-----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, Ri8IhCUZizMblIS9kVUUt9IajdewG2hoQQj/tCWQ0SuccEUvwecj7ZsHcQS7eu5M PZjgL+XA58uzXo5DvOzQ0g== 0001158957-02-000261.txt : 20020930 0001158957-02-000261.hdr.sgml : 20020930 20020930154046 ACCESSION NUMBER: 0001158957-02-000261 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 02776509 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10KSB 1 form10ksb063002.txt INTEGRATED SECURITY SYSTEMS, INC. 10-KSB 063002 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- Form 10-KSB --------------- [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-11900 --------------- Integrated Security Systems, Inc. (Name of Small Business Issuer in its Charter) Delaware 75-2422983 (State of Incorporation) (I.R.S. Employer Identification No.) 8200 Springwood Drive, Suite 230, Irving, TX 75063 (972) 444-8280 (Address including zip code, area code and telephone number of Registrant's principal executive offices.) --------------- Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Title of Each Class ------------------- Common stock, $.01 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $4,957,897 As of August 31, 2002, 11,896,379 shares of the Registrant's common stock and 1,340,505 warrants, entitling holders to purchase 3,552,338 shares of common stock, were outstanding. On August 31, 2002, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $3,444,456. This amount was calculated by reducing the total number of shares of the registrant's common stock outstanding on August 31, 2002 by the total number of shares of common stock held by officers and directors, and stockholders owning in excess of 5% of the registrant's common stock, and multiplying the remainder by the closing price of the registrant's common stock on August 31, 2002, as reported on the over-the-counter market. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Documents Incorporated by Reference: None. TABLE OF CONTENTS Item No. Page -------- ---- Part I 1. Description of Business............................................3 2. Description of Property............................................8 3. Legal Proceedings..................................................8 4. Submission of Matters to a Vote of Security Holders................8 Part II 5. Market for Common Equity and Related Stockholder Matters...........9 6. Management's Discussion and Analysis or Plan of Operation.........12 7. Financial Statements..............................................17 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............................35 Part III 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act........35 10. Executive Compensation............................................37 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................39 12. Certain Relationships and Related Transactions....................42 13. Exhibits and Reports on Form 8-K..................................43 PART I Forward Looking Statements This annual report on Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as "may," "believe," "expect," "intend," "plan," "seek," "anticipate," "estimate," or "continue" or the negative of those words or other variations or comparable terminology. All statements other than statements of historical fact included in this annual report on Form 10-KSB, including the statements under "Item 1. Description of Business" and "Item 6. Management's Discussion and Analysis or Plan of Operation" and located elsewhere in this annual report on Form 10-KSB regarding the financial position and liquidity of the Company are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company's expectations, are disclosed in this annual report on Form 10-KSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this annual report on Form 10-KSB. Important factors that could cause actual results to differ materially from those in the forward-looking statements in this annual report on Form 10-KSB include changes from anticipated levels of operations, customer acceptance of existing and new products, anticipated development schedules of new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, casualty to or other disruption of the Company's production facility and equipment, delays and disruptions in the shipment of the Company's products, government regulations and the ability of the Company to meet its stated business goals. Item 1. Description of Business ----------------------- General The Company was formed in December 1991 as a Delaware corporation. The Company became publicly traded in April 1993. The Company designs, develops, manufactures, distributes and services security and traffic control products used in the commercial, industrial and government sectors through two wholly owned subsidiaries, B&B Electromatic, Inc. and Intelli-Site, Inc. B&B's products are used in thousands of locations across the country. The Company has experienced unanticipated delays in the completion of its Intelli-Site(R) software product and has not met the anticipated sales levels for this product. In addition, the audit report of Grant Thornton LLP, the Company's independent auditors, for the Company's consolidated financial statements for the year ended June 30, 2002 states that in fiscal 2002 and 2001 the Company has suffered significant losses from operations and at June 30, 2002 had a stockholders' deficit of $8,099,160. The audit report further states that these matters raise substantial doubt about the Company's ability to continue as a going concern. Intelli-Site, Inc. Intelli-site(R) computer software allows automated security and facility controls system integration. It allows a customer to decouple the selection of software from hardware, so that a customer can mix and match different hardware, from various manufacturers, into a single, integrated system. Within the security industry, it is generally accepted that automated integration of products improves productivity, response time and accuracy. Automated integration of products also reduces loss, which in turn potentially reduces insurance premiums. Intelli-Site(R) integration can break the stranglehold of closed systems that proprietary system providers have on customers. The open system design provided by Intelli-Site(R) can integrate hardware and software products from different vendors, to provide a tailored solution to unique customer requirements. 3 More specifically, Intelli-Site(R) allows customers to integrate a wide variety of devices from various manufacturers, such as access control, closed circuit television, badge systems, fire alarm systems, lighting control and heating, ventilation and air conditioning systems. In addition to providing centralized control, Intelli-Site(R) users can tailor the interface for ease of operation based on their unique functional requirements. Since Intelli-Site(R) is device non-specific, customers can integrate currently installed equipment, even if purchased from different manufacturers. For example, an access control system and a closed circuit television system from different hardware manufacturers may already exist within a facility, but due to the proprietary nature of both systems, they cannot communicate with each other. Unless the two systems can communicate, a "forced door" alarm on the access control system cannot initiate a video recording of the event. A proprietary integrated system would require replacement of one or both of the existing systems with equipment compatible to that of the proprietary system. Intelli-Site(R) can integrate existing systems to avoid expensive equipment retrofits, time delays and single vendor dependencies. The software can also be tailored to a manufacturer's proprietary specifications to be marketed as an added feature to their existing product line. No two companies, facilities or workgroups are identical, so each has different security requirements. Intelli-Site(R), while a standard product, allows users to define the following aspects of a security system: o its configuration--what is to be integrated; o its graphical user interface--how the operator controls the system; o its functionality--what the system does; and o its databases--what and how data is stored. In the past, only a custom-designed system could provide this level of user-specific features. Other standard software products either cannot be tailored or attempt to provide limited "customization" through a fixed set of user options. With Intelli-Site(R), user-defined restrictions are limited only by the capabilities of the integrated devices. B&B Electromatic, Inc. B&B Electromatic, Inc., the Company's manufacturing subsidiary, designs, manufactures and distributes warning gates, crash barriers (such as railroad, anti-terrorist and traffic control barriers), lane changers, airport and navigational lighting, and perimeter security gates and operators. B&B has been in operation since 1925, and enjoys a long-term reputation of high quality designs with its broad customer network of distributors, engineering and architectural firms and local, state and federal government agencies. On March 18, 2002, B&B entered into a Patent Assignment and Technology Transfer Agreement with Quixote Corporation. This Agreement transferred two patents and certain technology related to B&B's VT-6802 railroad barrier to Quixote Corporation for $350,000 in cash. Sales of this product since its inception have been insignificant to B&B. B&B recognized a gain on the sale of the patents and technology of approximately $200,000, after fees and expenses related to the transaction, as well as future obligations under the Agreement. B&B also entered into a Non-Exclusive Patent License Agreement with Quixote Corporation on March 18, 2002, whereby B&B may utilize this technology for certain roadway and bridge applications. 4 Core Business B&B's core products are warning gates and crash barriers, automatic gate, operators, gate panels, and navigational lighting. These products compete primarily in the road and bridge construction, refurbishment and perimeter security markets. These products are used for: o gating and barricading movable bridges; o locking down sections of roads under construction; o gates for reversible lane changer systems; o gates to secure railroad crossings; o operators and gates used in perimeter security; o navigational lights used primarily with waterways; and o anti-terrorist crash barriers used to prevent malevolent use of vehicles. B&B typically sells its products through electrical sub-contractors and distributors. In certain instances, sales are made directly to end users. B&B's XL automatic gate operator product line, called the XL Series, includes hydraulic sliding gate operators with numerous different configurations. The XL Series has been tested and certified to be in compliance with the Underwriters Laboratories Inc. latest safety standard. Fewer movable bridges are being constructed. As a result, B&B is seeking broader applications of its movable gates and barriers. Highway lane changers, road construction gates and barriers, seismic gates and perimeter security gates are all growing market opportunities for B&B. New Business Since the tragic events of September 11, 2001, interest in B&B's CR 25 anti-terrorist crash barrier has dramatically increased. This interest has manifested itself in orders from such facilities as oil refineries, chemical plants, nuclear power plants and federal and state government buildings. The crash barrier comes in both a manual and electrical version. Each version has a vertical to horizontal arm, is equipped with an energy absorption cable assembly and weatherproof housing. The manual version has been successfully crash tested to U.S. Navy specifications OR-98-09-88 and M-56-86-05 with a level 1/L2 rating and Department of the Army rating level of KN1-LN2. It is listed by the US Army Corps of Engineers in their document Protection Against Malevolent Use of Vehicles at Nuclear Power Plants (NUREG/CR-6190 Vol. 2, Rev. 1). The electrical version has the same physical characteristics as the manual version. 5 Warranties The Company has one-year, two-year and five-year warranties on products it manufactures. The length of the warranty is dictated by competition. The Company provides for repair or replacement of components and/or products that contain defects of material or workmanship. When the Company uses other manufacturers' components, the warranties of the other manufacturers are passed to the dealers and end users. To date, the servicing and replacement of defective software components and products have not been material. Backlog The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At August 31, 2002, the Company's backlog was approximately $1.7 million. The Company expects that it will fill the majority of this backlog by December 31, 2003. Product Design and Development As of August 31, 2002, the Company has four employees dedicated to research, development and product engineering. The Company spent $431,346 and $525,946 during fiscal 2002 and 2001, respectively, primarily related to the development and enhancement of Intelli-Site(R). Competition Intelli-Site, Inc. Many companies across the industry use the term "integrated security system" to describe their products and services. In fact, an integrated security system can range from very limited fixed function systems "integrating" as few as two sub-systems to feature-rich, real-time sophisticated software systems, including custom coded integrated solutions. Differences in functionality, performance, and price among integrated security systems vary greatly. Intelli-Site(R) has the capability to compete across the entire spectrum of integrated security systems. Consequently, Intelli-Site(R) has a diverse set of competitors, depending on the complexity of the integration effort. Intelli-Site(R)'s competitors generally fall into one of three categories: (a) access control manufacturers, (b) "pure" integrated systems platforms and (c) custom software developers. Access Control Manufacturers Access control integration is the integration of access control systems with other security devices and sub-systems. Access control manufacturers produce integrated security systems that range in capability from the control of panel inputs and outputs to the integration of access control systems with other security devices and sub-systems, most commonly closed circuit television. Access Control and Security Systems Integration magazine, in its annual buyers guide, lists approximately 200 companies that provide software for access control integration representing approximately 81% of the market. Access control manufacturers provide closed, proprietary systems for integration of their hardware. Only a few manufacturers offer complete integrated systems. Vendor-proprietary systems tend to be expensive and lock the customer into one supplier. With vendor-proprietary systems, the end user can only add new features or integrate new technologies if the access control manufacturer supplies them. Access control manufactures' integrated product solutions prevent systems integrators and end users from integrating the products and/or technologies that best meet the end-user requirements. 6 "Pure" Integrated Systems Platforms "Pure" integrated system providers, such as Intelli-Site(R), offer integration platforms that are non-proprietary and able to integrate across any device or sub-system. Integrated system providers can integrate products, such as hardware or devices, across the industry from different vendors. The Company has identified two third-party providers that supply software that competes with Intelli-Site NT. These competitors are Wonderware, Inc., and Montgomery Technologies, Inc. (MTI). Security Design Magazine (SDM) top 100 report for 2002 states that integrated systems platform products accounted for about 10% of the $20 million software systems integration market. Software system integration is the integration of various types of systems utilizing software technology. The software systems integration market includes access control manufacturers; "pure" integrated system platforms and custom software developers. The software systems integration market is a segment of the $4.6 billion systems integration market. The systems integration market encompasses all industries that integrate any type of system by utilizing various means and processes. Wonderware has, primarily due to their broad market acceptance, established itself as the clear market leader. Custom Software Developers Custom software solutions for integrated security typically target large systems with complex user integration requirements between multiple sub-systems. A number of system developers and large systems integrators provide custom software solutions. A declining number of end users use custom-developed solutions. However, the Company believes many of these end users would consider using a non-proprietary, tailored, user-definable standard platform if one were available. Today, of the estimated more than 1,000 system integrators in the market, only a small fraction is capable of developing custom software applications. Open, user-definable systems such as Intelli-Site(R) would allow many of these integrators to bid competitively on large, integrated security system jobs that have traditionally required custom-developed software solutions. The Company faces intense competition in the security industry. Some of the Company's competitors are large, well-financed and established companies that have greater name recognition and resources for research and development, manufacturing and marketing than that of the Company. These competitors may be better able to compete for market share. B&B Electromatic, Inc. The competitors of B&B Electromatic, Inc.'s road and bridge products are relatively the same size as B&B. The customers of these competitors are concentrated in only certain geographical regions. In contrast, B&B's customers are located throughout the United States. B&B has a far more extensive design specification network than its competitors, mostly because B&B has been in existence in this market niche since 1925. Only one other manufacturer of horizontal sliding gates powered by a hydraulic operator mechanism competes with B&B's high-end perimeter security products. B&B does not compete in the lower end perimeter security products market. B&B has two competitors in the general market of warning gates, crash barriers, such as anti-terrorist and traffic control barriers, lane changers, and seismic gates. B&B has two competitors in the airport and navigational lighting market. Employees As of June 30, 2002, the Company employed 49 people, all in full-time positions. None of the Company's employees are subject to collective bargaining agreements. The Company believes that relations with its employees are good. 7 Item 2. Description of Property ----------------------- B&B Electromatic, Inc. owns its manufacturing and office facility in Norwood, Louisiana. This facility consists of approximately 26,000 square feet of manufacturing and office space on five acres of land. The Company has a mortgage on this property. At August 31, 2002, the principal amount of the mortgage was $666,927. The interest rate is 10% and the amortization provisions are standard. There are no prepayment provisions and the mortgage matures on February 8, 2004. The balance due on the maturity date is approximately $576,000. The Company occupies 8,386 square feet of office and warehouse space in Irving, Texas. The lease for the Irving facility expires on December 31, 2003. The monthly rent of this lease is $6,988, plus the costs of utilities, property taxes, insurance, repair and maintenance expenses and common area utilities. The Company believes that the Louisiana and Texas properties are in good condition. The Company also believes that the properties, equipment, fixtures and other assets of the Company located within the Company's facilities are adequately insured against loss, that suitable alternative facilities are readily available if the lease agreements described above are not renewed, and that its existing facilities are suitable and adequate to meet current requirements. Item 3. Legal Proceedings ----------------- The Company is subject to certain legal actions and claims arising in the ordinary course of the Company's business. Although management recognizes the uncertainties of litigation, based upon the dollar amount involved, the nature and management's understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company's financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. 8 PART II Item 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- The Company's preferred stock is not publicly traded. The Company's Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol "IZZI." The following table sets forth, for the periods indicated, the high and low bid quotations for the Common Stock on the Over-the-Counter Bulletin Board market. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The trading market in the Company's securities may at times be illiquid due to low volume. Common Stock ------------------- High Low ------ ------ Fiscal 2002 First Quarter $ 0.50 $ 0.25 Second Quarter 0.75 0.32 Third Quarter 0.48 0.23 Fourth Quarter 0.41 0.23 Fiscal 2001 First Quarter $ 0.72 $ 0.47 Second Quarter 0.53 0.11 Third Quarter 0.43 0.14 Fourth Quarter 0.40 0.26 On September 13, 2002, the last reported sales prices for the Common Stock as reported on the Over-the-Counter Bulletin Board was $0.35. Holders As of August 31, 2002, there were 11,896,379 shares of Common Stock outstanding and 1,340,505 warrants outstanding entitling holders to purchase 3,552,338 shares of Common Stock. The shares of Common Stock are held of record by approximately 165 holders and the warrants are held of record by approximately 39 holders, including those brokerage firms and/or clearing houses holding the Company's Common Stock for their clientele, with each such brokerage house and/or clearing house being considered as one holder. Dividend Policy The Company has never declared or paid any dividends on the Company's Common Stock. The Company currently intends to retain future earnings, if any, for the operation and development of the Company's business and to repay outstanding debt. The Company does not intend to pay any dividends on the Common Stock in the foreseeable future. Recent Sales of Unregistered Securities During fiscal 2002, the Company issued unregistered promissory notes and unregistered shares of preferred stock in connection with the transactions described below in this Item 5. The issuance of promissory notes and preferred stock was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as transactions not involving a public offering and an appropriate restrictive legend was affixed to the securities. 9 Issuances of Promissory Notes in Fiscal 2002 The following table summarizes the promissory notes that the Company issued to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC (known together as "Renaissance") from September 2001 through January 2002. These notes are not convertible and accrue interest at a rate of 8% per year. The form of each of these non-convertible promissory notes is filed with the SEC as an exhibit to this Form 10-KSB. As a part of each of the transactions detailed in the table below, the Company issued stock purchase warrants to each of the Renaissance entities. Each of the stock purchase warrants entitles each of the Renaissance entities to purchase from the Company, at any time, and in whole or in part, shares of the Company's Common Stock, as indicated in the table below, for $0.20 per share. The number of shares of Common Stock purchasable upon exercise of a warrant is subject to adjustment in the event of any dividends, distributions, reclassifications, or capital reorganizations. The holder of the warrant is also entitled to certain registration rights.
Number of Stock Amount of Promissory Purchase Warrants Notes Issued to Each of the Issued to Each of the Date Renaissance Entities ($) Maturity Date (1) Renaissance Entities ------------------ ------------------------ ----------------- -------------------- September 28, 2001 75,000 January 26, 2002 375,000 October 12, 2001 25,000 February 9, 2002 125,000 October 29, 2001 25,000 February 23, 2002 125,000 November 9, 2001 25,000 March 9, 2002 125,000 November 16, 2001 25,000 March 16, 2002 125,000 December 29, 2001 25,000 April 26, 2002 125,000 January 14, 2002 50,000 May 13, 2002 250,000 -------------------
(1)The maturity date was extended until September 5, 2003. The following table summarizes the promissory notes that the Company issued to C. A. Rundell, Jr., in November 2001. These notes are not convertible and accrue interest at a rate of 8% per year. The form of each of these non-convertible promissory notes is filed with the SEC as an exhibit to this Form 10-KSB. As a part of each of the transactions detailed in the table below, the Company issued stock purchase warrants to Mr. Rundell. Each of the stock purchase warrants entitles Mr. Rundell to purchase from the Company, at any time, and in whole or in part, shares of the Company's Common Stock, as indicated in the table below, for $0.20 per share. The number of shares of Common Stock purchasable upon exercise of a warrant is subject to adjustment in the event of any dividends, distributions, reclassifications, or capital reorganizations. The holder of the warrant is also entitled to certain registration rights.
Number of Stock Date Amount of Promissory Notes ($) Maturity Date (1) Purchase Warrants - ------------------ ------------------------------ ----------------- ----------------- November 9, 2001 50,000 March 9, 2002 125,000 November 16, 1001 50,000 March 16, 2002 250,000 - -------------------
(1)The maturity date was extended until September 5, 2003. In addition, in exchange for an aggregate of $50,000 cash investment received on February 27, 2002, the Company issued a promissory note to The Rundell Family Partnership. C. A. Rundell, Jr., who is Chairman and Chief Executive Officer of the Company, is also the Managing Partner of The Rundell Family Partnership. The promissory note is in the original principal amount of $50,000 and has an annual interest rate of 8% that is due on the first day of each month. The promissory note, plus interest, was due on June 26, 2002 or upon the sale of the VT 6802 railroad barrier technology, whichever occurred first. This note, plus all accrued interest, was paid in full on March 21, 2002, the approximate date of the sale of the Company's VT 6802 railroad barrier technology. The form of each of these non-convertible promissory notes is filed with the SEC as an exhibit to this Form 10-KSB. As a part of the cash investment, on February 27, 2002, the Company issued a stock purchase warrant to The Rundell Family Partnership. The stock purchase warrant entitles The Rundell Family Partnership to purchase from the Company, at any time, and in whole or in part, 250,000 fully paid and non-assessable shares of Common Stock of the Company for $0.20 per share. The number of shares of Common Stock purchasable upon exercise of a warrant is subject to adjustment in the event of any dividends, distributions, reclassifications, or capital reorganizations. The holder of the warrant is also entitled to certain registration rights. 10 Issuances of Preferred Stock in Fiscal 2002 On July 27, 2001, the Company received $100,000 in cash from each of the Renaissance entities in exchange for 3,000 shares of the Company's Series G cumulative convertible preferred stock and 1,000 shares of its Series F cumulative convertible preferred stock to each of the Renaissance entities. The Series F preferred stock and Series G preferred stock are 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 preferred stock, based on an initial conversion price of $0.20 per share. The initial conversion price may be adjusted to prevent dilution as a result of issuances of Common Stock at a purchase price less than the conversion price then in effect. The initial conversion price will not be adjusted for the issuance of Common Stock pursuant to the conversion of Series F preferred stock or Series G preferred stock, pursuant to outstanding employee stock options or warrants, or the issuance of up to 1,500,000 shares of Common Stock upon exercise of future employee stock options. If there is a stock dividend, stock split or subdivision of shares of Common Stock into a greater number of shares, the conversion price will be proportionately decreased. If there is a combination of shares of Common Stock into a smaller number of shares, the conversion price will be proportionately increased. Subsequent Event - Financing - Issuances of Promissory Notes in Fiscal 2003 In exchange for an aggregate of $150,000 cash investment, Integrated Security Systems, Inc. issued a promissory note to each of Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. and Frost National Bank FBO Renaissance US Growth Investment Trust PLC on September 5, 2002. Each of the two promissory notes is in the original principal amount of $75,000 and has an annual interest rate of 8%. The promissory notes, plus interest, are due on September 5, 2003. Interest is payable in monthly installments on the first day of each month. As a part of this transaction, on September 5, 2002, Integrated Security Systems, Inc. issued a stock purchase warrant to each of Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. and Frost National Bank FBO Renaissance US Growth Investment Trust PLC. Each of the two stock purchase warrants entitles the Renaissance entities to purchase from the Company 375,000 fully paid and non-assessable shares of Common Stock, $0.01 par value, of the Company for $0.20 per share. 11 Item 6. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- General The Company's executive offices are located at 8200 Springwood Drive, Suite 230, Irving, Texas 75063. The Company's telephone number is (972) 444-8280. The Company is a Delaware corporation. The audit report of Grant Thornton LLP, the Company's independent auditors, for the Company's consolidated financial statements for the year ended June 30, 2002 states that in fiscal 2002 and 2001 the Company has suffered significant losses from operations and at June 30, 2002 had a stockholders' deficit of $8,099,160. The audit report further states that these matters raise substantial doubt about the Company's ability to continue as a going concern. The Company cannot predict any material trends, events or uncertainties that may affect the Company, its subsidiaries, their businesses and financial condition. Results of Operations Year Ended June 30, 2002 Compared to Year Ended June 30, 2001 Sales. The Company's total sales decreased by $0.3 million, or 7%, during the fiscal year ended June 30, 2002, from $5.3 million in fiscal 2001. This decrease is primarily due to a decrease in road and bridge sales at the Company's B&B subsidiary together with a slight decrease in sales at the Intelli-Site subsidiary. For the twelve months ended June 30, 2002, approximately 97% of the Company's revenues were generated from the sale of products manufactured by the Company compared to 94% for the twelve months ended June 30, 2001. Cost of Sales. Cost of sales as a percentage of sales remained comparable at 64% for the fiscal year ended June 30, 2002 and at 68% for the fiscal year ended June 30, 2001. For the twelve months ended June 30, 2002, approximately 99% of the Company's cost of sales were related to the products manufactured by the Company, compared to 89% for the twelve months ended June 30, 2001. This increase in the percentage of cost of sales related to manufactured products is due to an unfavorable change in product mix sales at B&B, coupled with a decrease in costs related to the project revenue decrease at the Intelli-Site, Inc. subsidiary. Gross Margin. The gross margin percentage increased from 32% in fiscal 2001 to 36% in fiscal 2002. The increase was primarily due to increased software only sales at Intelli-Site, but was offset by a decrease at B&B due to an unfavorable change in product mix sales. Selling, General and Administrative. Selling, general and administrative expenses decreased by 36% or by $1.5 million during the fiscal 2002 period compared to fiscal 2001 due to overall company reduction in staffing and operating expenses. Research and Development. Research and development expenses decreased approximately $95,000 during fiscal period 2002 compared to fiscal 2001 due to decreased staffing at the Intelli-Site subsidiary. Other income. Other income consists of the gain on the sale of the Company's B&B subsidiary VT-6802 railroad crash barrier and related technology. Interest Expense. During fiscal 2002, interest expense increased by approximately $168,000 compared to fiscal 2001. Interest expense on the Company's current outstanding debt decreased by approximately $0.6 million. The Company did, however, incur approximately $0.8 million in non-cash interest expense relating to warrants that were issued in connection with securing additional financing in order to meet working capital needs. 12 Liquidity and Capital Resources Cash Position The Company's cash position decreased $41,624 during the fiscal year 2002. At June 30, 2002, the Company had $28,958 in cash and cash equivalents and $557,021 outstanding under its accounts receivable factoring facility. This accounts receivable factoring facility is explained in greater detail below in this section. Operating Activities For the fiscal year ended June 30, 2002, the Company's operating activities used $1,392,698 of cash compared to $2,138,242 cash used during the fiscal year ended June 30, 2001, a difference of $745,544. This $745,544 decrease in cash used in operating activities in fiscal 2002 is primarily due to the reduction in net loss offset in part by the effect of the level of investment in working capital. Accounts Receivable Factoring Facility The Company currently has an Account Transfer Agreement with Evergreen Funding Corporation to factor accounts receivable with recourse. Under the terms of this factoring facility, the Company sells its accounts receivable to Evergreen Funding Corporation, a factoring company. Evergreen Funding Corporation then acts as the principal in collecting those accounts receivable. The Company sells the receivables with recourse, which means that Evergreen Funding Corporation can turn to the Company if the accounts receivable prove to be not collectable. The Company's factoring facility also allows the Company to borrow money from Evergreen Funding Corporation in anticipation of the Company's expected sales. Borrowing money from the factoring company allows the Company to build up its inventory before a peak selling period. This accounts receivable factoring facility may be terminated by either party with 30 days notice. The Company may sell its eligible accounts receivable at an advance rate of 80%, less an adjustable factoring fee, or service charge, of 1.5% to 2.0% of the amount of accounts receivable sold. The factor has recourse to the 20% residual of aggregate accounts receivable purchased and outstanding. The factor may require the Company to repurchase all or any portion of the accounts receivable unpaid following 90 days after its due date. The interest rate charged is equal to the prime rate charged by Chase Bank of Texas, N.A. plus 2% per annum. The monthly minimum borrowing amount is $200,000 and the maximum monthly borrowing amount is $800,000, subject to availability under the Company's borrowing base. This facility is secured by the accounts receivable and inventory of the Company's B&B Electromatic, Inc. subsidiary and is guaranteed by the Company and Intelli-Site, Inc. The cash that the Company receives from the accounts receivable factoring facility is also used to support Company-wide operations. 13 Financial Restructuring On May 10, 2001 the Company received stockholder approval of a financial restructuring plan. Pursuant to the terms and conditions of the financial restructuring, the following actions were taken by the Company: o the amendment of the Company's certificate of incorporation to authorize 80,000 shares of a new Series F preferred stock and 300,000 shares of a new Series G preferred stock; o the issuance to Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC (known together as "Renaissance") of 41,439 shares of Series F preferred stock in exchange for aggregate principal of $1.0 million in promissory notes of the Company together with accrued interest; o the issuance to Renaissance of 268,711 shares of Series G preferred stock in exchange for all other promissory notes and convertible debentures of the Company held by Renaissance, constituting $6.7 million, including accrued interest; o the issuance to C. A. Rundell, Jr. of 2,077 shares of Series F preferred stock in exchange for the promissory note of the Company held by Mr. Rundell in the principal amount of $50,000 together with accrued interest; o the issuance to C. A. Rundell, Jr. and The Rundell Foundation of 13,091 shares of Series G preferred stock in exchange for the promissory notes of the Company held by them in the aggregate principal amount of $300,000 together with accrued interest; and o the issuance to HBW Investment Partners II, L.P. and HBW Capital Fund, L.P. of 12,213 shares of Series F preferred stock in exchange for the promissory notes of the Company held by HBW in the aggregate principal amount of $300,000 together with accrued interest. Additional Debt Service Obligations As described in greater detail in "Item 5. Market for Common Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities," during the fiscal year ended June 30, 2002, the Company financed its operations with cash flows from long-term borrowings of $908,001. The Company made payments of $127,978 on debt. As discussed in "Item 2. Description of Property" above, the Company has a mortgage on B&B Electromatic, Inc.'s facility. At August 31, 2002, the principal amount of the mortgage was $666,927. The interest rate is 10% and the amortization provisions are standard. There are no prepayment provisions and the mortgage matures on February 8, 2004. The balance due on the maturity date is approximately $576,000. The Company does not have any material commitments to purchase property and equipment in fiscal 2003. The Company does not have any material funding requirements for software and other products under development. Property and Equipment The Company used $46,277 for the purchase of property and equipment during fiscal 2002 compared to $53,944 for the previous fiscal 2001 period. This decrease is primarily due to a reduction in the amount of capitalized computer equipment purchased company wide. Additional Sources of Financing On July 27, 2001 the Company received an additional investment of $100,000 in cash from each of the two Renaissance entities in exchange for 3,000 shares of the Company's Series G cumulative convertible preferred stock and 1,000 shares of its Series F cumulative convertible preferred stock to each of the Renaissance entities. 14 Subsequent Event - Financing - Issuances of Promissory Notes In exchange for an aggregate of $150,000 cash investment, Integrated Security Systems, Inc. issued a promissory note to each of Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. and Frost National Bank FBO Renaissance US Growth Investment Trust PLC on September 5, 2002. Each of the two promissory notes is in the original principal amount of $75,000 and has an annual interest rate of 8%. The promissory notes, plus interest, are due on September 5, 2003. Interest is payable in monthly installments on the first day of each month. Recent History of the Company and Its Impact on the Company's Financial Condition In order to explain the Company's current financial position and what led to the changes in the Company's financial position, the following is a brief summary of the recent history of the Company and its subsidiaries. The Company's operating cash deficit has been increasing as a result of lower revenues and higher than budgeted development costs. In 1999, management refocused the Company on two of its subsidiaries, B&B Electromatic, Inc. and Intelli-Site, Inc., and sold its other subsidiaries, as a part of the Company's repositioning strategy. Intelli-Site, Inc. manufactures the Intelli-Site(R)software product and B&B Electromatic, Inc. manufactures traffic control, safety systems and safety barriers. When the Company decided to shift its focus, management assumed that the development of its Intelli-Site(R) software product was complete. However, due to unanticipated delays in the completion of the product, the Company did not meet the anticipated sales levels for the product and the Company experienced operating cash shortfalls. In addition, the anticipation by customers of a new requirement concerning the Underwriters' Laboratories UL325 listing for gate operators caused B&B to experience a significant downturn in perimeter security sales. B&B received UL compliance listing in July 2000. B&B also experienced a much lower sales volume than anticipated for the new railroad barrier product, of which the patents and certain technology related to the railroad barrier product were sold in fiscal 2002. The Company has experienced significant losses during fiscal 2002 and 2001 and at June 30, 2002 had a stockholders' deficit of $8,099,160. Management expects losses to continue through the majority of fiscal 2003. In order to meet working capital needs, the Company will need to receive additional financing either through the sale of assets, equity placement and/or additional debt. Failure to receive such financing could jeopardize the Company's ability to continue as a going concern. Backlog The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At August 31, 2002, the Company's backlog was approximately $1.7 million. The Company expects that it will fill the majority of this backlog by December 31, 2003. Capital Expenditures During the year ended June 30, 2002, the Company acquired $46,277 of property and equipment with both short-term and long-term borrowings. The Company does not anticipate any significant capital expenditures during fiscal 2003. 15 Effects of Inflation The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company's sales or operating results. Seasonality Historically the Company has experienced seasonality in its business due to fluctuations in the weather. The Company typically experiences a decline in sales and operating results during the quarter ended March 31 due to winter weather conditions. Environmental Matters The Company believes that it is currently in compliance with all applicable environmental regulations. Compliance with these regulations has not had, and is not anticipated to have, any material impact upon the Company's capital expenditures, earnings or competitive position. 16 INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Item 7. Financial Statements -------------------- Page ---- Report of Independent Public Accountants.................................18 Consolidated Balance Sheets as of June 30, 2002 and 2001.................19 Consolidated Statements of Operations for the years ended June 30, 2002 and 2001...................................................20 Consolidated Statements of Stockholders' Deficit for the years ended June 30, 2002 and 2001.......................................21 Consolidated Statements of Cash Flows for the years ended June 30, 2002 and 2001...................................................22 Notes to Consolidated Financial Statements............................23-34 17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Stockholders of Integrated Security Systems, Inc. We have audited the accompanying consolidated balance sheets of Integrated Security Systems, Inc. as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Security Systems, Inc. as of June 30, 2002 and 2001, and the consolidated results of its operations and its consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, in fiscal 2002 and 2001 the Company suffered significant losses from operations and at June 30, 2002 had a stockholders' deficit of $8,099,160. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ GRANT THORNTON LLP Dallas, Texas August 16, 2002, except for Note 12, as to which the date is September 5, 2002. 18
INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS June 30, ----------------------------- 2002 2001 ------------ ------------ ASSETS Current assets: Cash and cash equivalents .............................................. $ 28,958 $ 70,582 Accounts receivable, net of allowance for doubtful accounts of $100,692 and $89,943, respectively ....................... 1,035,833 1,312,464 Inventories ............................................................ 710,700 632,989 Other current assets ................................................... 74,999 113,844 ------------ ------------ Total current assets ................................................. 1,850,490 2,129,879 Property and equipment, net ............................................ 551,935 655,240 Other assets ........................................................... 18,181 14,410 ------------ ------------ Total assets ......................................................... $ 2,420,606 $ 2,799,529 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable - trade ............................................... $ 684,146 $ 926,076 Accrued liabilities .................................................... 477,873 425,391 Current portion of long-term debt ...................................... 631,779 494,959 ------------ ------------ Total current liabilities ............................................ 1,793,798 1,846,426 Long-term debt ............................................................ 1,230,916 620,306 Preferred stock subject to redemption ..................................... 7,495,052 7,345,052 Stockholders' deficit: Convertible preferred stock, $.01 par value, 750,000 shares authorized; 161,345 and 160,845 shares, respectively, issued and outstanding (liquidation value of $3,529,875 and $3,509,875, respectively) ....... 1,613 1,608 Common stock, $.01 par value, 75,000,000 shares authorized; 11,834,589 and 10,782,417 shares, respectively, issued ............... 118,346 107,824 Additional paid in capital ............................................. 17,234,734 16,123,610 Accumulated deficit .................................................... (25,335,103) (23,126,547) Treasury stock, at cost - 50,000 common shares ......................... (118,750) (118,750) ------------ ------------ Total stockholders' deficit ............................................ (8,099,160) (7,012,255) ------------ ------------ Total liabilities and stockholders' deficit .......................... $ 2,420,606 $ 2,799,529 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 19
INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended June 30, 2002 2001 ------------ ------------ Sales.......................................................... $4,957,897 $5,311,194 Cost of sales.................................................. 3,177,479 3,625,300 ------------ ------------ Gross margin................................................... 1,780,418 1,685,894 Operating expenses: Selling, general and administrative......................... 2,778,917 4,315,790 Research and product development............................ 431,346 525,946 ------------ ------------ 3,210,263 4,841,736 ------------ ------------ Loss from operations........................................... (1,429,845) (3,155,842) Other income (expense): Other income................................................ 203,834 -- Interest expense............................................ (926,947) (759,250) ------------ ------------ Net loss....................................................... (2,152,958) (3,915,092) Preferred dividends............................................ (608,091) (166,498) Beneficial conversion feature of preferred stock issued........ -- (3,188,474) ------------ ------------ Net loss allocable to common stockholders...................... $ (2,761,049) $ (7,270,064) ============ ============ Weighted average common shares outstanding..................... 11,200,308 10,656,034 ============ ============ Basic and diluted loss per share $ (0.25) $ (0.68) ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 20
INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Convertible Preferred Stock Common Stock Additional --------------------------- --------------------------- Paid In Accumulated Treasury Shares Amount Shares Amount Capital Deficit Stock ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 2000 . 102,250 $ 1,023 10,564,145 $ 105,641 $ 14,502,963 $(19,044,507) $ (118,750) Preferred stock issuance . 58,595 585 1,464,296 Common stock issuance .... 112,158 1,122 23,878 Warrant issuance ......... 83,450 Warrant exercise ......... 97,714 977 (977) Stock option issuance .... 50,000 Stock option exercise .... 8,400 84 Preferred stock dividends. (166,948) Net loss.................. (3,915,092) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 2001 . 160,845 1,608 10,782,417 107,824 16,123,610 (23,126,547) (118,750) Preferred stock issuance . 2,000 20 49,980 Preferred stock conversion (1,500) (15) 37,500 375 (360) Common stock issuance .... 547,079 5,471 152,377 Warrant issuance ......... 782,500 Warrant exercise ......... 8,000 80 Stock option issuance .... 50,000 Stock option exercise .... 265,000 2,650 22,975 Preferred stock dividends. 194,593 1,946 53,652 (55,598) Net loss.................. (2,152,958) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 2002 . 161,345 $ 1,613 11,834,589 $ 118,346 $ 17,234,734 $(25,335,103) $ (118,750) ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 21
INTEGRATED SECURITY SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended June 30, 2002 2001 ----------- ----------- Cash flows from operating activities: Net loss..................................................... $(2,152,958) $(3,915,092) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............................................... 138,233 160,835 (Gain)/loss on sale of assets.............................. (203,650) 154,444 Amortization............................................... -- 113,713 Provision for bad debt..................................... 39,250 24,000 Provision for warranty reserve............................. 89,000 77,500 Provision/(credit) for inventory reserve................... 25,423 (24,517) Unbilled revenue........................................... 3,411 249,156 Amortization of debt discount.............................. 782,500 83,450 Expenses paid with stock, warrants and options............. 166,223 50,000 Changes in operating assets and liabilities: Accounts receivable...................................... 237,381 (134,973) Inventories.............................................. (103,134) (22,986) Notes receivable......................................... -- 28,546 Other assets............................................. 31,663 4,773 Accounts payable - trade................................. (241,927) 1,033,431 Accrued liabilities...................................... (204,113) (20,522) ----------- ----------- Net cash used in operating activities................ (1,392,698) (2,138,242) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment........................... (46,277) (53,944) Proceeds on the sale of assets............................... 350,000 5,120 ----------- ----------- Net cash provided/(used) in investing activities..... 303,723 (48,824) ----------- ----------- Cash flows from financing activities: Issuance of preferred stock.................................. 200,000 300,000 Issuance of common stock..................................... -- 25,084 Dividends on preferred stock................................. 41,623 (166,948) Employee stock option exercise............................... 25,625 -- Warrant exercise............................................. 80 -- Payments of debt............................................. (127,978) (170,124) Proceeds from debt........................................... 908,001 2,170,000 ----------- ----------- Net cash provided by financing activities............ 1,047,351 2,158,012 ----------- ----------- Decrease in cash and cash equivalents........................... (41,624) (29,054) Cash and cash equivalents at beginning of period................ 70,582 99,636 ----------- ----------- Cash and cash equivalents at end of period...................... $ 28,958 $ 70,582 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 22 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Integrated Security Systems, Inc. was formed in December 1991. The Company has two wholly-owned subsidiaries: B&B Electromatic, Inc., a gate and barrier engineering and manufacturing facility; and Intelli-Site, Inc., a developer and retail seller of PC-based control systems which integrate discrete security devices. 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the Company and its subsidiaries: B&B Electromatic, Inc. and Intelli-Site, Inc. All significant intercompany transactions and balances have been eliminated. Cash and Cash Equivalents Cash is comprised of highly liquid instruments with original maturities of three months or less. Inventories Inventories are carried at the lower of cost or market using the first-in, first-out method. Property and Equipment and Depreciation Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Leased property and equipment under capital leases are amortized on the straight-line method over the lesser of the life of the asset or the remaining term of the lease. Estimated useful lives range from 3 to 31 years. Income Taxes The Company accounts for income taxes using the liability method. Under the liability method, deferred taxes are provided for tax effects of differences in the basis of assets and liabilities arising from differing treatments for financial reporting and income tax purposes using currently enacted tax rates. Valuation allowances are recorded when it is more likely than not that a tax benefit will not be realized. Revenue Recognition and Accounts Receivable The Company recognizes revenue from sales at the time of shipment. The Company's accounts receivable are generated from a large number of customers in the traffic and security products markets. No single customer accounted for 10% or more of revenues during the years ended June 30, 2002 or 2001. 23 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Software Development Costs The Company accounts for software development costs pursuant to SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalized costs are amortized over the greater of the revenue method or the straight-line method over five years. Amortization expense for the years ended June 30, 2002 and 2001 was $0 and $113,713, respectively. Accumulated amortization at June 30, 2002 was $0 and at June 30, 2001 was $839,996. The Company expenses all other research and product development costs as they are incurred. Fair Value of Financial Instruments The carrying values of the Company's cash and cash equivalents, accounts receivable, and long-term debt approximate the fair values of such financial instruments. Net Loss Per Share The Company computes basic loss per common share using the weighted average number of common shares. At June 30, 2002 and 2001, there were 51,208,031 and 47,686,416 potentially dilutive common shares, which were not included in weighted average shares outstanding because their effect is antidilutive. Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual amounts could differ from these estimates. Statements of Cash Flows Supplemental cash flow information for the years ended June 30, 2002 and 2001: 2002 2001 --------- --------- Interest paid $ 114,727 $ 144,528 During fiscal 2001, the Company converted approximately $8.8 million of debt and accrued interest into shares of Series F and G preferred stock. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company follows the practice of filing statutory liens on construction projects where collection problems are anticipated. The liens serve as collateral for trade receivables. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. 24 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Stock-based Compensation The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, compensation cost for stock options to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. 3. LIQUIDITY The Company has experienced significant losses during fiscal 2002 and 2001 and at June 30, 2002 had a stockholders' deficit of $8,099,160. Management expects losses to continue through the majority of fiscal 2003. In order to meet working capital needs, the Company will need to receive additional financing either through the sale of assets, equity placement and/or additional debt. Failure to receive such financing could jeopardize the Company's ability to continue as a going concern. 4. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS The composition of certain balance sheet accounts is as follows: June 30, -------------------------- 2002 2001 ----------- ----------- Inventories: Raw materials $ 523,879 $ 434,024 Work-in-process 186,821 184,962 Finished goods -- 14,003 ----------- ----------- $ 710,700 $ 632,989 =========== =========== Property and equipment: Land $ 40,164 $ 40,164 Building 586,449 586,449 Leasehold improvements 48,769 48,769 Office furniture and equipment 1,093,052 1,092,368 Manufacturing equipment 644,789 628,567 Vehicles 70,921 70,921 ----------- ----------- 2,484,144 2,467,238 Less: accumulated depreciation (1,932,209) (1,811,998) ----------- ----------- $ 551,935 $ 655,240 =========== =========== 25 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 5. DEBT
Debt: June 30, -------------------------- 2002 2001 ----------- ----------- Term note payable to a bank; due in monthly principal and interest installments of $12,000 through August 2003; interest at 10% at June 30, 2002 and 2001; secured by first mortgage on real estate and equipment............................................................. $ 676,809 $ 680,062 Accounts receivable factoring facility with a finance company to factor accounts receivable with recourse. This accounts receivable factoring facility has an adjustable factoring fee of 1.5%-2.0%, a minimum and maximum borrowing of $200,000 and $800,000, respectively, per month; interest at the prime rate of Chase Bank of Texas, N. A. plus 2%; agreement may be terminated by either party with 30 days written notice......................................... 557,021 363,883 Notes payable to venture capital funds; interest at 8% due in monthly installments of $3,333; principal and accrued unpaid interest due September 5, 2003............................................ 500,000 -- Notes payable to individual; interest at 8% due in monthly installments of $667; principal and accrued unpaid interest due September 5, 2003..................................................... 100,000 -- Other..................................................................... 28,865 71,320 ----------- ----------- 1,862,695 1,115,265 Less current portion...................................................... (631,779) (494,959) ----------- ----------- $ 1,230,916 $ 620,306 =========== ===========
Payments required under long-term debt and other liabilities outstanding at June 30, 2002 are as follows: 2003 $ 631,778 2004 1,225,499 2005 5,418 ----------- $ 1,862,695 26 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 6. INCOME TAXES A reconciliation of the income tax provision and the amount computed by applying the federal statutory benefit rate to loss before income taxes follows: For the Years Ended June 30, 2002 June 30, 2001 ------------- ------------- Federal statutory benefit rate (34.0)% (34.0)% Increase in valuation allowance 31.0% 33.0% Other 3.0% 1.0% ------------- ------------- --% --% ============= ============= Deferred tax assets (liabilities) are comprised of the following at: June 30, 2002 June 30, 2001 ------------- ------------- Deferred tax assets Warranty reserve $ 33,000 $ 24,000 Accounts receivable 34,000 31,000 Net operating loss carryforward 6,546,000 5,904,000 Other 7,000 6,000 ------------- ------------- Gross deferred tax asset 6,620,000 5,965,000 Deferred tax liabilities Property and equipment (78,000) (84,000) ------------- ------------- Net deferred tax asset 6,542,000 5,881,000 Valuation allowance (6,542,000) (5,881,000) ------------- ------------- Net deferred tax asset $ -- $ -- ============= ============= The Company has unused net operating loss carryforwards of approximately $19.3 million at June 30, 2002. These carryforwards expire from 2007 through 2021. The Company has recorded a valuation allowance to the extent it is more likely than not that a tax benefit will not be realized prior to expiration of the carryforward periods. As a result of fiscal 2002 and 2001 operating losses, the Company has fully reserved its deferred tax asset. 7. COMMITMENTS AND CONTINGENCIES The Company leases facilities and equipment under leases accounted for as operating leases. Future minimum payments for fiscal years subsequent to June 30, 2002 under these leases are as follows: 2003 $ 122,777 2004 63,286 2005 2,230 ---------- $ 188,293 ========== Rent expense for operating leases was $143,571 and $163,283 for the years ended June 30, 2002 and 2001, respectively. 27 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Contingencies The Company is subject to certain legal actions and claims arising in the ordinary course of business. Management recognizes the uncertainties of litigation; however, based upon the nature and management's understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company's financial position, results of operations or cash flows. 8. BENEFIT PLANS The Company has established a 401(k) savings and profit sharing plan. Participants include all employees who have completed six months of service and are at least 21 years of age. Employees can contribute up to 15% of compensation and the Company may at its option make discretionary contributions. Vesting on the Company's contribution occurs over a five-year period. The Company made contributions of $17,460 and $28,913 during fiscal 2002 and 2001, respectively. 9. STOCK OPTIONS AND WARRANTS AND COMMON STOCK ISSUANCES Stock Options The Company's 1993 Stock Option Plan provides for grants of options for up to 500,000 shares of common stock. Under the plan, options must be granted with an exercise price not less than the fair market value on the date of grant. The Company's 1997 Omnibus Stock Plan provides for the granting of incentive stock options, non-statutory stock options, stock appreciation rights, awards of stock and stock purchase opportunities to its directors, employees and consultants. Under the plan, incentive stock options may only be granted to employees or directors of the Company. Option exercise prices are equal to the market price at date of grant. Shares under grant generally become exercisable over three years and expire after ten years. If the Company recognized compensation expense as permitted under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), based on the fair value at the grant dates, the Company's pro forma net loss and net loss per share would have been as follows (net loss amounts in thousands):
For the Year Ended For the Year Ended June 30, 2002 June 30, 2001 ------------------------- ------------------------- As reported Pro forma As reported Pro forma ----------- --------- ----------- --------- Net loss $ (2,153) $ (2,449) $ (3,915) $ (4,209) Loss per common share $ (0.25) $ (0.27) $ (0.68) $ (0.72)
The fair value of these options was estimated at the date of grant using the Black-Sholes option pricing model with the following weighted average assumptions used for grants in fiscal 2002 and 2001, respectively: no dividend yield, expected volatility of 111% and 113%; risk-free interest rates of approximately 4.57% and 5.12% and expected lives of five years. 28 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Additional information with respect to options outstanding at June 30, 2002 and changes for the two years then ended is as follows:
For the Year Ended For the Year Ended June 30, 2002 June 30, 2001 ---------------------------- ---------------------------- Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ---------- -------------- ---------- -------------- Outstanding at beginning of period 5,080,612 $ 0.49 2,217,214 $ 1.29 Granted 1,377,445 0.33 3,640,928 0.11 Exercised (265,000) 0.10 (8,400) 0.01 Forfeited (2,075,664) 0.22 (769,130) 0.98 ---------- ------ ---------- ------ Outstanding at end of period 4,117,393 $ 0.59 5,080,612 $ 0.49 ========== ====== ========== ====== Exercisable at end of period 2,616,949 $ 0.79 2,283,208 $ 0.95 ========== ====== ========== ====== Weighted-average fair value of options granted during the period $ 0.29 $ 0.17
Information about stock options outstanding at June 30, 2002 is summarized as follows:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Range of Weighted Weighted Weighted Exercise Number Average Average Number Average Prices Of Shares Remaining Life Exercise Price Of Shares Exercise Price ------------ ---------- -------------- -------------- ---------- -------------- $0.01-1.00 3,444,585 7.3 Years $0.34 1,944,141 $0.42 $1.1875-2.00 409,262 4.4 Years 1.51 409,262 1.51 $2.0938-2.50 263,546 1.0 Years 2.43 263,546 2.43 ---------- ------ ---------- ------ 4,117,393 $0.59 2,616,949 $0.79 ========== ==========
During fiscal 2002, the Company granted options to purchase 100,000 shares of common stock at less than the market price at the date of the grants. The options vested during the year. Accordingly, the entire amount of the intrinsic value of the options of $50,000 was charged to operations. 29 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Warrants In connection with short-term debt financings, the Company issued 250,000 warrants in fiscal 2001 and 3,250,000 warrants in fiscal 2002. The warrants provide for the purchase of common stock at $0.20 per share and expire five years from date of issuance. The Company valued the warrants using the Black-Scholes model, which resulted in a discount on debt being recorded in the amount of $83,450 in fiscal 2001 and $782,500 in fiscal 2002. The discount was amortized over the life of the debt. Additional information with respect to warrants outstanding at June 30, 2002 and changes for the two years then ended are as follows:
For the Year Ended For the Year Ended June 30, 2002 June 30, 2001 ------------------------------ ------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ---------- -------------- ---------- -------------- Outstanding at beginning of period 7,996,401 $ 1.69 8,505,269 $ 1.69 Granted 3,250,000 0.20 250,000 0.20 Exercised (8,000) 0.01 (97,714) 0.01 Forfeited (75,556) 1.54 (661,154) 1.09 ---------- ------ ---------- ------ Outstanding at end of period 11,162,845 $ 1.22 7,996,401 $ 1.69 ========== ====== ========== ====== Exercisable at end of period 11,162,845 $ 1.22 7,996,401 $ 1.69 ========== ====== ========== ======
Common Stock Issuances During fiscal 2002, the Company issued common stock in the following non-cash transactions: Number of shares Fair value --------- ---------- Employee and director bonuses 173,429 $ 48,300 Consultants 130,000 41,250 Payment of interest 99,596 26,674 Payment of dividends on Series D Preferred Stock, including 144,054 shares applicable to fiscal 2001 338,647 97,221 --------- ---------- 741,672 $ 213,445 ========= ========== The shares issued in these transactions are subject to restrictions on sale. Fair value was based on a reduction from the quoted market at date of issuance of approximately 25%. 30 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 10. CONVERTIBLE PREFERRED STOCK At June 30, 2002 and 2001, convertible preferred stock, $0.01 par value per share, consisted of the following:
June 30, 2002 June 30, 2001 ------------------------------------- ------------------------------------- Shares Par Liquidation Shares Par Liquidation Outstanding Value Value Outstanding Value Value ----------- ------- ----------- ----------- ------- ----------- Series A $20 9,500 $ 95 $ 190,000 9,500 $ 95 $ 190,000 Series D $20 91,250 913 1,825,000 92,750 928 1,855,000 Series F $25 60,595 606 1,514,875 58,595 585 1,464,875 ----------- ------- ----------- ----------- ------- ----------- 161,345 $ 1,613 $ 3,529,875 160,845 $ 1,608 $ 3,509,875 =========== ======= =========== =========== ======= =========== Convertible Preferred Stock Subject to Redemption Series G $25 299,802 $ 2,998 $ 7,495,052 293,802 $ 2,938 $ 7,345,052 =========== ======= =========== =========== ======= ===========
Series A $20 Convertible Preferred Stock. At June 30, 2002, the Company had 9,500 shares of its Series A $20 Convertible Preferred Stock (the "Series A Preferred") outstanding. Holders of the Series A Preferred are not entitled to receive any dividends, and have no voting rights, unless otherwise required pursuant to Delaware law. Each share of the Series A Preferred may, at the option of the Company, be converted into 20 shares of Common Stock at any time after (i) the closing bid price of the Common Stock is at least $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the shares of Common Stock to be received on conversion have been registered or otherwise qualified for sale under applicable securities laws. The holders of the Series A Preferred have the right to convert each share into 20 shares of Common Stock at any time. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series A Preferred are entitled to receive $20 per share before the holders of Common Stock are entitled to receive any distribution. Series D $20 Convertible Preferred Stock. At June 30, 2002 the Company had 91,250 shares of its Series D $20 Convertible Preferred Stock (the "Series D Preferred") outstanding. Holders of the Series D Preferred are entitled to receive dividends at the annual rate of 9% per share paid quarterly in cash, and have voting rights of one vote for each share of Common Stock into which the Preferred Stock is convertible. Beginning on November 15, 2004 the Company may redeem the Series D Preferred upon not less than 30 days' notice, in whole or in part, plus all accrued but unpaid dividends. After notice and prior to the expiration of the 30-day notice period, holders of the Series D Preferred will have the option to convert the Series D Preferred into Common Stock prior to the redemption. Each share of the Series D Preferred may, at the option of the Company beginning on November 15, 2000, be converted into 25 shares of Common Stock at any time after (i) the closing bid price of the Common Stock exceeds $2.00 for at least 20 trading days during any 30 trading day period, and (ii) the Company has sustained positive earnings per share of Common Stock for the two previous quarters. The holders of the Series D Preferred have the right to convert each share into 25 shares of Common Stock at any time. Upon liquidation, dissolution, or winding up of the Company, the holders of the Series D Preferred are entitled to receive $0.1 per share until (a) all the shares of Series F Preferred stock and the Series G Preferred Stock have been converted and/or redeemed, or (b) all of the holders of the shares of Series F Preferred Stock and Series G Preferred Stock have received dividends and/or other distributions with respect to the Series F Preferred Stock and Series G Preferred Stock in an aggregate amount equal to the liquidation preference for such shares. After the Series F Preferred Stock and Series G Preferred Stock have received liquidation preference, the holders of the Series D Preferred Stock are entitled to receive $20 per share before the 31 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- holders of Common tock are entitled to receive any distribution. Each holder also received a stock purchase warrant to purchase 16.67 shares of common stock at $1.00 per share for each share of Series D Preferred purchased. These warrants expire on October 10, 2004. Series F $25 Convertible Preferred Stock. At June 30, 2002 the Company had 60,595 shares of its Series F $25 Convertible Preferred Stock (the "Series F Preferred") outstanding. Holders of the Series F Preferred are entitled to receive dividends at the annual rate of 5% per share paid quarterly in cash beginning on March 31, 2003 for dividends cumulative from the date of issue through payment, and thereafter the dividends will be paid in quarterly installments each year. The Series F Preferred has voting rights of one vote for each share of Common Stock into which the Preferred Stock is convertible. The Series F Preferred stock ranks on a parity with the Series G Preferred stock and senior to the Common Stock, Series A Preferred stock and the Series D Preferred stock. The Series F Preferred stock will not be redeemable. Each share of the Series F Preferred may, at the option of the holder, be converted into shares of Common Stock at an initial conversion rate of 125 shares of Common Stock for each share of the Series F Preferred stock, based on an initial conversion price of $0.20 per share. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series F Preferred are entitled to receive $25 per share, plus an amount equal to all dividends, whether or not earned or declared, accumulated, accrued and unpaid before the holders of the Series A Preferred stock, Series D Preferred stock and Common Stock are entitled to receive any distribution. The holders of the Series F Preferred stock and the holders of the Series G Preferred stock, voting together as a single class, are entitled to elect two additional directors to the Company board of directors. Series G $25 Convertible Preferred Stock. At June 30, 2002 the Company had 299,802 of its Series G $25 Convertible Preferred Stock (the "Series G Preferred") outstanding. Holders of the Series G Preferred are entitled to receive dividends at the annual rate of 5% per share paid quarterly in cash beginning on March 31, 2003 for dividends cumulative from the date of issue through payment, and thereafter the dividends will be paid in quarterly installments each year. The Series G Preferred has voting rights of one vote for each share of Common Stock into which the Preferred Stock is convertible. The Series G Preferred stock ranks on a parity with the Series F Preferred stock and senior to the Common Stock, Series A Preferred stock and the Series D Preferred stock. The Company is required to redeem the Series G Preferred stock upon the earlier of: (a) the sale of B&B Electromatic, Inc., to the extent of the net proceeds to the Company from such sale or (b) two years after issuance. Each share of the Series G Preferred may, at the option of the holder, be converted into shares of Common Stock at an initial conversion rate of 125 shares of Common Stock for each share of the Series G Preferred stock, based on an initial conversion price of $0.20 per share. Upon any liquidation, dissolution, or winding up of the Company, the holders of the Series G Preferred are entitled to receive $25 per share, plus an amount equal to all dividends, whether or not earned or declared, accumulated, accrued and unpaid before the holders of the Series A Preferred stock, Series D Preferred stock and Common Stock are entitled to receive any distribution. The holders of the Series G Preferred stock and the holders of the Series F Preferred stock, voting together as a single class, are entitled to elect two additional directors to the Company board of directors. Because the Series G Preferred is a redeemable security, it is not classified as equity on the balance sheet. At June 30, 2002, dividends in arrears on the Series D, F and G preferred stock totaled approximately $613,700. 32 INTEGRATED SECURITY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Beneficial Conversion Feature As stated above, each share Series F and Series G preferred stock is convertible into the Company's common stock at a rate of $0.20 per share. During fiscal 2001, at the dates the preferred stock was issued, the Company's common stock had a market value of $0.27 to $0.34 per share, resulting in a beneficial conversion feature of $3,188,474. This amount has been reflected in the financial statements as a preferred stock dividend and an increase in net loss allocable to common shareholders. 11. SEGMENT REPORTING The Company has two business segments: B&B Electromatic, Inc. and Intelli-Site, Inc. These segments are differentiated by the products they produce and the customers they service as follows: B&B Electromatic, Inc. This segment consists of road and bridge perimeter security and railroad physical security products such as warning gates, crash barriers, lane changers, navigational lighting, airport lighting and hydraulic gates and operators, and aluminum gate panels. Intelli-Site, Inc. This segment consists of the development and marketing of programmable security systems that integrate multiple security devices and subsystems for governmental, commercial and industrial facilities utilizing the Intelli-Site(R) software product through systems integrators and original equipment manufacturers to end users. The Company's underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. The Company evaluates performance based on earnings from operations before income tax and other income and expense. The corporate column includes corporate overhead-related items. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 2). The following table provides financial data by segment for the fiscal years ended June 30, 2002 and 2001.
B&B Intelli-Site, Electromatic, Inc Inc. Corporate Total ----------------- ------------- ----------- ----------- 2002 Sales $ 4,817,153 $ 140,744 $ -- $ 4,957,897 Loss from operations (32,018) (1,125,791) (272,036) (1,429,845) Total assets 2,239,111 114,553 66,942 2,420,606 Depreciation and amortization expense 90,930 43,934 3,369 138,233 Capital additions 46,277 -- -- 46,277 2001 Sales $ 5,001,251 $ 309,943 $ -- $ 5,311,194 Loss from operations (16,484) (2,050,760) (1,088,598) (3,155,842) Total assets 2,449,796 192,002 157,731 2,799,529 Depreciation and amortization expense 109,553 160,386 4,609 274,548 Capital additions 46,662 7,282 -- 53,944
12. SUBSEQUENT EVENTS In September 2002, the Company issued notes for $150,000 due in September 2003. The lender also received warrants to purchase 750,000 shares of common stock for $0.20 per share. The warrants expire in September 2007. 33 Item 8. Changes in and Disagreements with Accountants on Accounting and ----------------------------------------------------------------------- Financial Disclosure -------------------- There are no changes or disagreements required to be reported under this Item 8. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; ----------------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- The following individuals are directors of the Company. C. A. RUNDELL, JR., 70, has been a director of the Company since March 1999. Mr. Rundell was appointed Chief Executive Officer of the Company upon Gerald K. Beckmann's resignation on August 31, 2000. Since 1988, Mr. Rundell has owned and operated Rundell Enterprises, a sole proprietorship engaged in providing acquisition and financial services to business enterprises. Mr. Rundell was previously the Chief Executive Officer of Tyler Corporation from October 1996 to December 1998. Mr. Rundell was a director and Chairman of the Board of NCI Building Systems, Inc. from April 1989 to July 2000. Mr. Rundell is a director of Renaissance US Growth Investment Trust, PLC. He is also a director of Tandy Brands Accessories, Inc., a designer, manufacturer and marketer of men's, women's and children's fashion accessories. 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, 58, has been a director of the Company since 1999. Mr. Arsht is President of Arsht & Company, Inc., a New York based investment banking firm established in 1986 and is also Chief Executive Officer of M Space Holdings, LLC, a lessor of commercial modular space. From 1977 to 1986, Mr. Arsht was Senior Vice President and Managing Director of Thomson McKinnon Securities, Inc. He also served as Vice President, Corporate Finance at Wertheim & Company, Inc. and was Special Assistant to the Deputy Secretary of the U.S. Treasury Department. Mr. Arsht also held positions at the U.S. Securities and Exchange Commission. Mr. Arsht earned an M.B.A. in Finance from American University and a B.A. in History from East Texas State University. PETER BEARE, 45, has been a director of the Company since June 2002. Mr. Beare is a Principal Consultant in Peter Beare & Associates Ltd and Straight Talk Sales & Marketing Services, LLP. Mr. Beare was the President and Chief Operating Officer of Ultrac, Inc. from July 2000 until March 2002 and was the Vice President - Technology of Ultrac from May 2000 to July 2000. From April 1994 to May 2000, he was employed by Baxall Ltd. in the United Kingdom (UK), a subsidiary of Upperpoint, in various capacities, including Managing Director and later joined the main board of Upperpoint as Technology Director. Prior to Baxall, Ltd., Mr. Beare was a consultant to various companies in the communications and audio industries. From 1986 to 1990, Mr. Beare was the founder and Director of Camteq, Ltd. in the UK. WILLIAM D. BREEDLOVE, 62, has been a director of the Company since May 2001. Mr. Breedlove has served as Vice Chairman of Hoak Breedlove Wesneski & Co. (HBW), an investment banking firm, since August 1996. Mr. Breedlove has held senior management positions in commercial and merchant banking for over 30 years. Prior to HBW's formation in 1996, Mr. Breedlove was chairman, managing director and co-founder of Breedlove Wesneski & Co., a private merchant banking firm. From 1984 to 1989, Mr. Breedlove also served as president and director of Equus Capital Corporation, the corporate general partner of three public and private limited partnerships operating as management leveraged buyout funds. Mr. Breedlove's experience also includes 22 years at First National Bank in Dallas, the last three years of which he served as chairman and chief executive officer of the lead bank and vice chairman of InterFirst Corporation. Mr. Breedlove currently serves as a director of NCI Building Systems, Inc., Local Financial Corporation, Park Pharmacy Corporation and seven private companies. He has previously served as director of several other publicly-held companies, including InterFirst Corporation, Texas Oil and Gas Corporation, Dillard's Department Stores, and Cronus Industries, Inc. Mr. Breedlove received his B.B.A. degree in finance and banking from the University of Texas at Austin. 34 RUSSELL CLEVELAND, 63, has been a director of the Company since February 2001. Mr. Cleveland is the President, Chief Executive Officer, sole Director and the majority shareholder of Renaissance Capital Group, Inc. He has served as President, Chief Executive Officer and director of Renaissance Capital Growth & Income Fund III, Inc. since its inception in 1994. Mr. Cleveland is a Chartered Financial Analyst with more than 41 years experience as a specialist in investments for smaller capitalization companies. Mr. Cleveland has also served as President of the Dallas Association of Investment Analysts. He serves on the Boards of Directors of Renaissance US Investment Trust PLC, BFS US Special Opportunities Trust PLC, Cover-All Technologies, Inc., Digital Recorders, Inc. and Tutogen Medical, Inc. Mr. Cleveland is a graduate of the Wharton School of Commerce and Finance of the University of Pennsylvania. ROBERT M. GALECKE, 60, has been a director of the Company since May 1996. Mr. Galecke is currently Senior Vice President of Finance and Administration for the University of Dallas. Prior to that he was a principal in the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to May 1996. He also served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of Southmark Corporation, a financial services insurance and real estate holding company, from 1986 to 1992. From 1989 to 1995, Mr. Galecke served as Chairman of the board, President and Chief Executive Officer of National Heritage, Inc. Mr. Galecke received a graduate degree from the School of Banking at the University of Wisconsin, Madison, and a B.S. in Economics from the University of Wisconsin at Stevens Point. FRANK R. MARLOW, 63, has been a director of the Company since May 1995. Mr. Marlow served as Vice President, Sales and Marketing for the Company from October 1993 to February 1995. Mr. Marlow is currently Vice President of Sales for Conformity, formerly Money Star, a technology company based in Austin, Texas. From 1995 until 1998, Mr. Marlow was Vice President of Hogan Systems, a publicly-traded company subsequently purchased by Computer Sciences Corp. Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL Corporation and Syntelligence Corporation in executive sales and training positions. In addition to Mr. Rundell, the following individuals are significant employees of the Company and its subsidiaries. JACK G. CALDWELL, 65, has been president of B&B Electromatic, Inc., a subsidiary of the Company since January 1998. Prior to joining the Company, Mr. Caldwell was a Results Manager for Thomas Group, Inc. from 1992 to 1998. From 1986 to 1992, Mr. Caldwell served as the European Operations Manager for E-Systems and was Director of Sales and Marketing from 1978 to 1986 for the Cooper Industries. Mr. Caldwell earned a B.S. degree from East Texas State University and did graduate work at Southern Methodist University, the University of Maryland and New Mexico State University. RICHARD B. POWELL, 38, Vice President, Chief Accounting Officer and Secretary, joined the Company in April 1998 as Corporate Controller, became Vice President, Chief Accounting Officer in April 2001, and Secretary in May 2001. Prior to joining the Company, Mr. Powell was the Accounting Manager at Medical City Dallas Hospital from 1995 to 1998, Accounting Manager of HealthCor, Inc., a home health care company, from 1993 to 1995 and Accounting Supervisor of Signature Home Care Group, Inc., a home health care company, from 1989 to 1993. Mr. Powell holds a B.S. in Accounting from McNeese State University. 35 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto provided to the Company pursuant to Rule 16a-3(e), Messrs. Arsht, Breedlove, Galecke, and Marlow and Powell had late filings during the fiscal year ending June 30, 2002. Item 10. Executive Compensation ---------------------- Summary Compensation Table The following table shows the compensation of the Chief Executive Officer(s) and the two executive officers of the Company whose compensation exceeded $100,000 for the fiscal years ended June 30, 2002, 2001 and 2000.
Annual Compensation Long-Term Compensation Award ----------------------------------------- ---------------------------- Securities Underlying Name and Other Annual Restricted Options/ Principal Position Year Salary Bonus Compensation Stock Awards SARs ------------------- ---- -------- ----- ------------ ------------ ---------- C. A. Rundell, Jr. 2002 $ 24,000 -- -- -- 596,518 Chief Executive Officer 2001 24,000 -- -- -- 78,301 2000 24,000 -- -- -- 35,310 Gerald K. Beckmann 2002 $ -- -- -- -- -- Chief Executive Officer 2001 62,500 -- -- -- -- and President (1) 2000 277,078 -- -- -- 100,000 Holly J. Burlage 2002 $ -- -- -- -- -- Executive Vice President, 2001 123,270 -- -- -- -- Chief Financial Officer (2) 2000 125,650 -- -- -- 40,000 Jack G. Caldwell 2002 $160,500 -- -- -- -- President 2001 160,500 -- -- -- 500,000 B&B Electromatic, Inc. 2000 149,213 -- -- -- 100,000 Lars H. Halverson 2002 $ 70,417 -- -- -- 100,000 President 2001 59,583 -- -- -- 1,500,000 Intelli-Site, Inc. (3) 2000 -- -- -- -- -- --------------------
(1) Resigned as of August 31, 2000. (2) Resigned as of March 31, 2001. (3) Began employment on January 16, 2001 and resigned as of January 15, 2002. No other executive officer's salary and bonus exceeded $100,000 annually and no executive had any form of long-term incentive plan compensation arrangement with the Company during the fiscal years ended June 30, 2002, 2001 and 2000. 36 Stock Option Grants The following table provides information concerning the grant of stock options during the twelve months ended June 30, 2002 to the named executive officers:
Number Of % Of Total Options Securities Underlying Granted To Employees Exercise Expiration Name Options Granted In Fiscal Year Price Date --------------------- --------------------- -------------------- -------- ---------- C. A. Rundell, Jr. (1) 7,479 .54% $ 0.39 06/21/07 C. A. Rundell, Jr. (2) 300,000 21.78% $ 0.35 06/12/12 C. A. Rundell, Jr. (1) 8,102 .59% $ 0.36 02/22/07 C. A. Rundell, Jr. (1) 7,292 .53% $ 0.40 12/14/06 C. A. Rundell, Jr. (1) 5,952 .43% $ 0.49 10/26/06 C. A. Rundell, Jr. (1) 9,115 .66% $ 0.32 09/07/06 C. A. Rundell, Jr. (1) 8,578 .62% $ 0.34 07/27/06 C. A. Rundell, Jr. (2) 250,000 18.15% $ 0.34 07/27/11 Lars H. Halverson (3) 100,000 7.26% $ 0.05 04/15/02 ---------------------
(1) These options vest immediately. (2) These options 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. (3) 33% of the shares issuable under this option vest on each of the first three anniversaries of the date of grant. Option Exercises and Holdings The following table provides information related to the number of shares received upon exercise of options, the aggregate dollar value realized upon exercise, and the number and value of options held by the named executive officers of the Company at June 30, 2002.
Number Of Unexercised Value Of Unexercised Options/SARS At In-The-Money Options/SARS Fiscal Year End At Fiscal Year End ----------------------------- ----------------------------- For the 12 Months Ended 6/30/02 Exercisable Unexercisable Exercisable Unexercisable ------------------------------- ----------- ------------- ----------- ------------- C. A. Rundell, Jr. 422,629 487,500 $ 50,000 $ 168,750 Gerald K. Beckmann 459,473 25,000 0 0 Jack G. Caldwell 319,290 257,500 16,875 31,250
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. 37 Item 11. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth the number and percentage of outstanding shares of Common Stock beneficially owned as of August 31, 2002, by (a) each director and named executive officer of the Company, (b) all persons who are known by the Company to be beneficial owners of 5% or more of the Company's outstanding Common Stock and (c) all officers and directors of the Company as a group. 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.
Number of Shares Beneficially Name of Beneficial Owner Owned (1) Percent (1) - ------------------------------------------------------------------- ---------------- ----------- Renaissance Capital Growth & Income Fund III, Inc. (4) 23,783,192 67.7% Renaissance US Growth Investment Trust PLC (5) 22,946,880 66.9% Russell Cleveland (2)(3)(6) 46,787,392 81.1% C. A. Rundell, Jr. (2)(3)(7) 5,402,946 33.4% William D. Breedlove (2)(3)(8) 1,842,139 13.5% Gerald K. Beckmann (9) 1,346,466 10.6% Phillip R. Thomas (10) 1,042,286 8.8% Alan M. Arsht (2)(3)(11) 576,790 4.7% Jack Caldwell (2)(3)(12) 436,721 3.6% Frank R. Marlow (2)(3)(13) 322,441 2.7% Robert M. Galecke (2)(3)(14) 179,831 1.5% Peter Beare (2)(3) 100,000 0.8% All current directors and executive officers as a group (8 persons) 55,618,260 85.6% - -------------------
(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) The address for this person is 8200 Springwood Drive, Suite 230, Irving, TX 75063. (3) Mr. Rundell is a director, chairman of the board and chief executive officer of the Company. Messrs. Arsht, Beare, Breedlove, Cleveland, Marlow, and Galecke are directors of the Company. Mr. Caldwell is president of B&B Electromatic, Inc., a subsidiary of the Company. (4) Based on a Schedule 13(d) filing dated September 11, 2002, Renaissance Capital Growth & Income Fund III, Inc. is deemed the beneficial owner of 23,783,192 shares of Common Stock of the Company as of August 31, 2002. The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (5) Based on a Schedule 13(d) filing dated September 11, 2002, Renaissance US Growth Investment Trust PLC is deemed the beneficial owner of 22,946,880 shares of Common Stock of the Company as of August 31, 2002. The address for this company is 8080 N. Central Expressway, Suite 210, Dallas, TX 75206. (6) Includes 57,300 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 4,122,916 shares of Common Stock issuable upon the exercise of warrants within 60 days; and 375,000 shares of Common Stock issuable upon the conversion of preferred stock within 60 days. 38 (7) Includes 910,129 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days; 1,455,971 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 65,509 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days and 250,000 shares of Common Stock issuable upon the exercise of warrants within 60 days. (9) Includes 434,473 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 3095 Whispering Oaks Drive, Highland Village, TX 75077. (10) Includes 60,417 shares of Common Stock issuable upon the exercise of warrants within 60 days. The address for Mr. Thomas is 3510 Turtle Creek Boulevard, Ph-A, Dallas, TX 75219-5542. (11) Includes 124,221 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 576,790 shares of Common Stock issuable upon the exercise of outstanding options exercisable within 60 days. (13) Includes 213,409 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. (14) Includes 158,998 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. 39 Equity Compensation Plan Information The following table provides information about securities that have been issued or are issuable under equity compensation plans as of June 30, 2002:
Number of Securities to Weighted Average Number of Securities be Issued upon Exercise Exercise Price of Remaining Available for of Outstanding Options, Outstanding Options, Future Issuance Under Plan category Warrants and Rights Warrants and Rights Equity Compensation Plans - ----------------------------------- ----------------------- -------------------- ------------------------- Equity compensation plans approved by security holders 1993 Stock Option Plan 129,884 $ 2.07 370,116 - ----------------------------------- ----------------------- -------------------- ------------------------- 1997 Omnibus Stock Plan 3,704,309 $ 0.43 3,530,691 - ----------------------------------- ----------------------- -------------------- ------------------------- Equity compensation plans not approved by security holders (1) 283,200 $ 2.07 None - ----------------------------------- ----------------------- -------------------- ------------------------- TOTAL 4,117,393 $ 0.59 3,900,807 - ----------------- (1) These options are fully vested in two years and have a ten year life.
40 Item 12. Certain Relationships and Related Transactions ---------------------------------------------- As described in greater detail in "Item 5. Market for Common Equity and Related Stockholder Matters-- Recent Sales of Unregistered Securities," C. A. Rundell, Jr., Chairman of the board of directors, chief executive officer and a stockholder of the Company, loaned the Company the certain amounts and the Company issued the stock purchase warrants to Mr. Rundell in connection with the loans. Each of the promissory notes are at 8% annual interest payable on the first of each month and were due 120 days from the date of issuance. The Company received from Mr. Rundell an extension of the due dates on all the above notes until September 5, 2003. Each of the warrants issued entitles the holder to purchase share of Common Stock of the Company at $0.20 per share. As described in greater detail in "Item 5. Market for Common Equity and Related Stockholder Matters-- Recent Sales of Unregistered Securities," on February 27, 2002, The Rundell Family Partnership, of which Mr. Rundell is Managing Partner, loaned the Company $50,000 and the Company issued to The Rundell Family Partnership a stock purchase warrant to purchase 250,000 shares of the Company's Common Stock at $0.20 per share. This loan, plus all accrued interest, was paid in full on March 21, 2002. As described in greater detail in "Item 5. Market for Common Equity and Related Stockholder Matters-- Recent Sales of Unregistered Securities," Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC loaned the Company amounts several times during fiscal 2002 and the Company issued several stock purchase warrants to the Renaissance entities in connection with the loans. Each of these promissory notes are at 8% annual interest payable on the first of each month and were due 120 days from the date of issuance. The Company received from the Renaissance entities an extension of the due dates on all the above notes until September 5, 2003. Each of the warrants issued entitles the holder to purchase share of Common Stock of the Company at $0.20 per share. 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. 41 Item 13. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits. 3.1 Amended and Restated Certificate of Incorporation of the Company. (1) 3.2 Amendment to Restated Certificate of Incorporation of the Company. (2) 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company. (7) 3.4 Amended and Restated Bylaws of the Company. (1) 4.1 Specimen certificate for Common Stock of the Company. (1) 4.2 Certificate of Designation for Series A $20 Convertible Preferred Stock. (3) 4.3 Certificate of Decrease of Series A $20 Convertible Preferred Stock. (10) 4.4 Certificate of Designation for Series D $20 Convertible Preferred Stock. (8) 4.5 Amendment to Certificate of Designation for Series D $20 Convertible Preferred Stock. (12) 4.6 Form of Subscription Agreement for Series D Convertible Preferred Stock. (7) 4.7 Certificate of Designation and Preferences of Series F Cumulative Convertible Preferred Stock. (12) 4.8 Certificate of Designation and Preferences of Series G Cumulative Convertible Preferred Stock. (12) 4.9 Form of Convertible Promissory Note. (12) 4.10 Form of Non-Convertible Promissory Note. (12) 4.11+ Form of Stock Purchase Warrant. 4.12 Warrant, dated February 27, 2001, to purchase 118,772 shares of Common Stock issued to HBW Capital Fund, L.P. (9) 4.13 Warrant, dated February 27, 2001, to purchase 131,228 shares of Common Stock issued to HBW Investment Partners II, L.P. (9) 4.14 Registration Rights Agreement, dated as of February 22, 1999, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC. (8) 4.15 Registration Rights Agreement, dated as of October 20, 2000, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC. (8) 4.16 Registration Rights Agreement, dated as of September 27, 2001, among the Company and Renaissance Capital Growth & Income Fund III, Inc. and Renaissance US Growth Investment Trust PLC. (14) 10.1* Integrated Security Systems, Inc. 1993 Stock Option Plan, dated September 7, 1993, as amended on December 30, 1994. (3) 42 10.2* Amendment to Integrated Security System, Inc. 1993 Stock Option Plan. (1) 10.3* Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option Agreement. (1) 10.4* Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock Option Agreement. (1) 10.5* Form of Indemnification Agreement by and between the Company and the Company's officers and directors. (1) 10.6+ Lease Agreement, dated May 1, 2001 and amended as of July 30, 2002, between TPLP Office Park Properties and the Company for property located in Irving, TX. 10.7 Form of Warrant Agreement for purchase of Common Stock, executed March 29, 1996. (4) 10.8 Patent Assignment and Technology Transfer Agreement, dated March 18, 2002. (13) 10.9 Non-Exclusive Patent License Agreement, dated March 18, 2002. (13) 21.1+ Subsidiaries of the Company. 23.1+ Consent of Grant Thornton LLP. -------------------- (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (No. 33-59870-FW). (2) Incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1994. (3) Incorporated by reference to the Company's Registration Statement on Form SB-2 (No. 333-5023). (4) Incorporated by reference to the Company's Form 10-QSB for the quarter ended March 31, 1996. (5) Incorporated by reference to the Company's Form 8-K filed on June 14, 1999. (6) Incorporated by reference to the Company's Form 10-KSB for the year ended June 30, 1999. (7) Incorporated by reference to the Company's Form 10-QSB for the quarter ended December 31, 1999. (8) Incorporated by reference to the Company's Form 10-KSB/A (Amendment No. 2) for the year ended June 30, 2000. (9) Incorporated by reference to the Company's Form 8-K filed on March 9, 2001. (10) Incorporated by reference to the Company's Form 10-QSB for the quarter ended March 31, 2001. (11) Incorporated by reference to the Company's proxy statement on Schedule 14A filed March 16, 2001. (12) Incorporated by reference to the Company's Form 10-KSB for the year ended June 30, 2002. (13) Incorporated by reference to the Company's Form 8-K filed on March 29, 2002. (14) Incorporated by reference to the Company's Form 8-K filed on October 15, 2002. -------------------- + Filed herewith. * Indicates management contract or compensatory plan or arrangement. (b) Reports filed on Form 8-K. The Company filed a Current Report on Form 8-K on September 10, 2002 to report the announcement the Company's earnings results for the fiscal year ending June 30, 2002. The Company filed a Current Report on Form 8-K on September 23, 2002 to announce that it issued a promissory note to each of Frost National Bank FBO Renaissance Capital Growth & Income Fund III, Inc. and Frost National Bank FBO Renaissance US Growth Investment Trust PLC. Each of the two notes is in the original principal amount of $150,000 and has an annual interest rate of 8%. 43 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Integrated Security Systems, Inc. ---------------------------------- (Registrant) Date: September 30, 2002 /s/ C. A. RUNDELL, JR. ---------------------------------- C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer (Principal Executive and Financial Officer) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Integrated Security Systems, Inc. ---------------------------------- (Registrant) Date: September 30, 2002 /s/ C. A. RUNDELL, JR. ---------------------------------- C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer (Principal Executive and Financial Officer) Date: September 30, 2002 /s/ RICHARD B. POWELL ---------------------------------- Richard B. Powell Vice President, Chief Accounting Officer, Secretary (Principal Accounting Officer) Date: September 30, 2002 /s/ ALAN M. ARSHT ---------------------------------- Alan M. Arsht Director Date: September 30, 2002 /s/ PETER BEARE ---------------------------------- Peter Beare Director Date: September 30, 2002 /s/ WILLIAM D. BREEDLOVE ---------------------------------- William D. Breedlove Director Date: September 30, 2002 /s/ RUSSELL CLEVELAND ---------------------------------- Russell Cleveland Director Date: September 30, 2002 /s/ ROBERT M. GALECKE ---------------------------------- Robert M. Galecke Director Date: September 30, 2002 /s/ FRANK R. MARLOW ---------------------------------- Frank R. Marlowe Director 44 CERTIFICATION I, C. A. Rundell, Jr., certify that: 1. I have reviewed this annual report on Form 10-KSB of Integrated Security Systems, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 30, 2002 /s/ C. A. RUNDELL, JR. --------------------------- C. A. Rundell, Jr., Chief Executive Officer and Principal Executive and Financial Officer 45 EX-4 3 exhibit4-1110ksb063002.txt EXHIBIT 4.11 FORM OF STOCK PURCHASE WARRANT Exhibit 4.11 Form of Stock Purchase Warrant THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. STOCK PURCHASE WARRANT This Stock Purchase Warrant (this "Warrant"), dated ____________, is issued to _________________________________________, a _______ corporation (the "Holder"), by Integrated Security Systems, Inc., a Delaware corporation (the "Company"). 1. Purchase of Shares. Subject to the terms and conditions -------------------- hereinafter set forth, the Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company ____________ fully paid and non-assessable shares of Common Stock, no par value (the "Common Stock"), of the Company (as adjusted pursuant to Section 6 hereof, the "Shares") for the purchase price specified in Section 2 below. 2. Purchase Price. The purchase price for the Shares is $______ per -------------- share. Such price shall be subject to adjustment pursuant to Section 6 hereof (such price, as adjusted from time to time, is herein referred to as the "Warrant Price"). 3. Exercise Period. This Warrant is exercisable in whole or in part --------------- at any time from the date hereof through__________________. 4. Method of Exercise. While this Warrant remains outstanding and ------------------ exercisable in accordance with Section 3 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (a) surrender of this Warrant, together with a duly executed copy of the form of Exercise Notice attached hereto, to the Secretary of the Company at its principal offices, and the payment to the Company of an amount equal to the aggregate purchase price for the number of Shares being purchased; or (b) if the Company's Common Stock is publicly traded as of such date, the instruction to retain that number of Shares having a value equal to the aggregate exercise price of the Shares as to which this Warrant is being exercised and to issue to the Holder the remainder of such Shares computed using the following formula: Y(A-B) X = -------- A Where: X = the number of shares of Common Stock to be issued to the Holder. Y = the number of shares of Common Stock as to which this Warrant is being exercised. A = the fair market value of one share of Common Stock. B = the Warrant Price. As used herein, the "fair market value of one share of Common Stock" shall mean: (1) Except in the circumstances described in clause (2) or (3) hereof, the closing price of the Company's Common Stock, as reported in the Wall Street Journal, on the trading day immediately prior to the date of exercise; (2) If such exercise is in conjunction with a merger, acquisition or other consolidation pursuant to which the Company is not the surviving entity, the value received by the holders of the Common Stock pursuant to such transaction for each share; or (3) If such exercise is in conjunction with the initial public offering of the Company, the price at which the Common Stock is sold to the public in such offering. 5. Certificates for Shares. Upon the exercise of the purchase ------------------------- rights evidenced by this Warrant, one or more certificates for the number of Shares so purchased shall be issued as soon as practicable thereafter, and in any event within thirty (30) days of the delivery of the subscription notice. 6. Reservation of Shares. The Company covenants that it will at all --------------------- times keep available such number of authorized shares of its Common Stock, free from all preemptive rights with respect thereto, which will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 7. Adjustment of Warrant Price and Number of Shares. The number and ------------------------------------------------ kind of securities purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as follows: 2 (a) Stock Dividends, Subdivisions, Combinations and Other ---------------------------------------------------------- Issuances. If the Company shall at any time prior to the expiration of this -------- Warrant subdivide its Common Stock, by stock split or otherwise, combine its Common Stock or issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, the number of Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend and proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7 shall become effective at the close of business on the date the subdivision or combination becomes effective or as of the record date of such dividend, or, in the event that no record date is fixed, upon the making of such dividend (b) Reclassification, Reorganization, Merger, Sale or ---------------------------------------------------------- Consolidation. In the event of any reclassification, capital reorganization or ------------ other change in the Common Stock of the Company (other than as a result of a subdivision, combination or stock dividend provided for in Section 7 above) or in the event of a consolidation or merger of the Company with or into, or the sale of all or substantially all of the properties and assets of the Company, to any person, and in connection therewith consideration is payable to holders of Common Stock in cash, securities or other property, then as a condition of such reclassification, reorganization or change, consolidation, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant immediately prior to such event, the kind and amount of cash, securities or other property receivable in connection with such reclassification, reorganization or change, consolidation, merger or sale, by a holder of the same number of shares of Common Stock as were exercisable by the Holder immediately prior to such reclassification, reorganization or change, consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any cash, securities or property deliverable upon exercise hereof. Notwithstanding the foregoing, (i) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, any other person, and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of the Company, then the Holder shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock as if this Warrant had been exercised immediately prior to such event, less the Warrant Price. Upon receipt of such payment, if any, the rights of the Holder shall terminate and cease, and this Warrant shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall promptly, after receipt of this surrendered Warrant, make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person as it may be directed in writing by the Holder surrendering this Warrant. (c) Certain Distributions. In case the Company shall fix a ---------------------- record date for the making of a dividend or distribution of cash, securities or property to all holders of Common Stock (excluding any dividends or distributions referred to in Sections or 7(a) above, the number of Shares purchasable upon an exercise of this Warrant after such record date shall be adjusted to equal the product obtained by multiplying the number of Shares purchasable upon an exercise of this Warrant immediately prior to such record date by a fraction, the numerator of which shall be the Warrant Price immediately prior to such distribution, and the denominator of which shall be the Warrant Price immediately prior to such distribution, less the fair market value per Share, as determined by the Holder, of the cash, securities or property so distributed. Such adjustment shall be made successively whenever any such distribution is made and shall become effective on the effective date of distribution. 3 8. Pre-Exercise Rights. Prior to exercise of this Warrant, the -------------------- Holder shall not be entitled to any rights of a shareholder with respect to the Shares, including without limitation, the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, and the Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. 9. Restricted Securities. The Holder understands that this Warrant --------------------- and the Shares purchasable hereunder constitute "restricted securities" under the federal securities laws inasmuch as they are being, or will be, acquired from the Company in transactions not involving a public offering and accordingly may not, under such laws and applicable regulations, be resold or transferred without registration under the Securities Act of 1933, as amended, or an applicable exemption from registration. In this connection, the Holder acknowledges that Rule 144 of the Securities and Exchange Commission is not now, and may not in the future be, available for resales of the Shares purchased hereunder. The Holder further acknowledges that the Shares and any other securities issued upon exercise of this Warrant shall bear a legend substantially in the form of the legend appearing on the face hereof. 10. Certification of Investment Purpose. Unless a current ----------------------------------------- registration statement under the Securities Act of 1933, as amended, shall be in effect with respect to the securities to be issued upon exercise of this Warrant, the Holder hereof, by accepting this Warrant, covenants and agrees that, at the time of exercise hereof, the Holder will deliver to the Company a written certification that the securities acquired by the Holder are acquired for investments purposes only and that such securities are not acquired with a view to, or for sale in connection with, any distribution thereof. 11. Registration Rights. This Warrant and the Shares shall be -------------------- subject to the registration rights set forth in the Registration Rights Agreement of even date herewith by and among the Holder and the Company, and the Holder shall be entitled to all rights and benefits thereof. 12. Successors and Assigns. The terms and provisions of this Warrant ---------------------- shall inure to the benefit of, and be binding upon, the Company and the Holder and their respective successors and assigns. 13. Governing Law. This Warrant shall be governed by the laws of the ------------- State of Texas, excluding the conflicts of laws provisions thereof. INTEGRATED SECURITY SYSTEMS, INC. By: ------------------------------------ C. A. Rundell, Jr. Chairman and Chief Executive Officer 4 EXERCISE NOTICE --------------- Dated _________, ____ The undersigned hereby irrevocably elects to exercise the Stock Purchase Warrant, dated _____________________, issued by Integrated Security Systems, Inc., a Delaware corporation (the "Company") to the undersigned to the extent of purchasing ___________ shares of Common Stock and hereby makes payment of $_________ in payment of the aggregate Warrant Price of such Shares. By: ------------------------------ 5 EX-10 4 exhibit10-610ksb063002.txt EXHIBIT 10.6 FIRST AMENDMENT TO LEASE Exhibit 10.6 FIRST AMENDMENT TO LEASE ------------------------ THIS First Amendment to Lease (this "Amendment") is entered into as of July 30, 2002 (the "Effective Date"), between TPLP Office Park Properties ------------ ------------------------------ ("Lessor"), and Integrated Security Systems, Inc. ("Lessee"). ------------------------------------ RECITALS: --------- A. Lessor and Lessee entered into a certain Modified Triple Net Lease (the "Lease Agreement") dated as of May 1, 2001 (the Lease Agreement and ----------- this Amendment are hereinafter collectively referred to as the "Lease"); and B. Lessor and Lessee now desire to amend the Lease and expand the area of the Premises in accordance with the terms and conditions of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Lease is amended as follows: AGREEMENTS: ----------- 1. Definitions. All terms not otherwise defined herein shall have the ----------- meanings given them in the Lease Agreement. 2. Premises. Effective as of August 1, 2002 (the "Effective Date"), the -------- -------------- Lease Agreement is amended to provide as follows: A. The term "Premises" shall mean the downsizing of the original Premises consisting of 9,440 rentable square feet to consist of 8,386 rentable ----- ----- square fee, identified as 8200 Springwood, Suite 230, Irving, Texas 75063 as -------------------------------------------------- depicted on Exhibit A hereto (the "Premises"). --------- B. Lessee's Proportionate Share of the Project shall be .1489. ----- Lessee's Proportionate Share of the Premises to the Building shall be .2977. ----- C. Base Rent for the Premises shall be $6,988.33 per month, --------- beginning August 1, 2002 and $7,163.04 beginning January 1, 2003. Estimated -------------- --------- --------------- expenses for the Premises shall be $2,494.84 per month under the lease, --------- beginning August 1, 2002. -------------- 3. Security Deposit: $8,431.24 payable in lawful money of the United ----------------- --------- States of America. 4. AS IS. Lessee accepts the Premises in the condition they are in on the ----- Effective Date. Lessor has no responsibility for any improvements thereto. Lessee shall maintain the Premises in good condition, order and repair, excepting only reasonable wear and tear. Lessee has examined and knows the permitted use under the Lease. Lessee has examined and knows the condition of the Premises and agrees that no representations, except such as are contained herein, have been made to Lessee respecting the condition of the Premises. The taking possession of the Premises by Lessee shall be conclusive evidence that the Premises are in good and satisfactory condition. Lessee shall make no alterations to the Premises, except as provided in the Lease Agreement. 5. Full Force and Effect. Except as expressly amended by this Amendment, --------------------- all terms and conditions of the Lease remain unmodified, in full force and effect. Lessee knows of no default by Lessor under the Lease as of the Effective Date. 6. Broker. Lessee represents and warrants that it has not dealt with any ------ broker in connection with the negotiation or execution of this Amendment, and Lessee agrees to indemnify and hold Lessor harmless from all liability arising from any claim by any broker claiming under Tenant including, without limitation, the cost of reasonable counsel fees in connection therewith. 7. Authority. Each party represents and warrants that it has due power and --------- lawful authority to execute and deliver this Amendment and to perform its obligations under the Lease; and the Lease and this Amendment are the valid, binding and enforceable obligations of such party. EXECUTED as of the date first written above.
LESSOR: LESSEE: TPLP Office Park Properties Integrated Security Systems, Inc. ------------------------------------------- ----------------------------------- By: American Office Park Properties TPGP, a California Corporation doing business in Texas as TPGP Office Park Properties, Inc., General Partner By: /S/ ANGELIQUE BENSCHNEIDER By: /S/ RICHARD POWELL --------------------------------------- ------------------------------- Angelique Benschneider, Vice President Richard Powell, Vice President, Chief Accounting Officer ------------------------------ ------------------------------ AUTHORIZED SIGNATURE/TITLE AUTHORIZED SIGNATURE/TITLE Date: September 3, 2002 Date: August 7, 2002 ----------------- --------------
MODIFIED TRIPLE NET LEASE TPLP Office Park Properties --------------------------- (LESSOR) AND Integrated Security Systems, Inc. --------------------------------- (LESSEE) MODIFIED TRIPLE NET LEASE TABLE OF CONTENTS Page 1. Lease Terms...........................................................1 2. Letting...............................................................2 3. Base Rent.............................................................3 4. Additional Rent.......................................................3 5. Late Charges..........................................................5 6. Security Deposit and Financial Reporting..............................5 7. Use of Premises; Quiet Enjoyment; Trash...............................6 8. Parking...............................................................6 9. Utilities.............................................................7 10. Lessee Improvements; Lessee Alterations and Mechanic's Liens.........8 11. Repairs..............................................................9 12. Insurance...........................................................10 13. Indemnification and Waiver of Claims................................11 14. Hazardous Materials.................................................11 15. Auctions and Signs..................................................13 16. Lessor's Access.....................................................13 17. Abandonment.........................................................13 18. Damage or Destruction...............................................13 19. Transfer (Assignment/Subletting)....................................14 20. Default.............................................................15 21. Remedies of Lessor..................................................15 22. Arbitration.........................................................16 23. Surrender of Lease Not Merger.......................................17 24. Professional Fees, Costs and Expenses...............................17 25. Condemnation........................................................17 26. Rules and Regulations...............................................17 27. Estoppel Certificate................................................18 28. Sale By Lessor......................................................18 29. Notices.............................................................18 30. Waiver..............................................................18 31. Lessee's Intent; Holdover...........................................18 32. Relocation of the Premises..........................................18 33. Default by Lessor; Limitation of Liability; Real Estate Investment Trust..................................................19 34. Subordination.......................................................19 35. Force Majeure.......................................................19 36. Miscellaneous Provisions............................................20 37. Examination of Lease; Good Faith Deposits...........................21 38. Governing Law.......................................................21 39. Lessor's Lien.......................................................21 40. Special Provisions and Exhibits.....................................21 MODIFIED TRIPLE NET LEASE Lease Preparation Date: May 1, 2001 --------------------------------------------------------- Lessor: TPLP Office Park Properties ------------------------------------------------------------------------- Lessee: Integrated Security Systems, Inc., a Delaware Corporation ------------------------------------------------------------------------- Guarantor: N/A ---------------------------------------------------------------------- 1. Lease Terms 1.01 Premises: The Premises is located within the Building (as defined below) and is depicted on Exhibit "A-1". The Premises contains -------------- approximately 9,440 rentable square feet. The address of the leased Premises is: ----- 8200 Springwood, Suite 230, Irving, TX 75063. -------------------------------------------- 1.02 Building: The Premises is located in the Building indicated on Exhibit "A-2". The Building contains approximately 28,165 rentable square feet ------------ ------ and is part of the Project. 1.03 Project: The Project is depicted on Exhibit "A-3" and consists -------------- of all improvements on the Property, including the Building of which the Premises is a part. The Project is commonly referred to as Springwood II -------------- Business Park and contains approximately 56,330 rentable square feet. ------------ ------ 1.04 Property: The Project, and all Lessor's land thereunder or appurtenant thereto as described in Exhibit "A" is the Property. ----------- 1.05 Lessee's Notice Address: Lessee's Notice Address is the address of the leased Premises as stated in Paragraph 1.01 above unless otherwise --------------- specified here: 8200 Springwood, Suite 230, Irving, TX 75063. -------------------------------------------- 1.06 Lessor's Notice Address: Lessor's Notice Address is: 8200 ---- Springwood, Suite 240, Irving, Texas 75063. ----------------------------------------- 1.07 Lessee's Permitted Use: Lessee and Lessor agree that Lessee may only use the Premises for the following purpose(s): Security Systems ------------------ Consultants. ---------- 1.08 Lease Term: The Lease Term commences on July 01, 2001 and ends ------------- on December 31, 2003 (30 months, and 0 days). ----------------- -- - 1.09 Base Rent: During the original term of this Lease, Base Rent shall be paid monthly, in lawful money of the United States of America in the amounts specified below, during the applicable periods noted: Base Rent Applicable Period $ 7,709.00 Beginning July 01, 2001 Ending December 31, 2001 -------- ------------- ----------------- $ 6,988.33 Beginning January 01, 2002 Ending August 01, 2002 -------- ---------------- --------------- $ 7,163.04 Beginning January 01, 2003 Ending November 01, 2003 -------- ---------------- ----------------- 1.10 Security Deposit: $ 8,431.24 payable in lawful money of the ---------- United States of America. 1.11 Lease Documentation Fee: $ N/A -----
1.12 Initial Monthly Rent Charges: Base Rent (1.09) $ 7,709.00. --------- CAM (1.14) $ 1,471.07. -------- Real Property Taxes (1.14) $ 1,384.53. -------- Utility and Service Costs (1.14) $Included in CAM. Insurance Premiums (1.14) $ 86.53. ----- Total initial monthly payment $10,651.13. ---------
1 1.13 Proportionate Share: Lessee's Proportionate Share of the Project, which represents the approximate Proportionate Share of the Premises to the Project is .0168. Lessee's Proportionate Share of the Building within which ----- it is located, which represents the approximate Proportionate Share of the Premises to the Building is .3352. Proportionate Share may be adjusted during ----- the Lease Term if the size of the Project, Premises or Building changes. 1.14 Operating Expense Estimate: Lessee's Operating Expense Estimate is $3.74. ----- 1.15 Broker(s): N/A. --- 2 1.16 Additional Attachments: Exhibits: "A-1", "A-2", "A-3", "B", "C", ------------------------------ "D" and "F". ----------- 2. Letting 2.01 Lessor leases to Lessee, and Lessee leases from Lessor, the Premises, as indicated in Paragraph 1.01 in consideration of Lessee's payment of -------------- Base Rent and other payments hereunder subject to all of the terms, covenants and conditions of this Lease and all recorded matters, laws, ordinances and governmental regulations and orders. Lessee's possession and occupancy of the Premises constitutes Lessee's acknowledgment that it has satisfied itself with respect to the overall condition of the Premises, the present and future suitability of the Premises for Lessee's intended use and the substantial completion of the improvements to the Premises, if any, which are to be constructed by Lessor pursuant to Exhibit "B." Any such improvements to be ------------- constructed by Lessor pursuant to Exhibit "B" are herein referred to as ------------ "Landlord's Work." 2.02 Lessee shall only use the Premises for Lessee's Permitted Use set forth in Paragraph 1. Lessee shall not occupy or use the Premises or any ------------ part thereof for other than Lessee's Permitted Use and not for any use or purpose which is unlawful or deemed by Lessor to be disreputable in any manner or dangerous to life, limb or property. 2.03 Unless otherwise provided herein, any statement of square footage set forth in this Lease is an approximation which Lessor and Lessee agree is reasonable for all purposes, and the Premises shall be deemed to contain the rentable square feet set forth in this Lease, regardless of minor variations in actual square footage. Lessor reserves the right to change Lessee's Proportionate Share to reflect any increase or decrease in the common area. Any use of the terms "rentable" and "usable" is for convenience only, and such descriptions represent Lessor's interpretation of such terms. If there is no Lessor's Work pursuant to Exhibit "B," or if Exhibit "B" is not attached ------------- ----------- hereto, then Lessee accepts the Premises in "AS-IS" condition and Lessor shall have no obligation to provide or pay for any repair or other work therein, except as stated in this Lease; and Lessee shall obtain and deliver to Lessor a certificate of occupancy for the Premises from the appropriate governmental authority. 2.04 Lessor will deliver, where applicable, all systems in the Premises to Lessee with existing plumbing, electrical, fire sprinkler, lighting, air conditioning, heating and mechanical, if any, in good working condition. Lessee has thirty (30) days after the Lease Term commences, or Lessee's occupancy, whichever is sooner, to notify Lessor, in writing, of any non-operative items, and Lessor will promptly rectify same at Lessor's sole cost. However, if Lessee does not give Lessor written notice of any non-operative items within this notification period, all repairs to the Premises which are Lessee's responsibility per Paragraph 11.01 of this Lease will become --------------- the obligation of Lessee at Lessee's sole cost and expense. 2.05 All Lessor's Work to be installed in the Premises pursuant to Exhibit "B," if any, shall be installed by Lessor in compliance with all then ----------- applicable codes. Subject to the foregoing, Lessee agrees to comply with all laws, codes, ordinances and other legal requirements (including covenants and restrictions) now or hereafter applicable to the Premises and agrees to cause the Premises to comply with the same, including by making any Lessee Alterations necessitated by any Lessee activity, including but not limited to: (a) any Lessee Improvements or Lessee Alterations, as defined in Paragraph 10.02 below, --------------- made or to be made by Lessee or at Lessee's direction; (b) Lessee's Permitted Use; (c) Lessee's occupancy of the Premises and/or the Property; and (d) the presence of Lessee's employees, agents, contractors, suppliers, invitees or licensees on or about the Property. 2.06 If for any reason Lessor cannot deliver possession of the Premises on the Commencement Date of the Lease Term, Lessor will not be subject to any liability nor will the validity of this Lease be affected in any manner. Rather, the Commencement Date shall be delayed until delivery of possession and the expiration date of the Lease Term shall be extended so that the Lease Term shall include the same number of full calendar months as set forth in Paragraph --------- 1.08 above (plus any partial first month); provided, in the event delivery of --- possession is delayed by any act, omission or request of Lessee, then the Premises shall be deemed to have been delivered (and the Commencement Date shall occur) on the earlier of the actual date of delivery or the date delivery would have occurred absent the number of days of such delay attributable to Lessee and the term shall then be for such number of full calendar months (plus any partial first month). If for any reason possession of the Premises is not delivered within ninety (90) days of scheduled Commencement Date set forth in Paragraph --------- 1.08 above, Lessor or Lessee may terminate this Lease by written notice given --- after such ninety (90) day period but prior to delivery of possession; provided, such ninety (90) day period shall be extended by (a) the number of days of delays attributable to Lessee, plus (b) the number of days of delays caused by events beyond the reasonable control of Lessor. Lessee shall take possession of the Premises within fifteen (15) days after Lessor notifies Lessee in writing that the Premises is ready for Lessee's occupancy. 2.07 Subject to Paragraph 10.05 and Lessor's right to retain ----------------- improvements, upon termination of this Lease, Lessee agrees to return the Premises to Lessor in the same condition as received by Lessee as of the original date Lessor delivers the Premises to Lessee, normal wear and tear excepted. 3 2.08 If Lessee, with Lessor's prior written consent, occupies the Premises prior to the Commencement Date, Lessee's occupancy of the Premises shall be subject to all the provisions of the Lease. Early occupancy of the Premises shall not advance the expiration date of the Lease. Lessee shall not pay Base Rent during the early occupancy period but all other charges shall begin to accrue on the date of such early occupancy. Lessee shall, however, provide Lessor with evidence of insurance coverage pursuant to Paragraph 12, ------------ prior to such early occupancy. 3. Base Rent 3.01 On or before the first day of each calendar month of the Lease Term, Lessee will pay to Lessor in lawful monies of the United States of America, without deduction or offset, prior notice or demand, Base Rent at the place Lessor designates. However, the first month's Base Rent and the Security Deposit will be due and payable concurrently with Lessee's execution of this Lease. All sums payable by Lessee to Lessor hereunder shall be deemed rental. 3.02 If indicated in Exhibit "B," Base Rent includes an amortized ------------- estimation of the costs of Lessor's Work (or costs of Lessor's Work in excess of any Lessee Allowance) which, subject to the terms and conditions of this Lease, shall be paid in equal installments as part of Base Rent by Lessee over the Lease Term. Subject to the provisions of Exhibit "B," should Lessor and Lessee ------------ agree to any additional Lessor's Work not included in this estimate or if the actual cost of Lessor's Work exceeds this estimate, Lessor may increase Base Rent according to the terms and conditions outlined in Exhibit "B" to similarly ----------- amortize such additional costs. 4. Additional Rent 4.01 Unless otherwise specifically stated, any charge payable by Lessee under this Lease other than Base Rent is called "Additional Rent". Additional Rent is to be paid concurrently with and subject to the same terms and conditions of Base Rent. The term "rent" whenever used in this Lease means Base Rent, Additional Rent and/or any other monies payable by Lessee under the terms of this Lease. In the event any rent payable under this Lease commences or ends on a day other than the first day of a calendar month, the actual number of days in the prorated month will be used as the basis for the calculation. 4.02 "Operating Expenses" as used herein shall include all costs and expenses related to the operation, maintenance, and repair of the Premises, Building, Project and/or Property, or any part thereof, incurred by Lessor including but not limited to: (1) Property supplies, materials, labor, equipment, and tools; (2) Lessor-incurred Utility and Service Costs (as further described in Paragraph 4.03B below), security, janitorial, and all applicable --------------- service and maintenance agreements; (3) Property related legal, accounting, and consulting fees, costs and expenses; (4) Insurance Premiums for all policies deemed necessary by Lessor and/or its lenders, and all deductible amounts under such policies (as further described in Paragraph 4.03C below); (5) costs and ---------------- expenses of operating, maintaining, and repairing common areas of the Property, including but not limited to, hallways, restrooms, conference rooms, exercise rooms, equipment and telephone rooms, driving, parking and other paved or unpaved areas (including but not limited to, resurfacing and striping), landscaped areas (including but not limited to, tree trimming), walkways, building exteriors (including but not limited to, painting and roof repairs), signs and directories, and elevators and stairways; (6) capital improvements and replacements (including all financing costs and interest charges) which are made to improve the operating efficiency of the Property; (7) capital improvements and replacements (including but not limited to, all financing costs and interest charges) required by any governmental authority or law including but not limited to, compliance required under the Americans with Disabilities Act of 1990; (8) compensation (including but not limited to, any payroll taxes, worker's compensation for employees, and customary employee benefits) of all persons, including independent contractors, who perform duties, or render services on behalf of, or in connection with the Property, or any part thereof, including but not limited to, Property operations, maintenance, repair, and rehabilitation; (9) Property management fees; (10) Real Property Taxes (as further described in Paragraph 4.03A, below), provided, however, wherever the --------------- Lessee and/or any other lessee of space within the Property has agreed in its lease or otherwise to provide any item of such services partially or entirely at its own expense, or wherever in the Lessor's judgment any such significant item of expense is not incurred with respect to or for the benefit of all of the space within the Property, in allocating the Operating Expenses pursuant to the foregoing provisions of this subsection the Lessor shall make an appropriate adjustment, as aforesaid, so as to avoid allocating to the Lessee or to such other lessee (as the case may be) those Operating Expenses covering such services already being provided by the Lessee or by such other lessee at its own expense, or to avoid allocating to all of the net rentable space within the Property those Operating Costs incurred only with respect to a portion thereof, as aforesaid. Lessor agrees that no cost or expense shall be charged more than once. All Operating Expenses other than Real Property Taxes, Utility and Service Costs, and Insurance Premiums, are herein referred to as Common Area Expenses (CAM). 4 4.03A "Real Property Taxes" as used herein shall include any fee, license, tax, late fee, levy, charge, assessment, penalty (if a result of Lessee's delinquency or negligence), or surcharge (hereinafter individually and/or collectively referred to as "Tax") imposed by any authority (including but not limited to, any federal, state, county, or local government, or any school, agricultural, lighting, drainage, or other improvement district, or public or private association) having the direct or indirect power to tax and where such Tax is imposed against the Property, or any part thereof, or Lessor in connection with its ownership or operation of the Property, including but not limited to: (1) any Tax on Lessor's right to receive, or the receipt of, rent or income from the Property, or any part thereof, or Tax against Lessor's business of leasing the Property; (2) any Tax by any authority for services or maintenance provided to the Property, or any part thereof, including but not limited to, fire protection, streets, sidewalks, and utilities; (3) any Tax on real estate or personal property levied with respect to the Property, or any part thereof, and any fixtures and equipment and other property of Lessor or the Property used in connection with the operation, maintenance or repair of the Property; (4) any Tax imposed on this transaction, or based upon a reassessment of the Property, or any part thereof, due to a change in ownership or transfer of all or part of Lessor's interest in the Property, or any part thereof and, (5) any Tax replacing, substituting for, or in addition to any Tax previously included with this definition. Real Property Taxes do not include: (1) Lessor's federal or state income, franchise, inheritance, or estate taxes; or (2) Lessee's personal property taxes (taxes charged against Lessee's trade fixtures, furnishings, equipment, or other personal property) which are the sole responsibility of Lessee, and shall be billed directly to, and paid in a timely manner by Lessee. 4.03B "Utility and Service Costs" as used herein shall include all Lessor incurred utility and service costs and expenses including, but not limited to water, electricity, gas, heating, lighting, steam sewer, waste disposal, air conditioning, heating and ventilation related to the Project. 4.03C "Insurance Premiums" as used herein shall include all insurance premiums for all policies deemed necessary by Lessor and/or its lenders, including but not limited to, worker's compensation, liability, commercial general liability, automobile, rental interruption insurance and any and all additional endorsements, casualty insurance with extended coverage, riders under or attached to such policies. 4.04 Throughout the Lease Term, Lessee will pay as Additional Rent its Proportionate Share (of the Project and/or building, as applicable) of Operating Expenses which will be equal to each calendar year's total Operating Expenses multiplied by Lessee's Proportionate Share. In the event Lessee is only responsible for a portion of a given calendar year, Lessee's share will be based on the actual number of elapsed applicable days. All Operating Expenses will be adjusted to reflect an average Project occupancy level of ninety-five percent (95%) during any calendar year in which the Project is not at least ninety-five percent (95%) occupied. 4.05 Lessee's Proportionate Share of Operating Expenses shall be determined and paid as follows: 4.05A. Lessee's Operating Expense estimates: On or about April 1st of each calendar year, Lessor will provide Lessee with a statement of: (1) Lessee's annual share of estimated Operating Expenses for the then current calendar year; (2) Lessee's new monthly Operating Expense estimate for the then current year; and, (3) Lessee's retroactive estimate correction billing (for the period of January 1st through the date immediately prior to the commencement date of Lessee's new monthly Operating Expense estimate) for the difference between Lessee's new and previously billed monthly Operating Expense estimates for the then current year. 4.05A(1). Annual estimated share: Lessee's annual share of estimated Operating Expenses for the then current calendar year shall be determined by multiplying Lessor's estimated total Operating Expenses for the then current calendar year, by Lessee's Proportionate Share (of the Project or Building, as applicable) identified in Paragraph 1.13. 4.05A(2). Monthly Operating Expense estimate: Lessee's new monthly Operating Expense estimate for the then current calendar year shall be calculated by dividing Lessee's annual share of estimated Operating Expenses, as determined above, by 12. 4.05A(3). Retroactive estimate correction: Lessee's share of the change in Operating Expense estimates retroactive to January 1st of each year shall be determined as follows: For the then current calendar year, the total of Lessee monthly Operating Expense estimates billed prior to the commencement of Lessee's new monthly Operating Expense estimate shall be subtracted from Lessee's new monthly Operating Expense estimate multiplied by the number of elapsed months within the same period. 4.05B. Lessee's share of actual annual Operating Expenses: On or about April 1st of each year, Lessor will provide Lessee with a statement reflecting the total Operating Expenses for the calendar year just ended. If the total of Lessee's Operating Expense estimates billed for the calendar year just ended are less than Lessee's Proportionate Share of the actual Operating Expenses for the calendar year just ended, the statement will indicate the payment amount and date due. If Lessee has paid more than its Proportionate Share of Operating Expenses for the preceding calendar year, Lessor will credit the overpayment towards Lessee's future Operating Expense obligations. 5 4.06 Under this Lease, monthly Operating Expense estimates, retroactive estimate corrections, and Lessee's share of actual annual Operating Expenses are considered Additional Rent. Monthly Operating Expense estimates are due on the 1st of each month and shall commence in the month specified by Lessor. Lessee's retroactive estimate correction, and actual annual Operating Expense charges, if any, shall be due, in full, on the date(s) specified by Lessor. 4.07 Lessee will not be entitled to any reduction, refund, offset, allowance or rebate should any Real Property Taxes be retroactively reduced, credited, abated or exempted by any direct or indirect taxing authority for any prior taxation or assessment period. If Lessor fails to provide Lessee with an Operating Expense statement by April 1st of any calendar year, or elects not to bill Lessee its share of actual Operating Expenses, and/or Operating Expenses estimate(s), or estimate increase(s) for any period of time, Lessor's right to bill and collect these charges from Lessee at a later time is not waived. 4.08 Whether now in force or hereafter in force, Lessee will pay as Additional Rent its share of any duties, levies or fees resulting from any statutes or regulations, or interpretations thereof, enacted by any governing authority which pertains to Lessor's or Lessee's use, ownership, occupancy or alteration of the Premises, Project, or Property, or any part thereof. Lessee's share of such duties or fees will be based on Lessee's Proportionate Share as indicated in Paragraph 1.13, or other equitable method determined by Lessor in -------------- its sole discretion. In the event the Property, or any part thereof, shares common Operating Expenses, commonly used areas, land or other items not exclusive to the Property, Lessor shall allocate and bill Lessee its share of any costs and expenses attributable to such sharing on an equitable basis, as determined by Lessor in its sole discretion. 4.09 In the event Lessee wishes to audit any Operating Expense charge, such an audit shall be limited to an audit of the annual statement delivered under Section 4.05B above. Such audit shall be performed only if -------------- Lessee is not in Default, as defined in Paragraph 20.02 below at the time of the --------------- audit request and/or at any time during the course of the audit. Any audit shall be conducted at a time and location mutually agreed by Lessor and Lessee within sixty (60) days of receipt by Lessor of a timely written request for audit. Lessor and Lessee agree that any Lessee audit must be requested by Lessee by written notice given within six (6) months of the date that Lessor provides the applicable annual statement under Section 4.05B above, and if Lessee does not ------------- give such written notice within this period of time, Lessee's right to audit is waived, and the Operating Expenses, as billed, including all calculations used as the basis for any applicable Base Year or expense stop, shall be deemed conclusive and final for all purposes under this Lease. Any audit shall be conducted only by Lessee and the CPA then used by Lessee for the preparation of its tax returns and financial statements. Lessee shall maintain as strictly confidential, and shall cause its auditor to execute in favor of Lessor a confidentiality agreement (in form prepared by Lessor) regarding, all financial information audited, the results of any such audit, and the resolution of any disputed issues arising in connection with such audit. Lessor shall not be bound by the result of any such audit. If the parties do not agree upon the inclusion or amount of any Operating Expense charged by Lessor, the sole remedy of Lessee shall be to conduct an audit within the time specified in this Lease and, if still in disagreement with Lessor, to submit the matter to arbitration pursuant to Paragraph 22 below within thirty (30) days after completion of the audit to ------------ request an adjustment to any disputed Operating Expense item. In no event will this Lease be terminable nor shall Lessor be liable for damages based upon any disagreement regarding or adjustment of Operating Expenses. 5. Late Charges If any installment, including any partial installment, of Base Rent, Additional Rent, rent or any other rent charge payable by Lessee is not received by Lessor within five (5) days after it becomes due, Lessee shall, without the necessity of notification from Lessor, pay Lessor a late charge equal to fifty dollars ($50.00) or ten percent (10%) of the then delinquent amount, whichever is greater. Additionally, a fifty dollar ($50.00) handling fee will be paid to Lessor by Lessee for each bank returned check, and Lessee will be required to make all future payments to Lessor by money order or cashier's check. The acceptance of late charges and returned check charges by Lessor will in no way constitute a waiver of Lessee's Default with respect to any overdue amount nor prevent Lessor from exercising any of its rights or remedies resulting from such late payment. 6. Security Deposit and Financial Reporting 6.01 Upon Lessee's execution of this Lease, Lessee will deposit with Lessor an initial Security Deposit in the amount specified in Paragraph 1.10 as -------------- security for Lessee's full and faithful performance of every provision under this Lease. Lessor will not be required to keep the Security Deposit separate from its general funds and has no obligation or liability for payment of interest thereon (except when required by law). Any time the Base Rent increases during the Lease Term, Lessee will deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit will at all times at a minimum bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.09. Such additional Security Deposit monies will be due -------------- and payable concurrently with the next payment of Base Rent, after receipt of written notice from Lessor of the need to increase this Security Deposit as required by this Paragraph. 6 6.02 In no event will Lessee have the right to apply any part of the Security Deposit to any amounts payable under the terms of this Lease nor is it a measure of Lessor's damages in event of a Default by Lessee. If Lessee fails to pay any rent due herein, or otherwise is in Default of any provision of this Lease, Lessor may, without waiver of the Default nor of any other right or remedy, use, apply or retain all or any portion of the Security Deposit for the payment of any amount due Lessor, or to compensate Lessor for any loss or damage suffered by Lessee's Default. Within five (5) days after written notification by Lessor, Lessee will pay monies to Lessor sufficient to restore the Security Deposit to the full amount required under this Lease. 6.03 Within sixty (60) days (or as otherwise prescribed by law) after the expiration or earlier termination of the Lease Term and after Lessee has vacated the Premises, Lessor will return to Lessee that portion of the Security Deposit not used or applied by Lessor to fulfill any and all of Lessee's obligations under this Lease. 6.04 At any time during the Lease Term, within ten (10) days after written request from Lessor, Lessee shall deliver to Lessor such financial statements as Lessor reasonably requests regarding Lessee or any assignee, subtenant, or guarantor of Lessee. In addition, Lessee shall deliver to any lender designated by Lessor any financial statements required by such lender to facilitate the financing or refinancing of the Property. Lessee represents and warrants to Lessor that each financial statement is a true and accurate statement as of the date of such statement. Lessor shall maintain as confidential any financial statements of Lessee delivered by Lessee to Lessor under this Section 6.04 which Lessee designates as confidential; provided, ------------- financial statements which are easily obtainable from public records need not be kept confidential; and provided further, Lessor shall have the right to disclose the contents of such financial statements (a) for any business purpose, including disclosure to third parties engaged by Lessor (including but not limited to attorneys, brokers, or accountants) and to actual or potential purchasers, lenders or investors of Lessor, (b) when ordered to do so by legal authority, (c) when Lessor determines that Lessor may have a legal obligation to do so, (d) in connection with enforcement of this Lease or any guaranty, and/or (e) in connection with any dispute with Lessee or any guarantor. 7. Use of Premises; Quiet Enjoyment; Trash 7.01 The Premises will be used and occupied only for Lessee's Permitted Use, as described in Paragraph 1.07. Lessee agrees it has negotiated --------------- Lessee's Permitted Use in a fair and reasonable manner and, as so written, Lessee's Permitted Use is enforceable for all purposes under this Lease. Further, Lessee expressly waives the right to challenge the validity of Lessee's Permitted Use, including but not limited to, in connection with any Default of this Lease, mitigation of damages, and any and all Transfers under this Lease. 7.02 Lessee will comply with all conditions and covenants of this Lease, and all applicable governmental agency laws, codes, regulations, ordinances, covenants and restrictions affecting the Property or any part thereof. Lessee will not use or permit the use of the Premises, the Property or any part thereof, in a manner that is unlawful, diminishes the appearance or aesthetic quality of any part of the Property, creates waste or a nuisance, disturbs Lessor, other lessees or any neighboring property occupants, or causes damage to the Property, or any part thereof, or to any neighboring property, personal property or person. Any animals, excepting guide dogs, on or about the Property or any part thereof are expressly prohibited. 7.03 Lessor agrees that so long as Lessee performs all of its obligations under the Lease, Lessee's possession, quiet enjoyment and use of the Premises for the term of the Lease will not be disturbed by Lessor, subject only to the provisions of the Lease. 7.04 Lessee shall be responsible for providing all trash receptacles and pickup for its premises. In the event of any excessive trash in or outside Lessee's Premises, as determined by Lessor in its sole discretion, Lessor will have the right to remove such excess trash, charge all costs and expenses attributable to its removal to Lessee, and require Lessee to obtain, at its sole cost and expense, additional trash receptacles, to be placed in a location designated by Lessor for Lessee's specific use. Under no circumstances may any "Hazardous Materials," as defined in Paragraph 14 below, any materials not ------------- permitted by law, any materials improperly or illegally handled, stored, contained or released, or any materials which are not permitted by Lessor, as determined in its sole discretion, be disposed of in any trash receptacles located in or about the Property. Lessee will not cause, maintain or permit any outside storage on or about the Property without prior written consent by Lessor, which consent, if given, may be revoked at any time. In the event of any unauthorized outside storage by Lessee, Lessor will have the right, without notice, in addition to such other rights and remedies it may have, to remove any such storage and charge all direct and associated costs and expenses to Lessee. 7 8. Parking All parking will comply with the terms and conditions of this Lease and the parking rules and regulations included in Exhibit "D." Unless otherwise ------------- stated, Lessee, its employees, agents, contractors, suppliers, invitees and licensees will have a non-exclusive privilege, in conjunction with Lessor, other lessees of the Property, and such other persons as Lessor may designate, to use those parking spaces designated by Lessor for public parking. Vehicles parked in public parking areas will be no larger than full-sized passenger automobiles or pick-up trucks. Larger vehicles, if permitted in writing by Lessor, will be parked, loaded and unloaded in locations designated by Lessor. Lessor reserves the right, without notice to Lessee, to tow away at Lessee's sole cost and expense any vehicles parked in any parking area for any continuous period of 24 hours or more, or earlier if Lessor, in its sole discretion, determines such parking to be a hazard or inconvenience to other lessees or Lessor, upon prior written notice to Lessee, or violates any rules or regulations or posted notices related to parking. Lessor shall not be responsible for enforcing Lessee's parking rights against third parties. From time to time, Lessor reserves the right, upon written notice to Lessee, to change the location, the availability and nature of parking spaces, establish reasonable time limits on parking, and, on an equitable basis, assign specific spaces with or without charge to Lessee as Additional Rent. 9. Utilities 9.01 Lessor agrees to provide at its cost water and electric service connections (and gas where applicable) to the Premises and telephone service connections to the Building, but Lessee agrees to make all arrangements for and pay directly to the appropriate utility company all costs and expenses of utility services supplied to, and for the use of, Lessee in or about the Premises, including but not limited to, water, gas, heat, light, power, telephone, sewer, sprinkler charges, usage costs and expenses, service fees, connection charges, deposits and any duties or taxes for such utilities. 9.02 If for any reason, Lessor incurs any utility costs and expenses which are attributed to Lessee, as determined by Lessor, Lessee, upon notification from Lessor, shall immediately reimburse Lessor for all such costs and expenses. 9.03 In the event it is not possible for Lessee to pay directly for any utility service, the utility service may, at Lessor's discretion, be obtained in Lessor's name, and Lessee will pay Lessor, as Additional Rent, Lessor's best estimate of Lessee's share of such utility costs and expenses. Lessor's best estimate will be determined by Lessor in its sole discretion and will be subject to change as Lessor deems necessary. Periodically during the Lease Term, Lessor will compare Lessee's utility estimates to actual utility costs and expenses incurred, and bill or credit, whichever is applicable, Lessee for any difference. Lessor reserves the right to separately meter any such service not so separately metered at Lessee's sole cost and expense at any time during the Lease Term, at which time Lessee shall be directly responsible for payment of such expense directly to the utility service provider, if possible. 9.04 Lessor will not be liable or deemed in Lessor Default, nor will there be any abatement of rent, for any interruption or reduction of utilities, utility services or telecommunication services. Without limiting the foregoing, Lessor shall have no liability in the event any telecommunication service to the Premises is interrupted or in the event that any telecommunications company providing services to the Premises (whether selected by Lessor or Lessee) fails to provide such services or provides defective service. Additionally, Lessee agrees to comply with any energy conservation programs implemented by Lessor by reason of enacted laws or ordinances, or otherwise. 9.05 Lessor reserves the right, in its sole discretion, to designate, at any time, Lessee's utility equipment and service providers for any utility available for Lessee's use within the Property. 9.06 By execution of this Lease, Lessee acknowledges it has satisfied itself as to the adequacy of any Lessor owned telephone equipment, if any, and the quantity of telephone lines and service connections to the Building available for Lessee's use. Additionally prior to termination of this Lease, Lessee at its sole cost and expense, will remove all equipment, both above and below the ceiling to the phone closet where applicable, (if required by Lessor), including but not limited to, all lines, wiring and all telephone boards belonging to Lessee and restore the Premises to the same condition as before such installation. 9.07 Lessee acknowledges and agrees that the number and type of telephone lines to its Premises, and all other telephone, telecommunication or other communication equipment (specifically including any antennas, towers {microwave or otherwise} or other exterior equipment of any nature) which either utilizes telephone or telecommunications equipment or technology or in any other manner affects the ability to use telephone or communications facilities at the Premises, as presently existing and as contemplated to be installed prior to the Commencement Date as specifically provided in any Exhibit to this Lease, are fully adequate for Lessee's uses and purposes. In the event that Lessee later wishes additional telephone, telecommunication or other communication lines or equipment to be installed after the date of Lessee's execution of this Lease, no such additional lines or equipment shall be installed without first securing the prior written consent of Lessor, which will not be unreasonably withheld. Any telecommunications installation shall be subject to the following: (1) Lessor shall incur no expense whatsoever with respect to any aspect of Lessee's need for additional access or equipment, including without limitation, the costs of installation, consultants, materials, permits, service, etc. (2) Prior to the commencement of any work in or about the Building to install such additional access, lines or equipment, Lessee shall agree to abide by such conditions to installation, use and removal, as are determined by Lessor in its sole discretion. (3) Lessor reasonably determines that there is sufficient space in the Building for the placement of all of the lines, access and equipment. 8 (4) Lessee agrees to compensate Lessor the reasonable amount determined by Lessor for space used in the Building for the storage and maintenance of the equipment, if any lies outside the leased Premises, and for all costs that may be incurred by Lessor in arranging for access by the Lessee's personnel, security for Lessee's equipment, and any other such costs as Lessor may expect to incur. (5) Any other requirements Lessor may deem reasonable. The refusal of Lessor to consent to any request shall not be deemed a Lessor Default nor otherwise be grounds for any termination, claim or offset by Lessee. Lessee agrees that to the extent service by any telephone or communication equipment is interrupted, curtailed, or discontinued, Lessor shall have no obligation or liability with respect thereto and it shall be the sole obligation of Lessee at its expense to obtain substitute service, but only with Lessor's prior written permission, which shall not be unreasonably withheld. Lessor's consent under this section shall not be deemed a warranty or representation by Lessor as to the availability or suitability of the present or future telephone or communications equipment, connections, compatibility or space available for any additional equipment, lines or access. The provisions of this clause may be enforced solely by the Lessee and Lessor, and are not for the benefit of another party, specifically, without limitation, no telephone or telecommunications provider shall be deemed a third party beneficiary of the Lease. 10. Lessee Improvements; Lessee Alterations and Mechanic's Liens 10.01 Any improvements to be constructed in the Premises by Lessee prior to Lessor's initial delivery of the Premises are referred to throughout this Lease as "Lessee Improvements." All Lessee Improvements will be performed in accordance with the terms and conditions outlined in Exhibit "B" and this ----------- Section 10. --------- 10.02 Lessor's prior written consent is required for any: (a) Lessee constructed Lessee Improvements; and (b) any alterations, utility installations, additions, or other improvements made by Lessee, at its sole cost and expense, after Lessor's initial delivery of the Premises (herein collectively referred to as Lessee Alterations). Lessor's consent will be conditioned upon its approval of: (i) Lessee's contractor(s); (ii) detailed plans and work specifications of Lessee Alterations; and (iii) certificates of insurance from Lessee's contractor(s) for commercial general liability, automobile liability and property damage insurance with limits not less than $2,000,000 / $250,000 / $500,000 respectively endorsed to show Lessor as an additional insured evidencing Lessor's requirement to be notified at least thirty (30) days in advance of any change, expiration or cancellation of any such policies along with proof of a current worker's compensation policy. In addition, Lessee must obtain all approvals and permits required by any and all governmental authorities and provide same to Lessor prior to commencement of any work, and after work commences must comply with all conditions of such approvals and permits and perform work in a prompt and expeditious manner with good and sufficient materials. Lessor also retains the right, as a condition of its consent, to require Lessee to provide Lessor with a lien and completion bond in a form acceptable to Lessor in an amount equal to one and one-half times the estimated cost of Lessee constructed Lessee Improvements and Lessee Alterations and/or require the inclusion of Lessor's non-responsibility language in all contracts in a form approved by Lessor. Lessor shall be entitled to a contract management fee of 15% of the total cost of such construction. Lessee will give Lessor a minimum of fifteen (15) days prior written notice to the commencement of any Lessee constructed Lessee Improvements and Lessee Alterations to allow Lessor sufficient time in which to post notices of non-responsibility or no liability for work then in progress in, on, or about the Premises as provided by law. Upon completion of any improvements, all alterations or additions, Lessee shall deliver to Lessor accurate, reproducible as-built plans of such construction. 10.03 Lessor's approval of any Lessee constructed Lessee Improvements and Lessee Alterations will not create any liability whatsoever on the part of Lessor. By way of example and without limitation, Lessor's approval of Lessee's plans and work specifications will not create any responsibility or liability on the part of Lessor for their sufficiency, completeness or compliance with any and all governmental laws, codes, regulations, ordinances, covenants and restrictions (including without reservation any and all provisions of the Americans with Disabilities Act of 1990 and analogous local architectural barriers removal acts applicable to the Property, or any part thereof). 10.04 Lessee will pay when due, all claims for services, labor and materials furnished by, or at the request of Lessee, including any claims which are secured by any mechanic's or materialmen's or other lien against the Property, or any interest therein. Lessee agrees that should any lien be posted on the Property due to work performed, materials furnished, or obligations incurred by Lessee, or its employees, agents, contractors, suppliers, invitees or licensees, Lessee will immediately notify Lessor and proceed to remove such lien. Lessee further acknowledges that it will remain liable to Lessor and indemnify Lessor for any costs and expenses or damages to Lessor or the Property or any interest therein as a result of such lien(s). If Lessee, in good faith, contests the validity of any such lien, claim or demand, Lessee will, at its sole expense, defend and protect itself, Lessor and the Property, or any part thereof. To ensure such protection of Lessor and the Property and any part thereof, Lessor may, at its sole option, require Lessee to provide Lessor with a surety bond satisfactory to Lessor in an amount deemed appropriate by Lessor which will indemnify Lessor against any liability and ensure the Property, or any part thereof, is free from the effect of such a lien or claim. In addition, Lessor may require Lessee to pay all legal fees of Lessor's attorney(s) of choice and any other associated costs and expenses should Lessor decide it is in its best interest to participate in such an action. If Lessee fails to keep the Property, or any part thereof, free from any lien or provide a Lessor approved surety bond, then, in addition to any other rights and remedies available to Lessor, Lessor may take any action necessary to discharge such a lien, including but not limited to, payment to the claimant on whose behalf the lien was filed, and regardless of the corrective action taken by Lessor, Lessee will be liable to Lessor for all costs and expenses of such action to discharge the lien, including, but not limited to, any legal fees and costs. 9 10.05 All Lessee Improvements and Lessee Alterations are part of the realty and belong to Lessor. As a condition of Lessor consenting to any Lessee Improvements or Lessee Alterations, Lessor reserves the right, at any time to: (i) require Lessee to pay an amount determined by Lessor to cover the costs of demolishing part or all of any Lessee Improvements or Lessee Alterations and or the cost of returning the Premises to their condition before any such work commenced (normal wear and tear excepted); or (ii) elect to make Lessee the owner of all or any specified part and, upon termination of this Lease, require Lessee to remove same at its sole cost and expense. The provisions of this Paragraph shall survive the termination of this Lease. 10.06 Lessee may, without prior written consent of Lessor, make non-structural installations within the Premises of its trade fixtures, equipment, and machinery in conformance with all applicable governing agency laws, codes, regulations, ordinances, covenants and restrictions, and they may be removed upon termination of this Lease provided the Premises are restored to its condition at the commencement of this Lease and no material damage to the Premises will occur. All such installations shall be made by a licensed and bonded contractor, approved by Lessor, with all permits obtained when required by law. 10.07 Lessor retains the right to construct or permit construction of improvements, and/or lessee alterations, for new and existing lessees and to alter any commonly used areas in or about the Property. Notwithstanding anything which may be contained in this Lease, Lessee understands this right of Lessor and agrees that such construction will not be deemed to constitute a Lessor Default of this Lease. Lessee waives any such claims which it might have arising from such construction. 11. Repairs 11.01 This is a net lease. Lessee will, at all times and at its sole cost and expense, keep all parts of the Premises, interior and exterior, in good order, condition and repair, and all equipment and facilities within or serving the Premises, including but not limited to: windows, glass and plate glass, doors and office entry(s), walls and finish work, floors and floor coverings, interior of the roof, foundation, down spouts, gutters, heating and air conditioning systems, electrical systems, dock boards, truck doors, chain link gates and fences, dock bumpers, life safety-sprinkler systems, signage, speed bumps, paving, plumbing work and fixtures, termite and pest extermination, regular removal of trash and debris, snow removal, regular mowing of any grass, trimming, weed removal and general landscape maintenance, keeping the parking areas, driveways, alleys and whole of the Premises in a clean and sanitary condition. Lessee shall at its own costs and expense repaint exterior overhead doors, canopies, entries, handrails, gutters, and other exposed parts of the Building which reasonably require periodic repainting to prevent deterioration or to maintain aesthetic standards. The cost of maintenance and repair of any common party wall (any wall, divider, partition or other structure separating the premises from any adjacent premises occupied by other Lessees) shall be shared equally by Lessee and the lessee occupying the adjacent premises. Lessee shall not damage any party wall or disturb the integrity and support provided by any party wall and shall, at its sole cost and expense, promptly repair any damage or injury to any party wall caused by Lessee or its employees, agents or invitees. Lessee will keep the Premises and every part thereof in good order, condition and repair regardless of whether any portion of the Premises requiring repairs, or the means of repairing same are reasonably or readily accessible. Additionally, Lessee shall be obligated to maintain and repair the Premises whether the need for such repairs or maintenance occurs as a result of Lessee's use, any prior use, vandalism, acts of third parties, Force Majeure or the age of the Premises. The standard for comparison of condition will be the condition of the Premises as of the original date of Lessor's delivery of the Premises and failure to meet such standard shall create the need to repair. All Lessee repairs will be made by a licensed and bonded contractor, approved by Lessor, with permits and any other governmental agency approvals and requirements obtained and observed, and conform to all requirements of Paragraph 10.02 ---------------- herein. Lessor's maintenance and repair obligations are limited to air-conditioning and other equipment, facilities and areas used in common with other lessees, exterior walls, foundations and exterior roofs which Lessor agrees to repair and maintain on behalf of Lessee unless such repairs are due to negligent or intentional acts of Lessee or its employees, agents, contractors, suppliers, invitees or licensees. 11.02 Lessee expressly waives the benefit of any statute or other legal right now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense, whether by deduction of rent or otherwise, or to terminate this Lease because of Lessor's failure to keep the Property, or any part thereof in good order, condition and repair. If Lessee does not keep the Premises in good order, condition, conforming to and consistent with Lessor-specified standard colors, materials and quality, or fails to make any Lessor required maintenance or repairs, Lessor shall have the right, without waiver of Default nor of any other right or remedy, to perform such obligations of Lessee on Lessee's behalf, and Lessee will reimburse Lessor for any direct and indirect costs and expenses incurred immediately upon demand. 10 11.03 In the event the Premises constitute a portion of a multiple occupancy building, Lessor shall perform the roof, paving, and landscape maintenance, exterior painting and common sewage line plumbing which are otherwise Lessee's obligation under Paragraph 11.01 above, and Lessee shall, in --------------- lieu of the obligations set forth under Paragraph 11.01 above with respect to --------------- such items, be liable for its Proportionate Share of the Building (as defined in Paragraph 1.13 above) of the costs and expense of Building maintenance and the ------------- care for the grounds around the Building, including but not limited to, the mowing of grass, care of shrubs, general landscaping, maintenance of parking areas, driveways and alleys, roof maintenance, exterior repainting and common sewage line plumbing; provided, however, that Lessor shall have the right to require Lessee to pay such other reasonable proportion for said mowing, shrub care and general landscaping costs as may be determined by Lessor in its sole discretion, and further provided that if Lessee or any other particular lessee of the Building can be clearly identified as being responsible for obstruction or stoppage of the common sanitary sewage line, then Lessee, if Lessee is responsible, or such other responsible lessee, shall pay the entire cost thereof, upon demand, as Additional Rent. 11.04 Lessee shall, at its own cost and expense, enter into regularly scheduled preventive maintenance/service contract(s) with a maintenance contractor for servicing all heating and air conditioning systems and equipment within the Premises and shall provide Lessor with copies of all service reports. The maintenance contractor and contract must be approved by Lessor. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy thereof delivered to Lessor) within thirty (30) days of the date Lessee take possession of the Premises. Each Lease year Lessor, at its option, may inspect the HVAC system to determine that the aforementioned maintenance is being performed. If the HVAC system is not being maintained pursuant to this Section, Lessor will send notice of such lack of maintenance to Lessee and Lessee shall thereafter have thirty (30) days to perform the necessary maintenance. If Lessee fails to complete the necessary maintenance in such thirty (30) day period, Lessor shall have the right, without waiver of any other right or remedy, to perform such work at the expense of Lessee. Should the inspection demonstrate a lack of maintenance of the HVAC system, Lessee shall pay for the cost of such inspection. Thirty days before Lessee vacates the Premises, Lessor will have the HVAC equipment inspected by a qualified HVAC mechanic at Lessor's expense. If, in the opinion of the HVAC mechanic, the equipment has not been properly maintained, then Lessor may authorize necessary repairs and/or replacements to be made to the system. Such repairs will be deducted from the Lessee's Security Deposit. Lessee shall reimburse Lessor for any and all costs associated with such repairs which exceed the amount of any Security Deposit. The remainder of the Security Deposit, if any, shall be refunded to Lessee in accordance with the terms of the Lease. 12. Insurance 12.01 Except as expressly provided as Lessee's Permitted Use, or as otherwise consented to by Lessor in writing, Lessee will not do or permit anything to be done within or about the Premises or the Property which will increase the existing rate of any insurance on any portion of the Property or cause the cancellation of any insurance policy covering any portion of the Property. Lessee will not keep, use or sell, or permit anyone to keep, use or sell, anything in or about the Premises, which may be prohibited by the standard form of fire and other insurance policies. Lessee will, at its sole cost and expense, comply with any requirements of any insurer of Lessor and of Lessee. 12.02 Lessee agrees to maintain in full force and effect at all times during the Lease Term, at its sole cost and expense, for the protection of Lessee and Lessor, policies of insurance which afford the following coverage: (a) Worker's Compensation Statutory Requirements Employer's Liability Not less than $1,000,000.00 (b) Commercial General Liability Not less than $1,000,000.00 per occurrence Not less than $2,000,000.00 aggregate this location Commercial policies shall insure on an occurrence and not a claims-made basis and cover the Premises, Project and Property. The policy shall cover liability arising from premises, operations, independent contractors, products-completed operations, personal injury, advertising injury and liability assumed under an insured contract and not be excess, nor exclude pollution or employment-related practices. (c) Automobile Liability Not less than $300,000.00 combined single limit including property damage (d) "All Risk" coverage including fire and extended coverage, vandalism, malicious mischief and any other perils normally covered therein. This insurance coverage must be upon the Premises and all property owned by Lessee, for which Lessee is legally liable, which Lessee is obligated to repair and restore hereunder, and/or which was installed at the expense of or at the request of Lessee, including but not limited to, any Lessee Improvements, Lessee Alterations, furniture, fixtures, equipment, installations and any other personal property of Lessee, in an amount not less than their full replacement value, and with a deductible not to exceed $1,000.00 per occurrence. All proceeds of this insurance shall only be used for the repair and replacement of property so insured, and Lessee hereby assigns to Lessor all its rights to receive any proceeds of such insurance policies attributable to any Lessee Improvements and Lessee Alterations. 11 The limits of the insurance coverage required under this Lease will not limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee will be primary to, and non-contributory with Lessor's insurance, and contain cross-liability endorsements and will in addition to the above coverage specifically insure Lessor against any damage or loss that may result either directly or indirectly from any default of Lessee under Paragraph 14 (Hazardous Materials) herein. Any similar insurance carried ------------ by Lessor will be considered excess insurance only. 12.03 Lessee will name Lessor (and, at Lessor's request, any Mortgagee) as an additional insured on all insurance policies required of Lessee under this Lease, other than Worker's Compensation, Employer's Liability, Automobile Liability, and Fire and Extended coverage (except on improvements or alterations to Lessees' Premises for which Lessor shall be named an additional insured). Such insurance policies carried by Lessee will permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party without invalidating the coverage under the insurance policy, and will release Lessor and any of its agents and employees from any claims for damage to any person, to the Property of which the Premises are a part, any existing improvements, etc., Lessee Improvements and Lessee Alterations to the Premises, and to any furniture, fixtures, equipment, installations and any other personal property of Lessee caused by or resulting from, risks which are to be insured against by Lessee under this Lease, regardless of cause. 12.04 Lessee will deliver to Lessor, (and, at Lessor's request any Mortgagee, Assignee or Receiver) simultaneously with its execution of this Lease, (and thereafter at least thirty (30) days prior to expiration, cancellation or change in any Lessor required certificates of insurance), certificates of insurance evidencing, at a minimum, the coverage specified in Paragraph 12.02. All insurance required hereunder will be with companies --------------- licensed and authorized to do business in the state in which the Property is located and holding a "General Policyholders Rating" of "A -, VII" or better, as set forth in the most current Best's Insurance Guide. ---------------------- 12.05 Lessor will secure and maintain insurance coverage in such limits as Lessor may deem reasonable in its sole judgment to afford Lessor adequate protection. The premiums for such coverage are "Insurance Premiums" under Section 4.03C above. ------------- 12.06 Lessor makes no representation that the insurance policies and coverage amounts specified to be carried by Lessee or Lessor under the terms of this Lease are adequate to protect Lessee. Lessee will provide, at its own expense, all insurance as Lessee deems adequate to protect its interests. 12.07 As to any insurance proceeds received by Lessor, such proceeds shall for all purposes be deemed Lessor's sole property, free from any claims of Lessee, and unless otherwise stated, available for Lessor's exclusive use as it may alone determine in the exercise of its sole discretion. 12.08 Without limiting the effect of any other waiver of or limitation on the liability of Lessor set forth herein, and except as provided in Section ------- 13 and/or Section 14 below, neither Lessor nor Lessee shall be liable to the - ---------- other party or to any insurance company (by way of subrogation or otherwise) for any loss of or damage to tangible property due to casualty regardless of negligence. 13. Indemnification and Waiver of Claims Lessee waives all claims against Lessor and its agents for any damage to any property in or about the Property, for any loss of business or income, and for injury to any persons, including death resulting therefrom, regardless of cause or time of occurrence. Lessee will indemnify, protect, defend and hold harmless Lessor and its agents from and against all claims, losses, damages, causes of action, costs, expenses and liabilities, including legal fees, arising out of, involving, or in connection with Lessee's occupancy of the Premises or presence on the Property, the conducting of Lessee's business, any Default by Lessee, and/or any act, omission or neglect of Lessee, its agents, contractors, employees, suppliers, licensees or invitees except only for any third party claim for bodily injury or death which is the direct result of the gross or intentional acts by Lessor, its agents, contractors, employees, suppliers, licensees or invitees. In the event any action or proceeding is brought against Lessor, its agents, contractors, employees, suppliers, licensees or invitees, by reason of the foregoing, Lessee, upon notice by Lessor, will defend Lessor, its agents, contractors, employees, suppliers, licensees or invitees, at Lessee's sole cost and expense, and by counsel reasonably satisfactory to Lessor. 14. Hazardous Materials 12 14.01 For purposes of this Lease, "Hazardous Materials" will mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Property, now or in the future, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Property, or any part thereof; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental authority or third party. Hazardous Materials will include, but not be limited to, solvents, petrochemical products, flammable materials, explosives, asbestos, urea formaldehyde, PCB's, chlorofluorocarbons, freon or radioactive materials. Lessee agrees to provide Lessor, prior to its occupancy of the Premises, a list of all Hazardous Materials which Lessee proposes to bring into the Premises and their locations within the Premises and methods of storage. Lessee further agrees to comply with all future requests for information by Lessor including but not limited to copies of all applicable Material Safety Data Sheets (MSDS sheets). 14.02 Lessee will not cause or permit any Hazardous Materials to be brought upon, kept, stored, discharged, released or used in, under or about any portion of the Property by itself, its agents, employees, contractors, subcontractors, licensees or invitees, without the prior written consent of Lessor, and Lessor's consent will be in its sole discretion; provided, Lessee may bring into the Premises small amounts of Hazardous Materials (such as cleaning products and copy toner) which are readily available to Lessee by unregulated retail purchase if the same are necessary in Lessee's normal business operations. As to any Hazardous Materials brought to the Premise or Property by Lessee, with or without the prior written consent of Lessor (without waiver of the requirement of prior written consent), Lessee shall: (1) use such Hazardous Material only as is reasonably necessary to Lessee's business, in small, properly labeled quantities; (2) handle, use, keep, store, and dispose of such Hazardous Material using the highest accepted industry standards and in compliance with all applicable regulatory agencies and governmental Hazardous Materials requirements; (3) maintain at all times with Lessor a copy of the most current MSDS sheet for each such Hazardous Material; and (4) comply with such other rules and requirements Lessor may from time to time impose. 14.03 As to any Hazardous Materials brought to the Premises or Property by Lessee, with or without the prior written consent of Lessor (without waiver of the requirement of prior written consent), Lessee will comply with all federal, state and local laws, ordinances, and rules and regulations relating to Hazardous Materials, including but not limited to, current rules and regulations or levels and standards as set from time to time by the Environmental Protection Agency, the U. S. Occupational Safety and Health Administration, or any other governmental agency. It is not necessary that any presence or contamination of the Premises reflect any government mandated threshold or quantity in order for Lessor to take any action under this Paragraph 14. ------------ 14.04 Upon expiration or earlier termination of this Lease, Lessee will, at Lessee's sole cost and expense, cause all Hazardous Materials brought to the Premises or the Property by Lessee, its agents, contractors, employees, suppliers, licensees or invitees, to be removed from the Property in compliance with any and all applicable Hazardous Material disposal laws. If Lessee or its agents, contractors, employees, suppliers, licensees or invitees, violates the provisions of this Paragraph 14, or performs any act or omission, or ------------- contaminates, or expands the scope of contamination of the Premises, the Property, or any part thereof, the underlying groundwater, or any property adjacent to Lessor's Property, then Lessee will promptly, at Lessee's expense, take all investigatory and/or remedial action (collectively called "Remediation") that is necessary to fully clean up, remove and dispose of such Hazardous Materials and any contamination so caused and shall do so in compliance with any applicable Hazardous Material laws and regulations. Lessee will also repair any damage to the Premises and any other affected portion(s) of the Property caused by such Hazardous Material presence, investigation and Remediation. 14.05 With respect to any Remediation of the Premises, the Property or any portion thereof, Lessee will provide Lessor with written notice of Lessee's intended Remediation, including Lessee's method, time and procedure of Remediation, and Lessor will have the right to require reasonable changes in such method, time or procedure before Lessee commences any such work. Lessee will not commence any Remediation of Hazardous Materials in any way connected with the Property, or any portion thereof, without first notifying Lessor, in writing, of Lessee's intention to do so and affording Lessor ample opportunity to appear, intervene or otherwise appropriately assert and protect Lessor's interest. 14.06 Lessee will immediately notify Lessor in writing of any governmental or regulatory action threatened, any claim, demand, or complaint made or threatened by any person against Lessee or any portion of the Property relating to damage, contribution, cost recovery compensation, or loss or injury resulting from any Hazardous Materials, and any report made to any governmental authority arising out of any Hazardous Materials on, or removed from, the Property or any portion thereof. Lessor retains the right to join and participate, as a party, in any legal actions affecting the Property or any portion thereof initiated in connection with Hazardous Materials laws. 14.07 Lessee will indemnify, protect, defend and forever hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, the Property, or any portion thereof, harmless from any and all damages, losses, liabilities, judgments, penalties, claims, obligations, attorneys and consultants' fees and any other costs and expenses arising out of any failure of Lessee, its agents, contractors, employees, suppliers, licensees or invitees to observe any covenants of this Paragraph 14 of this Lease. All provisions of this Paragraph 14 shall survive any termination of this Lease. ----------- 13 15. Auctions and Signs 15.01 Lessee will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction on or about the Property, without having the express written consent of Lessor, and Lessor will not be obligated to exercise any standard of reasonableness in determining whether or not to grant such consent. Should Lessor grant such consent, Lessee will comply with any requirements of Lessor and any applicable laws governing such an auction. 15.02 Lessee will not place any Signage on or about the Property, or on any part thereof, without the prior written consent of Lessor, which Lessor may withhold in its sole discretion. All approved Lessee Signage will comply with the terms and conditions of this Lease and the sign criteria set forth in Exhibit "C" and Exhibit "D," or other criteria which Lessor may establish from ---------- ------------ time to time. 16. Lessor's Access 16.01 Lessor, its agents, contractors, consultants, servants and employees, will have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times to (a) examine the Premises; (b) perform any obligation to or exercise any right or remedy of Lessor under this Lease; (c) make repairs, alterations, improvements or additions to the Premises or to other portions of the Property as Lessor deems necessary or desirable; (d) perform work necessary to comply with laws, ordinances, rules or regulations of any governing authority or insurance underwriter; (e) serve, post or keep posted any notices required or allowed under the provisions of this Lease or by law; (f) show, at reasonable times, Lessee's Premises to prospective lessees; (g) post on or about the Premises any ordinary "For Lease" signs during the last sixty (60) days of the Lease Term; and (h) perform work at Lessee's sole cost that Lessor deems necessary to prevent waste or deterioration of the Premises should Lessee fail to commence to make, and diligently pursue to completion, its required repairs. 16.02 For each of the purposes described in Paragraph 16.01 above, ---------------- Lessor will at all times have and retain any necessary keys with which to unlock all doors in, upon and about the Premises, excluding Lessee's vaults and safes. Lessee will not alter any lock or install new or additional locks or bolts on any door in or about the Premises without obtaining Lessor's prior written approval and will, in each event, furnish Lessor with a new key. All access activities of Lessor will be without abatement of rent or liability on the part of Lessor. 17. Abandonment Lessee will not vacate or abandon the Premises, or cease to conduct its ordinary business operations in the Premises, or permit the Premises to remain unoccupied for any period longer than fifteen (15) consecutive days any time during the Lease Term. If Lessee abandons, vacates or surrenders the Premises, or is dispossessed by process of law, or otherwise, any personal property belonging to Lessee left in or about the Premises will, at the option of Lessor, be deemed abandoned and may be disposed of by Lessor. 18. Damage or Destruction 18.01 If the Premises is damaged or destroyed by fire or other casualty, Lessee will immediately give written notice to Lessor of the casualty and Lessor will promptly repair the damage as set forth in Paragraph 18.03 ---------------- unless Lessor has the right to terminate this Lease as provided in Paragraph --------- 18.02 and Lessor elects to so terminate. ---- 18.02 Lessor will have the right, but not the obligation, to terminate this Lease following a casualty if any of the following occur: (i) insurance proceeds actually payable and paid to Lessor are not sufficient to pay one hundred percent (100%) of the cost to fully repair the damage; (ii) Lessor determines that the Premises cannot, with reasonable diligence, within six (6) months after Lessor obtains knowledge of the casualty, be fully repaired by Lessor or cannot be safely repaired because of the presence of hazardous factors and conditions, including but not limited to, Hazardous Materials, earthquakes, utility outages and any other similar dangers; (iii) the Premises are damaged or destroyed within the last twelve (12) months of the Lease Term; (iv) the Building within which the Premises is located is damaged or destroyed and Lessor (as determined in its sole discretion) cannot reasonably complete such repair within six (6) months of Lessor obtaining knowledge of the casualty; (v) Lessee is in Default of this Lease at the time of the casualty; (vi) Lessor would be required under Paragraph 18.04 to abate or reduce Lessee's rent for a period in excess of six (6) months if the repairs were undertaken; or (vii) the Project, or the Building in which the Premises is located, is damaged such that the cost of repair of the same would exceed 10% of the replacement cost of the same. If Lessor elects to terminate this Lease pursuant to this Paragraph 18.02, Lessor will give Lessee written notice of this election, and fifteen (15) days after Lessee's receipt of such notice, this Lease will terminate. If Lessor elects to terminate this Lease, subject to the rights of any mortgagee, Lessor will be entitled to retain all applicable Lessee insurance proceeds excepting those attributable to Lessee's furniture, fixtures, equipment, and any other personal property. 14 18.03 If Lessor does not have the right to elect, or fails to elect, to terminate this Lease, this Lease will remain in full force and effect, and Lessor will, within ten (10) days after receipt of all applicable insurance proceeds and monies required to fully repair 100% of the Premises, begin the process of obtaining all necessary permits and approvals, and upon receipt thereof, diligently pursue the repair through completion. The repair obligation of Lessor shall be limited to repair of the Premises, including Lessor's Work (if any), excluding any Lessee Improvements, Lessee Alterations, and any personal property and trade fixtures of Lessee. 18.04 If Lessor does not have the right to elect, or fails to elect, to terminate this Lease, during the period of repair, Lessee's rent will be temporarily abated or reduced in proportion to the degree to which Lessee's use of the Premises is impaired, as determined by Lessor, beginning the date Lessor obtains knowledge of the casualty and ending on the date all repairs affecting Lessee's use of the Premises are substantially completed, as determined by Lessor in its sole discretion. However, the total amount of such rent abatement or reduction shall not exceed the total amount of insurance proceeds, directly attributable to Lessee's Premises, Lessor may receive from any rental loss insurance coverage it may carry free from any claim of Lessee. Except for the abatement of rent as herein described, Lessee will not be entitled to any compensation or damages for the loss of or interference with Lessee's personal property (including but not limited to, furniture, fixtures, equipment, and installations), or existing improvements of the Premises, Lessee Improvements, Lessee Alterations or any other improvements on or about any portion of the Property, or business, or use, or access to all or any part of the Premises or the Property resulting from such damage, destruction or repair, including but not limited to, any consequential damages, opportunity costs or lost profits incurred or suffered by Lessee. In no event, however, will Lessor be responsible for any abatement of rent if Lessee, or its agents, contractors, employees, suppliers, licensees or invitees is the cause of the casualty, or any part thereof. 19. Transfer (Assignment/Subletting) 19.01 Lessee will not assign, sell, convey, sublet or otherwise transfer all or any part of Lessee's right or interest in this Lease, or allow any other person or entity to occupy or use all or any part of the Premises (collectively called "Transfer") without first obtaining the written consent of Lessor. Any Transfer without the prior written consent of Lessor shall be void. "Transfer" for purposes of this section: (i) an entity other than Lessee becoming the Tenant hereunder by merger, consolidation Without limiting the generality of the definition of "Transfer," it is agreed that each of the following shall be deemed a, or other reorganization; (ii) a transfer of any ownership interest in Lessee (unless Lessee is an entity whose stock is publicly traded) so as to result in a change in the current control of Lessee; (iii) a grant of a license, concession, or other right of occupancy of any portion of the Premises, or (iv) the use of the Premises by any party other than Lessee. Should Lessee desire a Transfer, Lessee will notify Lessor in writing of: (i) Lessee's intent to Transfer; (ii) the name of the proposed transferee; (iii) the nature of the proposed transferee's business to be conducted on the Premises; (iv) the terms and provisions of the proposed Transfer, and (v) any other information Lessor may reasonably request concerning the proposed Transfer; including but not limited to, a statement of net worth, financial statements covering a specified period of time, environmental reports and a completed environmental questionnaire supplied by Lessor. 19.02 Lessee agrees, by way of example and without limitation, that Lessor may withhold its consent to a proposed Transfer if Lessor in its reasonable judgment determines that the proposed transferee: (a) is of a character or is engaged in a business which is not in keeping with Lessor's standards for the Property, as determined solely by Lessor; (b) has a use which conflicts with a provision of this Lease or proposes an unacceptable risk to Lessor, as determined by Lessor; (c) does not meet the then current financial standards required by Lessor; (d) has been required by any prior lessor, lender or governmental authority to take a remedial action in connection with Hazardous Materials contaminating a property; (e) is unacceptable because Lessee is in Default under this Lease at the time of the request for Transfer or as of the effective date of the Transfer. Notwithstanding the foregoing, Lessee's right to a Transfer is subject to Lessor's approval of Lessee's financial condition at the time the Transfer is requested by Lessee. 19.03 In the event Lessor consents to a Transfer, the Transfer will not be effective until Lessor is in receipt of a fully executed agreement to Transfer, in a form and of substance acceptable to Lessor, and a Transfer fee of two hundred and fifty dollars ($250.00) which shall represent Lessee's minimum liability for such service. The receipt and cashing of any check by Lessor wherein such check is in a name other than that of Lessee will not constitute consent to a Transfer. Lessor also reserves the right to collect any rents due under this Lease directly from the transferee, and such direct collection will not constitute recognition of the transferee as Lessee or release Lessee or any guarantor of Lessee from any of its obligations under this Lease. Any consideration received by Lessee in excess of Lessee's Base Rent (including additional rent) as a result of a Lessor approved transfer shall be due and payable to Lessor. Upon any assignment or sublease, any rights, options or opportunities granted to Lessee hereunder to extend or renew the Lease Term, to shorten the Lease Term, or to lease additional space shall be null and void. 19.04 Lessor may, within thirty (30) days after submission of Lessee's written request for Lessor's consent to a Transfer, cancel this Lease (or, as to a subletting or assignment, cancel as to the portion of the Premises proposed to be sublet or assigned) as of the date the proposed Transfer was to be effective. If Lessor cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises, and Lessee shall pay to Lessor all Base Rent and other amounts accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer and all brokerage commissions paid or payable by Lessor in connection with this Lease that are allocable to such portion of the Premises. Thereafter, Lessor may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Lessee. 15 19.05 If Lessor has not agreed in writing to a Transfer within thirty (30) days of Lessee's request hereunder, Lessor will be deemed to have rejected Lessee's request. 19.06 In no event shall Lessee mortgage, encumber, pledge or assign for security purposes all or any part of its interest in this Lease. 20. Default 20.01 Lessee's performance of each of Lessee's obligations under this Lease is a condition as well as a covenant. Lessee's right to continue in possession of the Premises is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions of Lessee. 20.02 Lessee will be in Default if any of the following events occurs: (a) Lessee fails to make any payment of Base Rent, Additional Rent, or any other monetary payment required to be made by Lessee herein and Lessee does not cure such failure within three (3) days after receipt of Lessor's written notice to Lessee. (b) Lessee fails to maintain, or to provide Lessor with proof of, insurance or performance or surety bond as required under this Lease. (c) Lessee violates any provision of Paragraph 14 or of Paragraph 19 above. ------------ ------------ (d) Lessee fails to ensure that life and property are not endangered, as determined by Lessor in its sole discretion. (e) Lessee vacates the Premises without the intention to reoccupy same, or abandons the Premises as further described in Paragraph 17. --------- -- (f) Lessor discovers that any financial statement of Lessee or of any guarantor of this Lease given to Lessor was materially false. (g) Lessee makes any general arrangement or assignment for the benefit of creditors, becomes a "debtor" as defined in 11 U. S. -------- Code Section 101 or any successor statute, has substantially all ---------------- it assets located at the Premises or its interest in this Lease appointed to a receiver or trustee, indicates in Lessor's reasonable opinion an inability to pay its debts or obligations as they occur, has an attachment, or execution or other judicial seizure of substantially all of its assets located at the Property or its interest in this Lease. (h) Lessee fails to observe, perform or comply with any of the non-monetary terms, covenants, conditions, provisions or rules and regulations applicable to Lessee under this Lease other than as specified above in this Section 20.02; provided, if such -------------- failure (i) is not intentional on the part of Lessee, (ii) is not the type of failure as to which Lessor shall have previously given Lessee written notice, (iii) does not constitute a default or violation under any loan or other agreement to which Lessor is a party, and (iv) is, in the sole opinion of Lessor, a curable failure, then such failure shall not be a "Default" unless Lessee does not cure such failure within ten (10) days following written notice of such failure from Lessor; and provided, if Lessor shall allow such a ten (10) day cure period, the same may be extended by Lessor, for a maximum additional period of twenty (20) days, if (x) Lessee promptly commences cure within the ten (10) day period but is not reasonably able to complete cure within the ten (10) day period, and (y) prior to the expiration of the initial ten (10) day period, Lessee provides to Lessor a written request for extension accompanied by a report of its cure efforts to date and its plan to complete cure within the requested extended period. 21. Remedies of Lessor 21.01 If Lessee fails to perform any duty or obligation of Lessee under this Lease, Lessor may at its option, without waiver of Default nor any other right or remedy, perform any such duty or obligation on Lessee's behalf. The costs and expenses of any such performance by Lessor will be immediately due and payable by Lessee upon receipt from Lessor of the reimbursement amount required. 16 21.02 Upon a Default, with or without notice or demand, and without limiting any other of Lessor's rights or remedies, Lessor may: (a) Terminate this Lease and/or terminate Lessee's right to possession of the Premises. Upon any such termination, Lessee will immediately surrender possession of the Premises to Lessor. Lessor reserves all right and remedies available to it pursuant to the terms and conditions of this Lease as well as under state law (whether by terms of this Lease or otherwise). Lessee hereby grants Lessor the full and free right to enter the Premises with or without process of law. Lessee releases Lessor of any liability for any damage resulting therefrom and waives any right to claim damage for such re-entry. Lessee also agrees that Lessor's right to re-lease or any other right given to Lessor as a consequence of Lessee's Default hereunder or by operation of law is not relinquished. On such termination, Lessor will be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid rents which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been avoided; (iii) the worth at the time of the award of the amount by which the unpaid rents for the balance of the Lease Term after the time of award exceeds the amount of such rental loss for such period that Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the damage proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of events would likely result therefrom, including but not limited to, all costs and expenses attributable to recovering possession of the Premises, reletting expenses (including the costs and expenses of any necessary repairs, renovations and alterations to the Premises), costs of carrying the Premises (including but not limited to, Lessor's payment of real property taxes and insurance premiums), actual legal fees and associated costs and expenses, the unamortized portion of all brokerage commissions paid in connection with this Lease and all costs of Lessor's Work (amortized without interest on a straight line basis over the initial Lease Term), and reimbursement of any deferred rent or other Lease execution inducement; or (b) Continue the Lease and Lessee's right to possession and recover rent as it becomes due. Acts of maintenance or preservation, efforts to relet the Premises, removal or storage of Lessee's personal property or the appointment of a receiver to protect Lessor's interest under this Lease, will not constitute a termination of Lessee's right to possession. Lessor agrees to make reasonable efforts to mitigate its damages provided however, Lessor shall not be required to relet any or all of the Premises prior to leasing other vacant space on the Project, nor shall Lessor be required to accept a tenant of lesser financial quality than Lessee was as of the commencement date of this Lease; and/or (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. 21.03 In the event of bankruptcy of Lessee, or if Lessee becomes a debtor as defined under the Bankruptcy Code, Lessee assigns to Lessor all its rights, title and interest in the Premises as security for its obligations under this Lease. The expiration or termination of this Lease, and/or the termination of Lessee's right to possession, will not relieve Lessee from any liability accruing during Lessee's Lease Term or by reason of Lessee's occupancy of the Premises. Any efforts by Lessor to mitigate the damages caused by Lessee's Default of this Lease will not waive Lessor's right to recover damages. 21.04 The "worth at the time of award" referred to in 21.02(a) (i) and ------------ 21.02(a) (ii) will additionally include interest computed by allowing interest ------------ at the maximum rate allowed by law. The "worth at the time of award" referred to in 21.02(a) (iii) will be computed by discounting the amount at the discount --------------- rate of the Federal Reserve Bank of San Francisco in effect at the time of award, plus one percent (1%). 21.05 No right or remedy conferred upon or reserved to Lessor in this Lease is intended to be exclusive of any right or remedy granted to Lessor by statute or common law, and each and every such right and remedy will be cumulative. 22. Arbitration In the event any dispute arises under a provision of this Lease which specifically requires resolution by arbitration under this Section 22, then the parties agree that in lieu of judicial proceedings, the matter shall be submitted to arbitration in accordance with the rules of the American Arbitration Association, in a venue nearest to the location of the Premises. This agreement to arbitrate shall not, however, prohibit Lessor from exercising its statutory and/or common law rights to proceed against Lessee for injunctive relief, for possession of the Premises, and/or for damages, including but not limited to any action in the nature of unlawful detainer, ejectment, or any other similar summary proceeding. If the subject matter of the arbitration includes Operating Expense calculations, Lessee shall maintain as strictly confidential all information regarding the same. 17 22.02 As security for payment of rent, damages and all other payments required to be made by this Lease, Lessee hereby grants to Lessor a lien upon all property of Lessee now or subsequently located upon the leased Premises. If Lessee abandons or vacates any substantial portion of the leased Premises or is in default in the payment of any rent or additional rent, damages or other payments required to be made by this Lease or is in default of any other provision of this Lease, Lessor may enter upon the leased Premises, whether by changing or picking locks, and take possession pursuant to Paragraph 21.01(a) of this Lease of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales to the highest bidder all of Lessee's title and interest in the personal property sold to him. The proceeds of the sale of the personal property shall be applied by Lessor toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Lessee to Lessor under the terms of this Lease; any excess remaining shall be paid to Lessee or any other person entitled thereto by law. 22.03 Any and all property which may be removed from the Premises by Lessor pursuant to the authority of this Lease or of law, to which Lessee is or may be entitled, may be handled, removed and stored, as the case may be, by or at the direction of Lessor at the risk, cost and expense of Lessee, and Lessor shall in no event be responsible for the value, preservations or safekeeping thereof. Lessee shall pay to Lessor, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Lessor's possession or under Lessor's control. Any such property of Lessee not retaken by Lessee from storage within thirty (30) days after removal from the Premises shall, at Lessor's option, be deemed conveyed by Lessee to Lessor under this Lease as by bill of sale without further payment or credit by Lessor to Lessee. 23. Surrender of Lease Not Merger Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation of this Lease, or the termination of this Lease by Lessor due to a Default by Lessee, will not work as a merger, and will, at the option of Lessor, terminate all or any subleases of the Premises or operate as an assignment to Lessor of any or all such subleases; provided, (a) Lessor shall not be liable for nor obligated to correct any failures by Lessee to have performed any obligation under any such assigned sublease, nor (b) be obligated to credit any prepaid rent or to return any security deposit paid by the sublessee to Lessee. 24. Professional Fees, Costs and Expenses 24.01 In the event that any party to this Lease initiates an action or proceeding to enforce the terms of this Lease or to declare the rights of a party to this Lease, the prevailing party will be entitled to all actual costs and expenses, including but not limited to, all fees and costs and expenses of appraisers, experts, accountants and attorneys, which obligations shall be deemed to have accrued as of the commencement date of such action or proceeding; attorneys fees shall include all attorneys fees incurred at and in preparation for arbitration, trial, appeal and review, including deposition attorneys fees. This attorneys fee provision shall also apply to all litigation and other proceedings in Bankruptcy Court. Should Lessor be named as a defendant in any legal action or proceeding brought against Lessee in connection with, or arising out of, Lessee's occupancy within the Property, Lessee will pay to Lessor all of Lessor's actual costs and expenses incurred, including its legal fees. Attorneys' fees will not be computed in accordance with any court fee schedule, but will be the actual amount of any fees incurred. 24.02 If Lessor utilizes the services of any attorney with regard to Lessee's occupancy or tenancy under this Lease, Lessor will be entitled to reimbursement by Lessee of its legal fees, and all other costs and expenses, whether or not a legal action is commenced by Lessor. 25. Condemnation If any portion of the Premises or any portion of the Building in which the Premises is located, or any portion of the Property which would substantially interfere with Lessor's ownership, or Lessor's or Lessee's ability to conduct business is taken for any public or quasi-public purpose by any governmental authority, including but not limited to, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking, Lessor, at its option, may terminate this Lease without recourse by Lessee. Any award for such taking or payment made under such threat of exercise of such power will be the property of Lessor, whether such award be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; however, Lessee will be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses. If this Lease is not terminated, Lessor will promptly proceed to restore the Premises and/or any portion of the Property used in common by all lessees to substantially the same condition as prior to such taking allowing for any reasonable effects of such taking. Should a partial taking directly affect a portion of Lessee's Premises and Lessor does not exercise its right to terminate this Lease, Lessor will make an appropriate allowance to Lessee for the rent corresponding to the term during which, and to the part of the Premises which, Lessee is deprived on account of such taking and restoration. 26. Rules and Regulations Lessee agrees to abide by, keep and observe all Rules and Regulations set forth in Exhibit "D" and all additions and amendments to the same of which Lessor provides written notice to Lessee. Lessor will not be responsible to Lessee for any nonperformance by any other lessee, occupant or invitee of the Property of any said Rules and Regulations. 18 27. Estoppel Certificate Lessee will execute and deliver, in a form prepared by Lessor, to Lessor within ten (10) business days after written receipt of notice from Lessor, a written statement certifying: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and any other charges are paid in advance, if any; (iii) acknowledgment that there are not, to Lessee's knowledge, any uncured Defaults on the part of Lessor, or stating the nature of any uncured Defaults; (iv) the current Base Rent amount and the amount and form of the Security Deposit on deposit with Lessor; and (v) any other information as Lessor, Lessor's agents, mortgagees and prospective purchasers may reasonably request, including but not limited to, any requested information regarding Hazardous Materials. Lessee's failure to deliver such statement within ten (10) days of its receipt of such request will be deemed as Lessee's conclusive confirmation that: (1) this Lease (including specifically the Base Rent, Additional Rent and Lease Term) is in full force and effect and without modification except as may be represented by Lessor; (2) neither Lessor nor Lessee are in Default under the Lease; and (3) not more than one (1) month's rent charges, if any, are paid in advance. 28. Sale By Lessor Upon the sale or any other conveyance by Lessor of the Property, or any portion thereof, Lessor will be relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease or arising out of any act, encumbrance, occurrence or omission occurring after the date of such conveyance. 29. Notices All communications and notices required under this Lease shall be in writing and shall be addressed to the respective address of the receiving party set forth in Paragraph 1 above. All notices to Lessee shall be given by ------------ reputable overnight courier, U. S. mail (First Class, postage prepaid), or personal delivery, and shall be deemed received five (5) days after such mailing, one business day following delivery by Lessor to such an overnight courier, or upon personal delivery. Any notice to Lessee may also be given by posting at the Premises and shall be effective upon such posting. Notices to Lessor shall be sent to Lessor by U. S. mail, postage prepaid, registered or certified mail with return receipt requested to the address indicated in Paragraph 1.06 and shall be deemed received five (5) days after such mailing. At ------------- any time during the Lease Term, Lessor or Lessee may specify a different Notice Address by providing written notification to the other. 30. Waiver No waiver by Lessor of a Default by Lessee of any term, covenant or condition of this Lease by Lessee, will be deemed a waiver of any other term, covenant or condition of this Lease, or of any subsequent Default of Lessee of the same or any other term, covenant or condition of this Lease, nor will any delay or omission by Lessor to seek a remedy for any Lessee Default of this Lease be deemed a waiver by Lessor of its remedies or rights with respect to such Default. Additionally, regardless of Lessor's knowledge of a Default at the time of accepting rent, the acceptance of rent by Lessor whether on account of monies or damages due Lessor, or otherwise, will not constitute a waiver by Lessor of any Default by Lessee. 31. Lessee's Intent; Holdover Unless otherwise specified in this Lease, Lessee will give Lessor, not less than ninety (90) days prior to the expiration date of this Lease Term, written notice of its intent to remain or vacate the Premises on the expiration date of this Lease. If Lessee remains in possession of all or any part of the Premises with Lessor's written consent after the expiration of the Lease Term, such possession will constitute a month-to-month tenancy, which may be terminated by either Lessor or Lessee with thirty (30) days written notice and will not constitute a renewal or extension of the Lease Term. If Lessee remains in possession after the Lease Term without Lessor's written permission, such possession will constitute a tenancy-at-will terminable upon forty-eight (48) hour notice by either Lessee or Lessor and will not constitute a renewal or extension of the Lease Term. In the event of a month-to-month tenancy or tenancy-at-will, Lessee's Base Rent will be two hundred percent (200%) of the Base Rent payable during the last month of the Lease Term, and any other sums due under this Lease will be payable in the amounts and at the times specified in this Lease and all options, rights of refusal, expansions and/or renewals shall be null and void. Such tenancy will be subject to every other term, condition and covenant contained in this Lease. 19 32. Relocation of the Premises Lessor may, at any time during the Lease Term, relocate Lessee to substantially comparable space within the Project. Lessor will give Lessee a written notice of its intention to relocate the Premises and Lessee will complete such relocation within the thirty (30) days after receipt of such written notice. Lessor shall pay all reasonable costs and expenses of such relocation, and the terms and conditions of the Lease will remain in full force and effect except for any actual adjustments in square footage, Base Rent, or Lessee's Proportionate Share that may result from such relocation. If the space to which Lessor proposes to relocate the Lessee are not substantially the same in configuration and finishout as those of the Premises, or if the Base Rent of the new space is not substantially the same as the prior Base Rent, Lessee may so notify Lessor, and if Lessor fails to offer space satisfactory to Lessee, Lessee may terminate this Lease effective as of the thirtieth (30th) day after Lessor's initial notice. 33. Default by Lessor; Limitation of Liability; Real Estate Investment Trust 33.01 In the event Lessor fails to perform any obligation required to be performed under this Lease, Lessee will notify Lessor in writing, pursuant to the provisions of Paragraph 29, of such failure at Lessor's Notice Address as ------------ specified in Paragraph 1.06, and Lessor shall not be deemed in Lessor Default --------------- hereunder unless and until such notice is received and Lessor fails within thirty (30) days of receipt of such notice to commence to make a good faith effort to cure the failure or thereafter ceases in a diligent and prudent manner to continue to pursue such cure to completion. 33.02 The obligations of Lessor under this Lease shall be binding only on Lessor and not upon any of the individual partners, investors, trustees, directors, officers, employees, agents, shareholders, advisors or managers of Lessor in their individual capacities, and with respect to any obligations of Lessor to Lessee, Lessee's sole and exclusive remedy shall be against Lessor. 33.03 In consideration of the benefits accruing hereunder, Lessee on behalf of itself and all of its Transferees covenants and agrees that, in the event of any actual or alleged Lessor Default of this Lease, Lessee's recourse against Lessor for any monetary damages will be limited to the lesser of Lessor's interest in the Property including, subject to the prior rights of any mortgagee, Lessor's interest in the rents of the Property, or Lessor's equity interest in the Property if the Property were encumbered by debt in an amount equal to eighty percent (80%) of its value of the Property as of the initial date Lessee notifies Lessor of the actual or alleged Default, and any insurance proceeds payable to Lessor. Any action by Lessee will be limited to actual damages only and will not, under any circumstances, include future profits or consequential damages. 33.04 If Lessor is a real estate investment trust, and if Lessor in good faith determines that its status as a real estate investment trust under the applicable provisions of the Internal Revenue Code of 1986, as heretofore or hereafter amended, will be jeopardized because of any provision of this Lease, Lessor may require reasonable amendments to this Lease and Lessee shall not unreasonably withhold or delay its consent thereto, provided that such modifications do not in any way, (i) increase the obligations of Lessee under this Lease or (ii) adversely affect any rights or benefits to Lessee under this Lease. Lessor shall pay all reasonable costs incurred by Lessee, including without limitation, legal fees incurred for reviewing any such proposed modifications. 33.05 Lessee represents that, to its knowledge, no person or entity who is a significant indirect owner of Lessor, owns actually or constructively a 10% or more interest in Lessee. Lessee will promptly notify Lessor if it learns that any such ownership interest exists. Significant owners of Lessor at this time include Public Storage, Inc. and New York Common Retirement Fund. 34. Subordination Without the necessity of any additional document being executed by Lessee for the purposes of effecting a subordination, and at the election of Lessor or any mortgagee or any ground lessor with respect to the land of which the Premises are a part, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Property and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Property, ground leases or underlying leases, or Lessor's interest or estate in any of said items is specified as security. Lessor or any mortgagee or ground lessor will have the right, at its election, to subordinate or cause to be subordinated any ground lessee or underlying leases or any such liens to this Lease. If Lessor's interest in the Premises is acquired by any ground lessor or mortgagee, or in the event any proceedings are brought for the foreclosure of, or in the event of exercise of power of sale under, any mortgage or deed of trust made by Lessor covering the Premises, or in the event a conveyance in lieu of foreclosure is made for any reason, Lessee will, notwithstanding any subordination and upon the request of such successor in interest to Lessor, attorn to and become the Lessee of the successor in interest to Lessor and recognize such successor in interest as the Lessor under this Lease. Lessee acknowledges that although this Paragraph 34 is self-executing, Lessee covenants and agrees to execute and deliver, upon demand by Lessor and in the form requested by Lessor, or any other mortgagee or ground lessor, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. 20 35. Force Majeure Lessor will not be deemed in Lessor Default or have liability to Lessee, nor will Lessee have any right to terminate this Lease or abate rent or assert a claim of partial or constructive eviction, because of Lessor's failure to perform any of its obligations under this Lease if the failure is due in part or in full to reasons beyond Lessor's reasonable control. Such reasons will include but not be limited to: strike, other labor trouble, fuel, labor or supply shortages, utility failure or defect, the inability to obtain any necessary governmental permit or approval (including building permits and certificates of occupancy), war, riot, mandatory or prohibitive injunction issued in connection with the enforcement of the Americans with Disabilities Act of 1990, civil insurrection, accidents, acts of God, any governmental preemption in connection with a national emergency or any other cause, whether similar or dissimilar, which is beyond the reasonable control of Lessor. If this Lease specifies a time period for performance of an obligation by Lessor, that time period will be extended by the period of any delay in Lessor's performance caused by such events as described herein. 36. Miscellaneous Provisions 36.01 Whenever the context of this Lease requires, the neuter, the masculine and the feminine gender shall include the other, and the word person shall include partnership or corporation or joint venture, and the singular shall include the plural and the plural shall include the singular. 36.02 If more than one person or entity is Lessee, the obligations imposed on each such person or entity will be joint and several. 36.03 The captions and headings of this Lease are used for the purpose of convenience only and shall not be construed to interpret, limit or extend the meaning of any part of this Lease. 36.04 This Lease contains all of the agreements and conditions made between Lessor and Lessee and may not be modified in any manner other than by a written agreement signed by both Lessor and Lessee. Any statements, promises, agreements, warranties or representations, whether oral or written, not expressly contained herein will in no way bind either Lessor or Lessee, and Lessor and Lessee expressly waive all claims for damages by reason of any statements, promises, agreements, warranties or representations, if any, not contained in this Lease. No provision of this Lease shall be deemed to have been waived by Lessor unless such waiver is in writing signed by a regional vice president or higher of Lessor or the management company, and no custom or practice which may develop between the parties during the Lease Term shall waive or diminish the Lessor's right to enforce strict performance by Lessee of any terms of the Lease. 36.05 Time is of the essence for the performance of each term, condition and covenant of this Lease. 36.06 Except as otherwise expressly noted, each payment required to be made by Lessee is in addition to and not in substitution for other payments to be made by Lessee. 36.07 Subject to Paragraph 19, the terms, conditions and provisions of ------------ this Lease will apply to and bind the heirs, successors, executors, administrators and assigns of Lessor and Lessee. 36.08 If any provision contained herein is determined to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability will not affect any other provision of this Lease. 36.09 In consideration of Lessor's covenants and agreements hereunder, Lessee hereby agrees not to disclose any terms, covenants or conditions of this Lease to any non-related party other than its officers, directors, attorneys or accountants without the prior written consent of Lessor. Additionally, Lessee shall not record this Lease or any short form memorandum hereof without the prior written consent of Lessor, which Lessor may withhold in its sole discretion. 36.10 The rights and obligations of the parties under this Lease shall survive the expiration of this Lease and the termination of this Lease and/or of Lessee's right of possession. 36.11 The duties and warranties of Lessor are limited to those expressly stated in this Lease and does not and shall not include any implied duties or implied warranties, now or in the future. No representations or warranties have been made by Lessor other than those contained in this Lease. 36.12 Lessee promises and it is a condition to the continuance of this Lease that there will be no discrimination against or segregation of any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring occupancy, tenure, or use of the Property, the Premises, or any portion thereof. 36.13 Lessor and Lessee each warrant to the other that it has not dealt with any broker or agent in connection with this Lease, other than the person(s) listed in Paragraph 1.15 above. Except for any broker(s) who shall be -------------- compensated in accordance with the provisions of a separate agreement, Lessor and Lessee each agree to indemnify the other against all costs, expenses, legal fees and other liability for commissions or other compensation claimed by any other broker or agent. 21 36.14 Lessee shall not permit or allow any activity in the Premises which will have an adverse effect on indoor air quality, including smoking and any remodeling activity or introduction of materials which would have such an effect. Lessor shall have the right, but not the obligation, to monitor indoor air quality within the Project. Lessee shall take such steps to protect and to improve indoor air quality as Lessor may request from time to time. Lessee acknowledges that construction (either initial construction or remodeling) by Lessor in the Premises or elsewhere in the Project, and other operations in the Project, may involve processes or materials which have adverse effects on indoor air quality; accordingly, Lessee (1) shall follow directives of Lessor and its agents related to ventilation, occupancy of the Premises, and other steps related to indoor air quality, and (2) hereby waives any claims related to such effects, including claims for damages, breach of quiet enjoyment, and/or constructive eviction. 36.15 Lessee specifically acknowledges that Lessor has no duty to provide security for any portion of the Project, including, without limitation, the Premises or the common areas, and Lessee has assumed sole responsibility and liability for the security of itself, its employees, customers and invitees and their respective property in, on or about the Project. Notwithstanding anything herein to the contrary, Lessee expressly acknowledges and agrees that to the extent Lessor elects to provide any security, Lessor is not warranting the effectiveness of any such security personnel, services, procedures or equipment and that Lessee is not relying and shall not hereafter rely on any such personnel, services, procedures or equipment. Lessor shall not be responsible or liable in any manner for failure of any such security personnel, services, procedures or equipment to prevent or control, or to apprehend anyone suspected of, personal injury or property damage in, on or around the Project. 36.16 The grant of any consent or approval required from Lessor under this Lease shall be proved only if granted in writing. Unless otherwise specified herein, any such consent or approval may be withheld in Lessor's sole discretion. Any consent may be issued subject to conditions determined by Lessor, in its sole discretion. As a condition to any consent, and without limiting the right of Lessor to impose other conditions, Lessor may require that any other party or parties with a right of consent issue such consent on terms acceptable to Lessor. Notwithstanding any other provision of this Lease, the sole and exclusive remedy of Lessee for any alleged or actual improper withholding, delaying or conditioning of any consent or approval by Lessor shall be the right to specifically enforce any right of Lessee to require issuance of such consent or approval on conditions allowed by this Lease; in no event shall Lessee have the right to terminate this Lease, to collect monetary damages, or to pursue any other remedy for any actual or alleged improper withholding, delaying or conditioning of any consent or approval, regardless of whether this Lease requires that such consent or approval not be unreasonably withheld, conditioned or delayed. 37. Examination of Lease; Good Faith Deposits Submission of this document for examination and signature by Lessee does not create a reservation or option to lease. Lessee hereby agrees that Lessor will be entitled to immediately endorse and cash any good faith check(s) forwarded by Lessee along with this document. It is further agreed that such cashing of good faith checks by Lessor will not guarantee acceptance of this document by Lessor, but, in the event Lessor does not accept or execute this document, the amount of such good faith check(s) will be refunded to Lessee. This document will become this "Lease" and be effective and binding only upon full execution by authorized representatives of both Lessee and Lessor as defined in this Lease. Thereafter, a fully executed copy of this Lease will be deemed an original for all purposes. 38. Governing Law This Lease is governed by and construed in accordance with the laws of the state in which the Premises are located, and venue of any legal action will be in the county where the Premises are located. 39. Lessor's Lien LESSOR HEREUNDER WILL HAVE THE BENEFIT OF, AND THE RIGHT TO, ANY AND ALL LESSOR'S LIENS PROVIDED UNDER THE LAW BY WHICH THIS LEASE IS GOVERNED. 40. Special Provisions and Exhibits The following Exhibits are attached to this Lease and by this reference made a part hereof: "A-1," "A-2," "A-3," "B," "C," "D" and "F". IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day and year indicated by Lessor's execution date as written below. If Lessee is a corporation, each person signing this Lease on behalf of Lessee represents and warrants that he or she has full authority to do so and that this Lease binds the corporation. Prior to the execution of this Lease, Lessee shall deliver to Lessor a certified copy of a resolution of Lessee's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Lessor. If Lessee is a partnership or limited liability company, each person or entity signing this Lease for Lessee represents and warrants that he, she or it is a general partner of the partnership or limited liability company, as applicable. Lessee shall give written notice to Lessor of any general partner's or member's withdrawal or addition. Simultaneous with the delivery of Lessee's signed lease, Lessee shall deliver to Lessor a copy of Lessee's recorded statement of partnership or certificate of limited partnership or articles of organization, as applicable. 22 THIS LEASE, WHETHER OR NOT EXECUTED BY LESSEE, IS SUBJECT TO ACCEPTANCE BY LESSOR, ACTING BY ITSELF OR BY ITS AGENT BY THE SIGNATURE ON THIS LEASE OF ITS SENIOR VICE PRESIDENT, VICE PRESIDENT, REGIONAL MANAGER OR DIRECTOR OF LEASING.
LESSOR: LESSEE: /S/ ANGEL BENSCHNEIDER /S/ RICHARD B. POWELL -------------------------------- -------------------------------------------- By: Angel Benschneider, By: Richard B. Powell ---------------------------- ---------------------------------------- Vice President Vice-President, Chief Accounting Officer ---------------------------- ---------------------------------------- TITLE AUTHORIZED SIGNATURE / TITLE Date: June 01, 2001 -------------------------- LEASE EXECUTION DATE Lessor Fed. ID #: 95-4613916 ----------
23 EX-21 5 exhibit21-110ksb063002.txt EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 Subsidiaries of the Company B&B Electromatic, Inc. Intelli-Site, Inc. EX-23 6 exhibit23-110ksb063002.txt EXHIBIT 23.1 CONSENT OF GRANT THORNTON LLP Exhibit 23.1 Consent of Grant Thornton LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated August 16, 2002, except for Note 12 as to which the date is September 5, 2002, accompanying the consolidated financial statements included in the Annual Report of Integrated Security Systems, Inc. on Form 10-KSB for the year ended June 30, 2002. We hereby consent to the incorporation by reference of said report in the Registration Statements of Integrated Security Systems, Inc. on Form S-3 (File No. 33-89218), on Form S-8 (File No. 33-59870-S), and on Form S-8 (File No. 333-76558). /s/ GRANT THORNTON LLP -----END PRIVACY-ENHANCED MESSAGE-----