the consent of holders of 80% of the Series G preferred stock and the Series F preferred stock, voting together as a class, shall be required to 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, or to approve any action that would materially and adversely affect the rights of the Renaissance 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 class, will be entitled to elect two additional directors to the Company's Board of Directors. Upon completion of the financial restructuring the Board of Directors may be expanded to seven members, one of whom will be elected by the holders of the Renaissance Preferred Stock. Exchange of New Renaissance Notes Background. Pursuant to the terms of the letter agreement, dated as of November 13, 2000, by and among the Company, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC, Renaissance Capital Growth & Income Fund III, Inc. will loan $500,000 to the Company to be evidenced by secured convertible promissory notes of the Company and Renaissance US Growth & Income Trust PLC will loan $500,000 to the Company to be evidenced by secured convertible promissory notes to the Company. The New Renaissance 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 Notes are convertible into the Company's Common Stock at a conversion price of $.20 per share. It is anticipated that as of January 19, 2001, $1,011,924 will be owed under the New Renaissance Notes. Exchange. As part of the proposed financial restructuring, the Renaissance Funds will exchange all of the New Renaissance Notes into an aggregate of 40,000 shares of Series F preferred stock at an exchange rate of $25.00 per share of Series F preferred stock. If the proposed financial restructuring is not effected by March 13, 2000, then the New Renaissance Notes will be immediately due and payable. Exchange of Other Indebtedness with the Renaissance Funds Background. In addition to the New Renaissance Notes, the Company has other indebtedness with the Renaissance Funds as evidenced by a loan agreement and other promissory notes with the Renaissance Funds (the "Original Renaissance Indebtedness"), as more specifically described below. As of December 31, 1996, pursuant to the terms of a convertible loan agreement, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth & Income Trust PLC loaned the Company $4,600,000 in convertible debentures at an interest rate of 9% per year. The debentures are convertible into shares of Common Stock at a rate of $0.549 per share. It is anticipated that as of January 19, 2001, $4,490,878 will be owed to the Renaissance Funds under the loan agreement. 17 21 Since 1999, Renaissance Capital Growth & Income Fund III, Inc. has individually made loans to the Company evidenced with six promissory notes. On February 22, 1999, Renaissance Capital Growth & Income Fund III, Inc. loaned $375,000 to the Company as evidenced by a convertible promissory note. The convertible promissory note is convertible into shares of Common Stock at an initial conversion price of $0.549 per share. On August 12, 1999, the Company granted a promissory note to Renaissance Capital Growth & Income Fund III, Inc. in exchange for a loan of $115,000. The promissory note was renewed and extended on May 5, 2000. On May 5, 2000, Renaissance Capital Growth & Income Fund III, Inc. loaned $150,000 to the Company as evidenced by a promissory note. On August 25, 2000, the Company granted a promissory note to Renaissance Capital Growth & Income Fund III, Inc. in exchange for a loan of $100,000. On September 15, 2000, Renaissance Capital Growth & Income Fund III, Inc. loaned $100,000 to the Company as evidenced by a promissory note. On September 29, 2000, the Company granted a promissory note to Renaissance Capital Growth & Income Fund III, Inc. in exchange for a loan of $50,000. Each of the promissory notes accrues interest at a rate of 9% per year. It is anticipated that as of January 19, 2001, an aggregate of $958,956 will be owed to Renaissance Capital Growth & Income Fund III, Inc. under such promissory notes. In addition, since 1999, Renaissance US Growth & Income Trust PLC has individually made loans to the Company evidenced with six promissory notes. On February 22, 1999, Renaissance US Growth & Income Trust PLC loaned $225,000 to the Company as evidenced by a convertible promissory note. The convertible promissory note is convertible into shares of Common Stock at an initial conversion price of $0.549 per share. On May 5, 2000, the Company granted a promissory note to Renaissance US Growth & Income Trust PLC in exchange for a loan of $115,000. In addition, on May 5, 2000, Renaissance US Growth & Income Trust PLC loaned another $150,000 to the Company as evidenced by a promissory note. On August 25, 2000, the Company granted a promissory note to Renaissance US Growth & Income Trust PLC in exchange for a loan of $100,000. On September 15, 2000, Renaissance US Growth & Income Trust PLC loaned $100,000 to the Company as evidenced by a promissory note. On September 29, 2000, the Company granted a promissory note to Renaissance US Growth & Income Trust PLC in exchange for a loan of $50,000. Each of the promissory notes accrues interest at a rate of 9% per year. It is anticipated that as of January 19, 2001, an aggregate of $797,253 will be owed to Renaissance US Growth & Income Trust PLC under such promissory notes. Exchange. As part of the proposed financial restructuring, the Renaissance Funds will exchange all of the Original Renaissance Indebtedness, including all interest accrued as of the date of exchange, into shares of Series G preferred stock at an exchange rate of $25.00 per share of Series G preferred stock. If the proposed financial restructuring is not effected by March 13, 2000, then all of the Original Renaissance Indebtedness will be immediately due and payable. Exchange of Indebtedness with C.A. Rundell, Jr. and The Rundell Foundation Background. On April 12, 2000, C.A. Rundell, Jr., currently Chairman of the Board and Chief Executive Officer of the Company, loaned the Company $200,000 as evidenced by a promissory note. In addition, on June 28, 2000, The Rundell Foundation, a non-profit corporation, loaned the Company $100,000 as evidenced by a promissory note (together with the promissory note to Mr. Rundell, the "Rundell Notes"). Both of the Rundell Notes accrue interest at a rate of 9% a year and are due and payable on demand. It is anticipated that as of January 19, 2001, an aggregate of $319,036 will be owed under the Rundell Notes. Mr. Rundell is President, a director and trustee of The Rundell Foundation. Exchange. As a requirement on the part of the Renaissance Funds, Mr. Rundell and The Rundell Foundation will exchange the Rundell Notes, including all interest accrued as of the date of exchange, into shares of Series G preferred stock at an exchange rate of $25.00 per share of Series G preferred stock. Additional Terms of the Letter Agreement In addition to the issuance of the Series F preferred stock and the Series G preferred stock, the issuance of the New Renaissance Notes and the exchange of the New Renaissance Notes into shares of Series F preferred stock and the exchange of the Original Renaissance Indebtedness and the Rundell Notes into shares of Series G preferred stock, the letter agreement also includes the following terms: 22 Amendment to Series D Certificate. According to the terms of the letter agreement, prior to the issuance of the Renaissance Preferred Stock, the holders of Series D preferred stock must approve an amendment to the Series D Certificate involving a modification to the liquidation preference. The Series D Certificate must be amended to provide for a reduction of the liquidation preference to $0.01 per share, until the Renaissance Preferred Stock has been converted or redeemed, or until the holders of the Renaissance Preferred Stock have recovered the full amount of investment, at which time the liquidation preference will revert back to an amount equal to $20.00 per share plus any accrued and unpaid dividends with respect to such share. Representations and Warranties. The Company represented and warranted as of the date of the letter agreement and must represent and warrant as of the date of issuance of the Renaissance Preferred Stock that (i) the Company is not insolvent, as defined in the U.S. Bankruptcy Code, and (ii) the Company has no pending or threatened material litigation, loss contingencies or material undisclosed liabilities. Registration Rights. The Company will file within 90 days of the issuance of the Renaissance Preferred Stock to the Renaissance Funds a registration statement on Form SB-2 (or, if applicable, on Form S-3) 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 will have, together, one demand registration right and unlimited piggyback registration rights. The Company shall pay all expenses of the Renaissance Funds in connection with such registrations, except underwriting discounts and commissions. Prior Actions The Company is also requesting, as part of the Financial Restructuring Proposal, that the stockholders ratify, confirm and approve any and all actions taken by the Company's Board of Directors and officers for and on behalf of the Company with regard to the Financial Restructuring Proposal, prior to the annual meeting. 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 because the Board of Directors believes that if we are able to implement the financial restructuring, then: o The termination of the dilutive share issuance rights will lessen the depressive effects on the market price of the Common Stock; and o The financial restructuring will improve the Company's ability to raise additional funds. However, the financial restructuring will negatively affect the current Common stockholders by reducing significantly their percentage equity interest. The Board of Directors believes that the positive effects outweigh the negative effects of the financial restructuring as described below. Positive Effects of the Financial Restructuring Market price - The Board of Directors believes that the outstanding, unconverted convertible debentures and notes with the Renaissance Funds have had a negative effect on the market price of the Common Stock because of the potential obligation to issue large amounts of Common Stock for no additional consideration. It is possible that the elimination of this indebtedness may have a positive 19 23 effect on the market price of the Common Stock because the new Common stockholders will not face the prospect of continuing dilution from these types of conversions. Facilitate growth and raising additional funds - Should the Company begin to make operating performance progress, the Company's access to additional growth capital may be improved as a result of the proposed refinancing. This is because the financial restructuring eliminates the convertible debentures and the convertible notes payable and the potential dilution they represent. The Board of Directors has concluded that under the current capital structure it is impossible to raise sufficient new capital to proceed with the business in its current state. Negative Effects of the Financial Restructuring Change in Percentage Equity Interest. If the financial restructuring is effected, then, assuming approximately 62 million fully diluted shares of Common Stock outstanding as of January 19, 2001, the percentage equity ownership of the current Common stockholders will be approximately 17.0%. However, in the absence of a financial restructuring, the percentage equity ownership of the current Common stockholders would be approximately 27.8%, on a fully diluted basis, assuming that the holders of the Series A preferred stock, the Series D preferred stock, warrants, options and the Renaissance Funds converted all their stock and exercised all their rights at market as of January 19, 2001. Therefore, even though there will be a decrease in percentage ownership for current Common stockholders as a result of the financial restructuring, the Board of Directors believes that the financial restructuring is in the best interests of the stockholders because of the positive effects discussed above and the fact that the Company has explored various alternatives for financial restructuring all of which have been unsuccessful. Without the infusion of cash associated with this financial restructuring, the Company's ability to continue operations is put at significant risk. PERCENTAGE EQUITY INTEREST
Current Pro Forma for on a Fully Diluted Basis(1) Financial Restructuring(2) --------------------------- -------------------------- Current Common Stockholders (3) 27.8% 17.0% Warrant & Option Holders 28.5% 17.3% Convertible Notes & Debt 37.1% -- Series A Holders (4) 0.5% 0.3% Series D Holders (4) 6.1% 3.7% Series F Holders (4) -- 8.9% Series G Holders (4) -- 52.8%
(1) Assumes all outstanding warrants, options, convertible promissory notes and other convertible debt, Series A preferred stock and Series D preferred stock as of September 30, 2000 are converted. (2) Assumes that (a) the exchange of the New Renaissance Notes for 40,000 shares of Series F preferred stock, (b) the issuance of 4,000 shares of Series F preferred stock to an accredited investor, (c) the exchange of the Original Renaissance Indebtedness for Series G preferred stock and (c) the exchange of the Rundell Notes for Series G preferred stock have occurred on exchange date of January 19, 2001. (3) Includes shares held by management. Also includes shares of Common Stock currently held by holders of our Series A preferred stock and Series D preferred stock. (4) Includes only the Common Stock issuable upon the conversion of Series A preferred stock, Series D preferred stock, Series F preferred stock or Series G preferred stock, as the case may be. Does not include shares of Common Stock currently held by these holders. Unaudited Pro Forma Financial Statements The following unaudited pro forma condensed consolidated financial statements present the effects of: (i) the issuance of 80,000 shares of a new series of preferred stock, Series F cumulative convertible preferred stock (the "Series F preferred stock") and 270,000 shares of a new 20 24 series of preferred stock, Series G cumulative preferred stock (the "Series G" preferred stock); (ii) the additional financing of $1,000,000 provided by Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Income Trust PLC (together, the "Renaissance Funds") and the exchange of such financing into 40,000 shares of Series F preferred stock; (iii) the sale of 4,000 shares of Series F preferred stock to an accredited investor (to date the Company has sold 2,000 shares and anticipates the remaining 2,000 shares will be sold in the near future); (iv) the exchange of all other existing promissory notes, convertible debt and interest arrearages of the Company to the Renaissance Funds into shares of Series G preferred stock; and (v) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock. The unaudited pro forma condensed consolidated balance sheet presents the financial position of the Company as of September 30, 2000 assuming the proposed transactions had occurred as of September 30, 2000. This pro forma information is based upon the historical September 30,2000 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 September 30, 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, 2000 and July 1, 1999, respectively. This pro forma information is based upon the historical results of operations of the Company for the three months ended September 30, 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 accompanying this proxy statement. The unaudited pro forma condensed consolidated financial statements are based upon available information and assumptions that management of the Company 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 and the Annual Report on Form 10-KSB accompanying this proxy statement. 21 25 INTEGRATED SECURITY SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2000 AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
Pro Forma Historical Adjustment Pro Forma ---------- ---------- --------- ASSETS Current assets: Cash and cash equivalents $ 103,195 $ 1,000,000 (A) $ 1,203,195 100,000 (B) Accounts receivable 1,002,626 1,002,626 Inventories 596,725 596,725 Notes receivable 28,546 28,546 Unbilled revenue 180,079 180,079 Other current assets 113,347 113,347 ------------ ----------- ------------- Total current assets 2,024,518 1,100,000 3,124,518 Property and equipment, net 893,736 893,736 Software development costs, net 56,856 56,856 Other assets 21,418 21,418 ------------ ----------- ------------- Total assets $ 2,996,528 $ 1,100,000 $ 4,096,528 ============ =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 957,324 $ (281,266) (C) $ 676,058 Accrued liabilities 383,967 (10,825) (C) 373,142 Current portion of long-term debt and other liabilities 6,643,925 (6,098,202) (C) 545,723 ------------ ----------- ------------- Total current liabilities 7,985,216 (6,390,293) 1,594,923 ------------ ----------- ------------- Long-Term debt and other liabilities 705,554 705,554 Preferred stock subject to redemption -- 6,390,293 (C) 6,390,293 Stockholders' equity (deficit): Total stockholders' deficit (5,694,242) 1,100,000 (4,594,242) ------------ ----------- ------------- Total liabilities and stockholders equity (deficit) $ 2,996,528 $ 1,100,000 $ 4,096,528 ============ =========== ============= 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 102,250 299,612 401,862 Common Stock 10,572,545 10,572,545
22 26 INTEGRATED SECURITY SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
Pro Forma Historical Adjustment Pro Forma ------------ ------------ ------------ Sales $ 1,223,507 $ -- $ 1,223,507 Cost of sales 921,108 -- 921,108 ------------ ------------ ------------ Gross margin 302,399 -- 302,399 ------------ ------------ ------------ Operating expenses: Selling, general and administrative 1,083,385 -- 1,083,385 Research and product development 145,475 -- 145,475 ------------ ------------ ------------ 1,228,860 -- 1,228,860 ------------ ------------ ------------ Loss from operations: (926,461) -- (926,461) Other income (expense): Interest income 139 -- 139 Interest expense (172,292) 132,431 (E) (39,861) ------------ ------------ ------------ Income (loss) before income taxes (1,098,614) 132,431 (966,183) Benefit (provision) for income taxes -- -- -- ------------ ------------ ------------ Net income (loss) after income taxes (1,098,614) 132,431 (966,183) Preferred dividends requirement (42,081) (88,728)(F) (130,809) (4,260,000)(G) (4,260,000) ------------ ------------ ------------ Net loss allocable to Common Stockholders $ (1,140,695) $ (4,216,296) $ (5,356,992) ============ ============ ============ Weighted average common and common equivalents outstanding - basic and diluted 10,518,345 -- 10,518,345 Basic and diluted loss per share $ (0.11) $ -- $ (0.51) ============ ============ ============
23 27 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 Adjustment 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) ------------ ------------ ------------ Income (loss) before income taxes (3,396,718) 460,865 (2,935,853) Benefit (provision) for income taxes 51,856 -- 51,856 ------------ ------------ ------------ Net income (loss) after income taxes (3,344,862) 460,865 (2,883,997) Preferred dividends requirement (107,467) (354,910)(F) (462,377) (4,260,000)(G) (4,260,000) ------------ ------------ ------------ Net loss allocable to Common Stockholders $ (3,452,329) $ (4,145,045) $ (7,606,374) ============ ============ ============ Weighted average common and common equivalents outstanding - basic and diluted 10,508,510 -- 10,508,510 Basic and diluted loss per share $ (0.33) $ -- $ (0.72) ============ ============ ============
24 28 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. GENERAL The proposed financial restructuring includes the following: (i) the issuance of 80,000 shares of a new series of preferred stock, Series F cumulative convertible preferred stock (the "Series F preferred stock") and 270,000 shares of a new series of preferred stock, Series G cumulative preferred stock (the "Series G" preferred stock); (ii) the exchange of certain secured convertible promissory notes with Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Income Trust PLC (together, the "Renaissance Funds") into 40,000 shares of Series F preferred stock; (iii) the issuance of a minimum of 4,000 shares of Series F preferred stock to an accredited investor (to date the Company has sold 2,000 shares and anticipates the remaining 2,000 shares will be sold in the near future); (iv) the exchange of all other existing promissory notes, convertible debt and interest arrearages of the Company to the Renaissance Funds into shares of Series G preferred stock; and (v) the exchange of an aggregate of approximately $300,000 plus accrued interest thereon in indebtedness of the Company to C.A. Rundell, Jr. and The Rundell Foundation into shares of Series G preferred stock. 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 June 30, 2000 and reflects the proforma adjustments: (A) to give effect to additional financing of $1,000,000 provided by the Renaissance Funds and the exchange of such financing into 40,000 shares of Series F convertible preferred stock. (B) To give effect to the sale of 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 debt and related accrued interest owed to the Renaissance Funds, C.A. Rundell, Jr. and the Rundell Foundation in the aggregate amount of $6,390,293 into 255,612 shares of Series G redeemable convertible preferred stock. (D) to give effect to the authorization of an additional 35,000,000 shares of common stock. NOTE C. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATION (E) to give effect to the reduction of interest expense as a result of the exchange of promissory notes, convertible debt and related accrued interest into shares of Series G redeemable convertible preferred stock. (F) to give effect to the dividend requirements on the Series F convertible preferred stock and Series G redeemable convertible preferred stock to be issued. 25 29 (G) To give effect to the amortization of the beneficial conversion features of the Series F convertible preferred stock and Series G redeemable convertible 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 November 20, 2000. DILUTION The net tangible book value per share of Common Stock as of June 30, 2000 was $(0.43) due to a shareholders' deficit of approximately $4.6 million. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our 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 June 30, 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 other convertible debt are converted and (3) the pro forma net tangible book value per share assuming that the exchange of the New Renaissance Notes, the Original Renaissance Indebtedness and the Rundell Notes have been effected: Current net tangible book value per share...................................................... $(0.43) Pro forma net tangible book value per share assuming exercise of options and warrants, conversion of convertible promissory notes and other convertible debt and conversion of the Series A preferred stock and Series D preferred stock........................................................................... $(0.12) Pro forma net tangible book value per share after the financial restructuring.................. $(0.07)
SHIFT IN CONTROL OF THE COMPANY After the proposed financial restructuring, the Renaissance Funds will own among themselves approximately 65.1% of the voting stock of the Company, assuming a January 19, 2001 exchange date. However, if the financial restructuring does not proceed and the Renaissance Funds decide to exercise their respective conversion rights, they would own collectively approximately 37.9% of the voting stock, assuming a January 31, 2001 conversion date. Acting as a group, they would be in a position to control the Company or significantly influence the business operations and policies of the Company. The Board of Directors believes that the financial restructuring is in the best interests of the stockholders despite the negative effects because the Board believes that the positive effects will outweigh the negative effects and because the Company has explored various alternatives for financial restructuring all of which have been unsuccessful. Without the infusion of cash associated with this financial restructuring, the Company's ability to continue operations is put at significant risk. INTERESTS OF CERTAIN PERSONS IN THE FINANCIAL RESTRUCTURING As part of the proposed financial restructuring, C.A. Rundell, Jr., the Company's Chairman of the Board and Chief Executive Officer, will be exchanging a $200,000 promissory note and accrued interest thereon into shares of Series G preferred 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 into shares of Series G preferred stock. Moreover, Mr. Rundell serves as a director of Renaissance US Growth & Income Trust PLC and served 26 30 as a director of Renaissance Capital Growth & Income Fund III, Inc. until October 12, 2000. The Renaissance Funds will also exchange the New Renaissance Notes for shares of Series F preferred stock and the Original Renaissance Indebtedness 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 Though 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, 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. 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. 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, THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION AND THE AMENDMENT TO THE SERIES D CERTIFICATE. AS A RESULT, IF THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION IS NOT APPROVED BY THE STOCKHOLDERS AND THE AMENDMENT TO THE SERIES D CERTIFICATE IS NOT APPROVED BY THE HOLDERS OF SERIES D PREFERRED STOCK, THEN WE CANNOT COMPLETE THE FINANCIAL RESTRUCTURING PURSUANT TO THE TERMS SET FORTH IN THE LETTER AGREEMENT EVEN IF THE STOCKHOLDERS APPROVE THE FINANCIAL RESTRUCTURING PROPOSAL. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE FINANCIAL RESTRUCTURING PROPOSAL. PROPOSAL THREE PROPOSED AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION 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, _______ shares of Common Stock were outstanding and __________ shares were subject to future issuance pursuant to outstanding convertible debentures, convertible notes, convertible preferred stock, warrants and options. Therefore, as of the record date, only _________ shares of Common Stock were available for future issuance. The Board 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. If the stockholders approve the amendment to the Restated Certificate of Incorporation, then our 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. 27 31 REASONS FOR AND EFFECT OF THE AMENDMENT The Company is currently attempting to exchange approximately $6.3 million of its convertible debentures, convertible promissory notes, promissory notes, and accrued interest into Series F and Series G preferred stock pursuant to the terms of the financial restructuring as described in proposal two in this proxy statement. If such debt 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 and retirement of debt, 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 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. 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 $.01 per share ("Common Stock") and 750,000 shares shall be Preferred Stock, par value $.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. 28 32 PROPOSAL FOUR PROPOSED AMENDMENT TO THE COMPANY'S INCENTIVE PLAN SUMMARY OF STOCK OPTION PLAN The purpose of the Company's 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 Incentive 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 Incentive 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 September 30, 2000, the Company had 63 employees and non-employee directors eligible to participate in the Incentive Plan. PLAN BENEFITS OUTSTANDING Of the total 2,000,000 shares for which options may be granted under the Incentive Plan, options to purchase 1,546,601 shares of Common Stock were outstanding as of September 30, 2000. As of September 30, 2000, the market value of all shares of Common Stock subject to outstanding options was $809,042 (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 Incentive Plan and related amendments that would increase the number of shares which may be issued pursuant to the Incentive Plan. Pursuant to the amendment, the number of shares of Common Stock authorized to be issued under the Incentive Plan will be increased from 2,000,000 shares to 5,500,000 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 Incentive 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 Incentive Plan to avoid granting options that are subject to subsequent stockholder approval. If the amendment is approved, the Incentive Plan will be amended by deleting Article V 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 29 33 Common Stock that may be issued under the Plan shall not exceed 5,500,000 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 Incentive Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE AMENDMENT TO THE COMPANY'S INCENTIVE PLAN. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") 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 (the "SEC") 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. 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 the Stockholders, such proposals must be received by 30 34 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. 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. OTHER MATTERS The Board 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 Annual Report on Form 10-KSB for the year ended June 30, 2000 is enclosed herewith. 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 December ___, 2000 31 35 APPENDIX 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. 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 1 36 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.Q. 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-K (or the annual reports to shareholders if distributed prior to the filling of 10-K), 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 37 APPENDIX B LETTER AGREEMENT 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 (the "Renaissance Funds") 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 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 38 Mr. Robert C. Pearson November 13, 2000 Page 2 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.. 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 39 Mr. Robert C. Pearson November 13, 2000 Page 3 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: ------------------------------------ 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: ------------------------------------- RENAISSANCE US GROWTH & INCOME TRUST PLC By: Renaissance Capital Group, Inc. Investment Manager By: ------------------------------ 40 FRONT OF PROXY CARD 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 shareholder of Integrated Security Systems, Inc. (the "Company") 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 on the reverse, all shares of Common Stock and Series D $20 Convertible Preferred Stock of Integrated Security Systems, Inc. (the "Company") held of record by the undersigned on December 8, 2000, at the Annual Meeting of Stockholders to be held on January 19, 2001 or any adjournment thereof. BACK OF PROXY CARD
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 Robert M. Galecke James E. Jack 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 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 PROPOSAL (2) AND PROPOSAL (3), THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION BY THE STOCKHOLDERS, AS WELL AS APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS FOR THE SERIES D $20 CONVERTIBLE PREFERRED STOCK (THE "SERIES D CERTIFICATE") BY THE HOLDERS OF THE SERIES D $20 CONVERTIBLE PREFERRED STOCK. AS A RESULT, IF 41 PROPOSAL (3), THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION IS NOT APPROVED BY THE STOCKHOLDERS AND THE AMENDMENT TO THE SERIES D CERTIFICATE IS NOT APPROVED BY THE HOLDERS OF SERIES D $20 CONVERTIBLE PREFERRED STOCK, 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, 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 JANUARY 19, 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. -----END PRIVACY-ENHANCED MESSAGE-----