-----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, EzW0+yWmnUaCq1gFQ1i9yUTseQxGsMAFsJaIdUISWSbtYfCGf0ygqziyWzdX7CpQ gBThEkbG3YEsit9zB/0Y2A== 0001158957-04-000230.txt : 20041116 0001158957-04-000230.hdr.sgml : 20041116 20041116165520 ACCESSION NUMBER: 0001158957-04-000230 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041110 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041116 DATE AS OF CHANGE: 20041116 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 041150075 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 8-K 1 form8k111604.txt INTEGRATED SECURITY SYSTEMS 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): November 10, 2004 INTEGRATED SECURITY SYSTEMS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-11900 75-2422983 ------------------------ --------------------- ------------------- (State of incorporation) (Commission File No.) (IRS Employer Identification No.) 8200 Springwood Drive Suite 230 Irving, Texas 75063 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 444-8280 Not Applicable ------------------------------------------------------------------------------ (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Section 1 - Registrant's Business and Operations Item 1.01 Entry into a Material Definitive Agreement. On November 10, 2004, B&B ARMR Corporation ("Borrower"), a wholly-owned subsidiary of Integrated Security Systems, Inc. ("ISSI") entered into a Loan Agreement ("Loan Agreement") with Briar Capital, L.P. ("Lender") for a $3,000,000 discretionary demand asset based lending credit facility. Under the terms of the Loan Agreement, working capital advances are made available to Borrower based on the value of its accounts receivable and inventory. Although payable on demand, the Loan Agreement has a stated 3-year term. A copy of the Loan Agreement is attached as Exhibit 4.1 to this Current Report on Form 8-K and incorporated herein by reference. In connection with the Loan Agreement, Borrower issued a Revolving Promissory Note ("Note"), dated November 10, 2004, to Lender in the principal amount of $3,000,000. The Note has an annual interest rate of two percent above the prime rate but in no event will interest exceed the maximum nonusurious interest rate allowable under applicable law. A copy of the Note is attached as Exhibit 4.2 to this Current Report on Form 8-K and incorporated herein by reference. Borrower, ISSI and Inteli-Site, Inc. ("Inteli-Site"), another wholly-owned subsidiary of ISSI, also entered into a Subordination Agreement ("Subordination Agreement"), dated November 10, 2004, with Lender, Renaissance US Growth Investment Trust PLC ("RUSGIT"), Renaissance Capital Growth & Income Fund III, Inc. ("Renaissance III"), and BFS US Special Opportunities Trust PLC ("BFS," and together with RUSGIT and Renaissance III, collectively, the "Subordinated Lenders"). Pursuant to the terms of the Subordination Agreement, the Subordinated Lenders agreed to subordinate their indebtedness, liens and other obligations to Lender's indebtedness, liens and other obligations. A copy of the Subordination Agreement is attached as Exhibit 4.3 to this Current Report on Form 8-K and incorporated herein by reference. As an inducement for Lender to enter into the Loan Agreement, C. A. Rundell, Jr., the Chairman and CEO of ISSI, agreed to subordinate certain indebtedness owed to him by Borrower pursant to the terms of a Subordination Agreement, dated November 10, 2004. A copy of the Subordination Agreement is attached as Exhibit 4.4 to this Current Report on Form 8-K and incorporated herein by reference. ISSI unconditionally guaranteed the obligations of Borrower pursuant to the terms of a Guaranty Agreement, dated November 10, 2004, a copy of which is attached as Exhibit 4.5 to this Current Report on Form 8-K and incorporated herein by reference. ISSI's guaranty obligations to Lender are secured by a first priority security interest in ISSI's personal property pursuant to the terms of a Guarantor Security Agreement, dated November 10, 2004, a copy of which is attached as Exhibit 4.6 to this Current Report on Form 8-K and incorporated herein by reference. Inteli-Site also unconditionally guaranteed the obligations of Borrower pursuant to the terms of a Guaranty Agreement, dated November 10, 2004, a copy of which is attached as Exhibit 4.7 to this Current Report on Form 8-K and incorporated herein by reference. Inteli-Site's guaranty obligations to Lender are secured by a first priority security interest in Inteli-Site's personal property pursuant to the terms of a Guarantor Security Agreement, dated November 10, 2004, a copy of which is attached as Exhibit 4.8 to this Current Report on Form 8-K and incorporated herein by reference. SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS Item 9.01 Financial Statements and Exhibits. (c) Exhibits. 4.1 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. 4.2 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. 2 4.3 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc., Briar Capital, L.P., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., and BFS US Special Opportunities Trust PLC. 4.4 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. 4.5 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. 4.6 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. 4.7 Guaranty Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. 4.8 Guarantor Security Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INTEGRATED SECURITY SYSTEMS, INC. Dated: November 16, 2004 By: /s/ C.A. RUNDELL, JR. ------------------------------- Name: C.A. Rundell, Jr. Title: Director, Chairman of the Board and Chief Executive Officer (Principal Executive and Financial Officer) 4 Exhibit Index Exhibit No. Description ----------- ------------------------------------------------------------ 4.1 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site and Briar Capital, L.P. 4.2 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. 4.3 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc., Briar Capital, L.P., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., and BFS US Special Opportunities Trust PLC. 4.4 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. 4.5 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. 4.6 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. 4.7 Guaranty Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. 4.8 Guarantor Security Agreement, dated November 10, 2004, by Inteli-Site, Inc. in favor of Briar Capital, L.P. 5 EX-4 2 exhibit4-18k111604.txt EXHIBIT 4.1 LOAN AGREEMENT EXHIBIT 4.1 LOAN AGREEMENT THIS LOAN AGREEMENT is made and entered into as of the 10th day of November, 2004 (the "Effective Date"), by and among B&B ARMR CORPORATION, a Delaware corporation, with its principal office and mailing address at 14113 Main Street, Norwood, Louisiana 70761 (hereinafter called the "Borrower"), BRIAR CAPITAL, L.P., a Texas limited partnership, with principal office at 1500 City West Boulevard, Suite 225, Houston, Harris County, Texas 77042 (hereinafter called the "Lender"), INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation ("ISSI"), INTELLI-SITE, INC., a Texas corporation ("Intelli"), and as validity guarantors, C.A. RUNDELL, JR., an individual ("Rundell"), PETER BEARE, an individual ("Beare"), and TED WLAZLOWSKI, an individual ("Wlazlowski"). W I T N E S S E T H: For and in consideration of the mutual covenants and agreements herein contained and of the loans and commitment hereinafter referred to, the Borrower and the Lender agree as follows: ARTICLE I GENERAL TERMS Section 1.01 Certain Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall have the definition as set forth in ss.9.102(2) of the Texas Business and Commerce Code, as amended. "Accounts Advance Amount" shall mean at any time an amount equal to the product of Eligible Accounts times a percentage (the "Accounts Advance Percentage"), which shall initially be eighty percent (80%); Lender shall have the right at any time, and from time to time, in its sole discretion, to revise the Accounts Advance Percentage. "Affiliate" shall mean any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. Without limiting the generality of the foregoing, for purposes of this Agreement, Borrower, Guarantors, and each of their respective Subsidiaries shall be deemed to be Affiliates of one another. "Agreement" shall mean this Loan Agreement, as the same may from time to time be amended, modified or supplemented. "Anti-Terrorism Laws" shall mean any and all present and future judicial decisions, statutes, rulings, rules, regulations, permits, certificates, orders and ordinances of any governmental authority relating to terrorism or money laundering, including, without limiting the generality of the foregoing, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Pub. L. No. 107-56); the Trading with the Enemy Act (50 U.S.C.A. App. 1 et. seq.); the International Emergency Economic Powers Act (50 U.S.C.A. ss.1701-06); Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (relating to "Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism") and the United States Treasury Department's Office of Foreign Assets Control list of "Specifically Designated National and Blocked Persons" (as published from time to time in various media, including, without limitation, at http:www.treas.gov/ofac/t11sdn.pdf). "Blocked Account" shall mean that certain account established by Borrower and Lender at a bank acceptable to Lender into which Borrower shall deposit certain receipts, as set forth in Section 4.11 hereof. "Blocked Account Agreement" shall mean that certain Blocked Account Agreement of even date herewith executed by and among Bank One, N.A., Borrower, and Lender regarding the establishment of the Blocked Account at a financial institution acceptable to Lender and setting forth Lender's security interest in such Blocked Account, the form of which Blocked Account Agreement is attached hereto as Exhibit "1.1A". "Borrower" shall have the meaning given to such term in the first paragraph of this Agreement. "Borrower's Facilities" shall mean those certain facilities described in Section 5.07 hereof. "Borrowing Base" shall mean at any time an amount not to exceed the lesser of: (1) Three Million and No/100 Dollars ($3,000,000.00), or (2) (a) the Accounts Advance Amount determined as of the date the Borrowing Base is calculated, plus (b) the Inventory Advance Amount as of the date of the Borrowing Base is calculated. The Borrowing Base will not include any Properties of Subsidiaries. "Business Day" shall mean any day on which Reference Bank is open for the conduct of general banking business. "Closing" shall mean the date and time for closing the transaction contemplated hereby, described in Section 7.01 hereof. 2 "Closing Fee" shall mean the fee payable by Borrower as described in Section 2.12 hereof. "Commitment" shall mean the obligation of the Lender to make loans to the Borrower under Section 2.01 hereof, up to the maximum amount therein stated. "Default" shall mean the occurrence of any of the events specified in Article VI hereof, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "DTPA" shall mean the Texas Deceptive Trade Practices-Consumer Protection Act, Subchapter E of Chapter 17 of the Texas Business and Commerce Code. "EBITDA" means an amount equal to Net Income plus the sum of interest, taxes, depreciation, amortization, and corporate management fee. "Effective Date" shall have the meaning given to such term in the first paragraph of this Agreement. "Eligible Accounts" shall mean at any time an amount equal to the gross amount owing on all trade accounts receivable of the Borrower for goods sold or leased or services rendered, in which the Lender has a valid, exclusive, fully perfected, first priority lien or security interest (except for Liens permitted under Section 5.02 hereof), which conform to the warranties contained herein and which, at all times, continue to be acceptable to Lender in the exercise of its sole judgment, after deducting, without duplication, the sum of (a) the amount of any returns, discounts, claims, credits and allowances of any nature (whether issued, owing, granted, claimed or outstanding) to such accounts, and (b) reserves for any such accounts that arise from or are subject to or include: (i) sales to the United States of America, any state or other governmental entity or to any agency, department or division thereof, except for any such sales as to which the Borrower has complied with the Assignment of Claims Act of 1940 or any other applicable statute, rules or regulation, to Lender's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales, other than sales which otherwise comply with all of the other criteria for eligibility hereunder and are (A) secured by letter of credit (in form and substance satisfactory to Lender) issued or confirmed by, and payable at, banks having a place of business in the United States of America, or (B) to customers residing in Canada; (iii) Accounts that remain unpaid more than ninety (90) days from invoice date or sixty (60) days from due date; (iv) contra accounts; (v) sales to any parent, Subsidiary, division, or any other company affiliated with the Borrower or its parent or Subsidiaries in any way; (vi) bill and hold (deferred shipment) or consignment sales; (vii) sales to any customer which is (A) insolvent, (B) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts, or (D) financially unacceptable to Lender or has a credit rating unacceptable to Lender; (viii) all sales to any customer if twenty-five percent (25%) or more of the aggregate dollar amount of all outstanding invoices to such customer are more than sixty (60) days past due or unpaid more than ninety (90) days from invoice date; (ix) sales to any customer and/or its affiliates to the extent such sales exceed at any one time ten percent (10%) or more of all Eligible Accounts; (x) pre-billed receivables and receivables arising from progress billing or purchase orders; (xi) an amount representing, historically, returns, discounts, claims, credits, allowances and applicable terms; (xii) sales not payable in United States currency; (xiii) all Accounts owed by account debtors in excess of the limit of total Accounts, if any, that is established and/or revised by Lender from time to time, in Lender's sole and exclusive discretion, for such account debtor; (xiv) Accounts for projects in which Borrower hired subcontractors but has not delivered to Lender an executed release of lien from said subcontractors; and (xv) any other reasons deemed necessary by Lender in its sole judgment, including without limitation, those which are customary either in the commercial finance industry or in the lending practices of Lender. Notwithstanding the foregoing limitations and concentrations, however, the standards of eligibility for Eligible Accounts may be set and may be revised from time to time solely by the Lender in its exclusive judgment. 3 "Eligible Inventory" shall mean the Borrower's Inventory that is subject to a valid, exclusive, first priority and fully perfected security interest in favor of Lender and which conforms to the warranties contained herein and which, at all times continues to be acceptable to Lender in the exercise of its reasonable judgment, less, without duplication, any (a) work-in-progress (whether listed or determined by Lender's inspection), (b) goods privately labeled for a customer (whether listed or determined by Lender's inspection), (c) Inventory not present in the United States of America, (d) Inventory returned or rejected by the Borrower's customers (other than goods that are undamaged and resaleable in the normal course of business) and goods to be returned to the Borrower's suppliers, (e) Inventory in transit to third parties (other than to the Borrower's agents or warehouses), or in the possession of a warehouseman, bailee, third party processor, or other third party, unless such warehouseman, bailee or third party has executed a notice of security interest agreement (in form and substance satisfactory to Lender) and Lender shall have a first priority perfected security interest in such Inventory, (f) any damaged or worthless goods (whether listed or determined by Lender's inspection), (g) unsold Inventory owned by Borrower for at least two (2) years, (h) categories of Inventory for which the individual components of which have not turned over at least twice in the previous twelve (12) months, (i) finished goods, and (j) any reserves required by Lender in its sole discretion, including, without limitation for special order goods, discontinued, slow-moving and obsolete Inventory, market value declines, bill and hold (deferred shipment), consignment sales, shrinkage and any applicable customs, freight, duties and taxes. Standards of eligibility for Eligible Inventory may be set and may be revised from time to time solely by the Lender in its exclusive judgment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 4 "Event of Default" shall mean the occurrence of any of the events specified in Article VI hereof, provided that any requirement for notice or lapse of time or any other condition precedent has been satisfied. "Financial Statements" shall mean the consolidated and consolidating financial statement or statements of the Borrower and its Subsidiaries described or referred to in Section 3.06 hereof. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Account Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Guaranties" shall mean those certain guaranty agreements referenced in Section 7.10. "Guarantors" shall mean, collectively, ISSI and Intelli, as defined and referred to in the preamble. "Indebtedness" shall mean any and all amounts owing or to be owing by the Borrower to the Lender in connection with the Note, this Agreement, the Security Instruments, and other liabilities of the Borrower to the Lender from time to time existing, including without limitation guaranties of indebtedness, letters of credit and obligations acquired from third Persons, whether in connection with this or other transactions. "Inventory" shall mean all personal property held by Borrower for sale or lease, including but not limited to, raw materials, finished goods, work-in-process, packaging materials and items located offsite, in which Lender has a perfected, first priority lien or security interest (subject to liens, if any, described in Section 5.02). "Inventory Advance Amount" shall mean at any time an amount equal to the lesser of: (1) product of the book value of the Eligible Inventory times a percentage (the "Inventory Advance Percentage"), which shall initially be twenty percent (20%), and (2) $300,000 (the "Maximum Inventory Advance Amount"); provided, however, that (i) under no circumstances shall the aggregate Inventory Advance Amount exceed twenty-five percent (25%) of the Accounts Advance Amount, and (ii) Lender shall have the right at any time, and from time to time, in its sole discretion, to revise the Inventory Advance Percentage and/or the Maximum Inventory Advance Amount. 5 "Lender" shall have the meaning given to such term in the first paragraph of this Agreement. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan" shall mean the loan from Lender to Borrower made the subject of this Agreement. "Maximum Credit Facility" shall mean the maximum amount of funds Lender have agreed to advance to the Borrower under the Note, which amount shall not exceed Three Million and No/100 Dollars ($3,000,000.00). "Maximum Nonusurious Interest Rate" shall mean the maximum nonusurious interest rate allowable under applicable United States federal law and under the laws of the State of Texas as presently in effect and, to the extent allowed by such laws, as such laws may be amended from time to time to increase such rate. "Net Income" or "net income" means the net income (or loss) of a Person for any applicable period of determination, determined in accordance with GAAP. "Note" shall mean the promissory note or notes (whether one or more) of the Borrower described in Section 2.01 hereof, together with any and all renewals, extensions, increases or rearrangements thereof. The "Note" shall include, without limitation, the Revolving Promissory Note. "Person" shall mean any individual, corporation, partnership, joint venture, limited liability company, association, joint stock company, trust, trustee, unincorporated organization, government or any agency or political subdivision thereof, or any other form of entity. 6 "Plan" shall mean any Plan subject to Title IV of ERISA and maintained by the Borrower or any Subsidiary, or any such plan to which the Borrower or any Subsidiary is required to contribute on behalf of its employees. "Prime Rate" shall mean the greater of: (i) four and one quarter percent (4.25%), or (ii) the variable rate of interest per annum established by Reference Bank from time to time as its "prime rate." Such rate is set by Reference Bank as a general reference rate of interest, taking into account such factors as Reference Bank may deem appropriate, it being understood that many of Reference Bank's commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that Reference Bank may make various commercial or other loans at rates of interest having no relationship to such rate. "Prohibited Person" shall mean any person or entity that (i) is specifically named or listed in, or otherwise prohibited from engaging in transactions with Lender due to, any Anti-Terrorism Laws, (ii) is owned or controlled by, or acting for or on behalf of, any person or entity specifically named or listed in, or otherwise prohibited from engaging in transactions with Lender due to, any Anti-Terrorism Laws, (iii) Lender is prohibited from dealing with, or engaging in any transaction with, pursuant to any Anti-Terrorism Laws, or (iv) is affiliated with any person or entity described in clauses (i)-(iii) of this definition. "Property" shall mean any interest in any kind of tangible or intangible property or asset. "Reference Bank" shall mean Wells Fargo Bank, a national banking association, and its successors and assigns, or such other national banking association as may be selected by Lender from time to time. "Revolving Promissory Note" shall mean the promissory note of the Borrower described in Subsection 2.01(a) hereof and being in the form of note attached as Exhibit "1.1B" hereto, and all renewals, extensions, modifications and rearrangements thereof. "RICO" shall mean the Racketeer Influence and Corrupt Organization Act of 1970, as amended. "Security Instruments" shall mean this Agreement, the Note, the agreements or instruments described or referred to in Sections 7.09, 7.10 and 7.12 hereof, and any and all other agreements or instruments now or hereafter executed and delivered by the Borrower, any Subsidiary or any other Person (other than solely by the Lender and/or any bank or creditor participating in the benefits of loans evidenced by the Note or any collateral or security therefor) in connection with, or as security for the payment or performance of, the Notes or this Agreement. 7 "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of directors is owned or controlled, directly or indirectly, by the Borrower and/or one or more of its subsidiaries and/or one or more shareholders of the Borrower; provided, that any such corporation of which more than fifty percent (50%) of such securities is owned by the shareholders of the Borrower, and none of which securities are owned by the Borrower or any subsidiary of the Borrower, shall not be deemed a Subsidiary hereunder. "Tangible Net Worth" shall mean as of any date, the amount by which the Borrower's assets less (i) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses and other similar intangibles net of accumulated amortization; (ii) unamortized debt discount and expense; (iii) assets located and notes due from obligors domiciled outside the United States of America; and (iv) obligations due to the Borrower from shareholders or other related parties, as of such date exceed the Borrower's liabilities as of such date. "Termination Date" shall mean that certain date which is three (3) years after the Effective Date of this Agreement. "Validity Guarantors" shall mean, collectively, Rundell, Beare, and Wlazlowski, as defined in the preamble. Section 1.02 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with GAAP, except where such method is inconsistent with the requirements of this Agreement. ARTICLE II AMOUNT AND TERMS OF LOAN Section 2.01 The Loans and Commitment. Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, the Lender agrees to make the following loans to the Borrower: (a) Revolving Credit Loans. From the date of this Agreement through the Termination Date, the Lender may make revolving credit loans to the Borrower from time to time on any Business Day in such amounts as the Borrower may request up to the maximum amount hereinafter stated, and the Borrower may make borrowings, prepayments and reborrowings (as permitted or required in Sections 2.03, 2.06 and 2.07 hereof) in respect thereof; provided, however, that the aggregate principal amount of all such revolving credit loans at any one time outstanding (i) shall not exceed the Borrowing Base, and (ii) shall not be less than $500,000.00, unless the Borrowing Base is less than $500,000.00, in which case such aggregate principal amount shall not be less than the Borrowing Base. To evidence the revolving credit loans made by the Lender pursuant to this Section, the Borrower will issue, execute and deliver the Note dated as of the Effective Date of this Agreement and payable on Lender's demand, but if no demand is made, on the Termination Date. On the Termination Date, in the event the Borrower has not given the Lender sixty (60) days' prior written notice of its intent to terminate the revolving credit loans pursuant to the Note, then, at the sole discretion of the Lender, the revolving credit loans may be renewed, and the Termination Date extended, for a period of one (1) year; and at the end of such one (1) year extension, the revolving credit loans may be again extended, from year to year, in the same fashion. Each such extension shall be upon the same terms and conditions as set forth herein and in the Note and the Security Instruments relating to the same, and upon such further stipulations and conditions as the Lender may require. Interest on the Note shall accrue at the rate provided in Section 2.02 hereof and shall be payable monthly on the first day of each month during its term. 8 (b) Inventory Advances. Notwithstanding anything to the contrary in this Agreement, the maximum Inventory Advance Amount shall be equal to the lesser of (i) ninety thousand dollars ($90,000), and (ii) the product of the book value of the Eligible Inventory and twenty percent (20%), until the following conditions have been satisfied: (x) Borrower has positive Net Income for one (1) calendar quarter during the term of this Loan, (y) Borrower implements an inventory accounting and reporting system acceptable to Lender which can produce weekly reporting and age inventory, and (z) if an entity other than Borrower owns any of the Borrower's Facilities and if requested by Lender, the owner of each such facility shall have executed and delivered to Lender, in form and substance satisfactory to the Lender, in sufficient executed counterparts for recording purposes, waivers of any Liens to which it may be entitled, in favor of the Lender. Upon the satisfaction of the requirements in this Section 2.01(b), the maximum Inventory Advance Amount shall be determined in accordance the definition set forth in Section 1.01. Section 2.02 Interest Rate. The Note shall bear interest at the following rate: (a) The Note shall bear interest from the date thereof until maturity at a varying rate per annum which is two percent (2.0%) above the Prime Rate as of the last day of the applicable month in which interest is being calculated, as the same may change from month to month (but in no event to exceed the Maximum Nonusurious Interest Rate); provided, however, that in the event that the Commitment is terminated and Indebtedness is paid in full on a day other than the last day of a month, the interest rate for the partial month in which termination occurs shall be calculated as of the date the Indebtedness is paid in full. 9 (b) Upon the occurrence of a Default or an Event of Default, principal and past due interest (to the extent permitted by law) in respect of the Note shall bear interest at a rate which is four percent (4%) per annum in excess of the rate set forth in Subsection 2.02(a) hereinabove (but in no event to exceed the Maximum Nonusurious Interest Rate) irrespective of whether the Indebtedness has been accelerated. Interest calculations are subject to certain recapture provisions set forth in the Note. Section 2.03 Notice and Manner of Revolving Credit Borrowing. The amount and date of each revolving credit loan shall be made as set forth in this Section. Advances under the Note may be made by Lender (i) pursuant to the terms of any written agreement executed in connection herewith between Borrower and Lender, or (ii) at the oral or written request of the Borrower or of any officer or agent of Borrower designated by or acting under the authority of resolutions of the board of directors of Borrower, if a corporation, or other written authorization of Borrower if other than a corporation, a duly certified or executed copy of which shall be furnished to the Lender, until written notice of the revocation of such authority is received by Lender. Borrower covenants and agrees to furnish to Lender written confirmation of any such oral request within five (5) days of the resulting loan or advance, but any such loan or advance shall be deemed to be made under and entitled to the benefits of the Note irrespective of any failure by Borrower to furnish such written confirmation. Any loan or advance shall be conclusively presumed to have been made under the terms of the Note to or for the benefit of Borrower when made pursuant to the terms of any written agreement executed in connection therewith between Borrower and Lender, or in accordance with such requests and directions, or when said advances are deposited to the credit of the account of Borrower with Lender regardless of the fact that persons other than those authorized hereunder may have authority to draw against such account, or may have requested an advance. Section 2.04 Application of Payments. All payments made to the Lender on account of any Property upon which the Lender has a Lien shall, for purposes of calculating the Borrowing Base, be applied by the Lender against the Indebtedness on the day such funds are credited to Lender's bank account at JPMorgan Chase or such successor bank Lender may choose from time to time, whether or not such Indebtedness shall have, by its terms, matured, such application to be made to the Note, and to principal or interest or expenses as the Lender may elect; provided, however, that, for purposes of calculating interest under Section 2.02 hereof, the Lender need not give credit for any payments made to and received by the Lender until at least the fourth [4th] Business Day following the Business Day in which such payments are credited to Lender's bank account; provided, further, however, that the Lender's failure to so apply any such payments to and received by the Lender on the Business Day such payments are received by Lender shall not be a waiver of the Lender's right to so apply such payments or any other payments at any time. Section 2.05 Computation. All payments of interest shall be computed on the per annum basis of a year of three hundred sixty (360) days and for the actual number of days (including the first but excluding the last day) elapsed unless such calculation would result in a usurious rate, in which case interest shall be calculated on a per annum basis of a year of three hundred sixty five (365) or three hundred sixty six (366) days, as the case may be. 10 Section 2.06 Voluntary Prepayments and Reborrowings. The unpaid principal balance of the Note at any time shall be the total amounts loaned or advanced thereunder by the Lender, less the amount of payments or prepayments of principal made thereon by or for the account of Borrower. All loans or advances and all payments or prepayments made thereunder on account of principal or interest may be evidenced by Lender, or any subsequent holder, maintaining in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrower resulting from all loans or advances and all payments or prepayments thereunder from time to time and the amounts of principal and interest payable and paid from time to time thereunder, in which event, in any legal action or proceeding in respect of the Note, the entries made in such account or accounts shall be prima fascia evidence of the existence and amounts of the obligations of the Borrower therein recorded. Section 2.07 Mandatory Prepayments. If at any time the outstanding principal balance under the Note exceeds the Borrowing Base, then the Borrower shall forthwith prepay the amount of such excess for application towards reduction of the outstanding principal balance of the Note. Said prepayment shall be without premium or penalty, and shall be made together with the payment of accrued interest on the amount prepaid. Section 2.08 Cross-Collateralization and Default. The Security Instruments, including this Agreement, the Note and any other instrument given in connection with, or as security for, any Indebtedness of the Borrower or any Subsidiary, shall serve as security one for the other, and an Event of Default under any of the Security Instruments or any such instrument shall constitute an Event of Default under all such other Security Instruments. Section 2.09 Refusal to Advance Funds/Termination of Commitment. Notwithstanding anything to the contrary contained herein, in the Note, or in any other instrument or agreement executed in connection with or as security for the Indebtedness, the Lender may (a) at any time, and from time to time, in its sole discretion, refuse to make any advance for a loan hereunder and under the Note, or (b) upon giving the Borrower at least ninety (90) days' prior notice, at any time terminate its Commitment to advance funds to the Borrower hereunder and under the Note and all other obligations, if any, of the Lender hereunder. The rights of the Lender under this Section 2.09 are in addition to the rights of the Lender to terminate the Commitment pursuant to Section 6.02 hereof. In the event Lender exercises its rights under 2.09(b) hereof without cause, Borrower shall not be required to pay the early termination fee described in Section 2.10 hereof; provided, however, that Borrower and Lender hereby specifically agree that, without limitation as to other circumstances when Borrower shall be required to pay a termination fee, Borrower shall pay an early termination fee described in Section 2.10 upon termination of the Commitment for cause or termination of the Commitment pursuant to Section 6.02 of this Agreement. For purposes of Sections 2.09 and 2.10 of this Agreement, Lender may terminate the Commitment "for cause" if an event occurs that leads Lender to believe that the prospect for repayment of the Loan in accordance with the terms of this Agreement and in the ordinary course of business is impaired. 11 Section 2.10 Early Termination Fee. If at any time prior to the Termination Date (as such date may be extended from time to time), (i) the Commitment is terminated by the Lender for cause, (ii) the Note is accelerated by the Lender upon the occurrence and continuance of an Event of Default, or (iii) the Borrower makes a voluntary total prepayment of the Revolving Promissory Note prior to the Termination Date, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower shall pay Lender upon the effective date of the termination, acceleration, or prepayment described above, a fee in an amount equal to: (a) three percent (3%) of the Maximum Credit Facility if such termination, acceleration, or prepayment occurs more than two (2) years prior to the Termination Date (as such date may be extended from time to time); or (b) two percent (2%) of the Maximum Credit Facility if such termination, acceleration, or prepayment occurs more than one (1) year and less than two (2) years prior to the Termination Date (as such date may be extended from time to time); or (c) one percent (1%) of the Maximum Credit Facility if such termination, acceleration, or prepayment occurs less than or equal to one (1) year before the Termination Date (as such date may be extended from time to time). Such fee shall be presumed to be the amount of damages sustained by Lender as the result of an early termination or total prepayment, and Borrower acknowledges that it is reasonable under the circumstances currently existing. The fee provided for in this section shall be deemed included in the Indebtedness. Section 2.11 Collateral Management Fee. Borrower shall pay to Lender, monthly in arrears, a collateral management fee of $1,500.00. Such fee shall be due and payable on the first day of each month during the term of this Loan. Section 2.12 Closing Fee. Borrower shall pay to Lender a closing fee of $30,000.00. The closing fee shall be payable in cash at the closing. Section 2.13 Minimum Amount Outstanding. So long as any part of the Note or the Commitment is outstanding, the outstanding principal balance under the Note shall be at least Five Hundred Thousand Dollars ($500,000.00), subject, in all instances, to the Borrowing Base. If, at any time, Borrower is not in compliance with the provisions of this Section 2.13, Lender shall have the right, in its sole discretion, to advance such amounts as shall be necessary to bring Borrower into compliance with this Section 2.13. Any such amounts advanced by Lender to bring Borrower into compliance with the provisions of this Section 2.13 shall constitute an advance under the Note and shall become immediately available to Borrower. Subject to the limitations set forth hereinabove, there may be times when no Indebtedness is owing under the Note; but notwithstanding such occurrences, the Note shall remain valid and be in full force and effect as to loans or advances made pursuant to and under the terms of the Note subsequent to each such occurrence. Section 2.14 Payoff Indemnification Letter Required Upon Refinance. In the event that Borrower desires to make a voluntary total prepayment of the Revolving Promissory Note and terminate the Commitment prior to the Termination Date using funds borrowed by Borrower from a third-party (the "New Lender"), Lender may refuse to accept such prepayment if Lender has not received a payoff letter from New Lender, in form and substance acceptable to Lender in Lender's reasonable discretion, providing certain indemnifications from New Lender to Lender (the "Payoff Indemnification Letter"). Until such time as Lender receives the fully-executed Payoff Indemnification Letter from the New Lender and accepts Borrower's voluntary total prepayment of the Revolving Promissory Note, the Loan shall continue according to its terms. 12 ARTICLE III REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender (which representations and warranties will survive the delivery of the Note and the making of the loans thereunder) that: Section 3.01 Corporate Existence. The Borrower is a Delaware corporation, duly organized and legally existing under the laws of the jurisdiction in which it is organized and is duly qualified as a foreign corporation in all other jurisdictions where it is required by applicable law. Section 3.02 Company Power and Authorization. The Borrower is duly authorized and empowered to create and issue the Note; and the Borrower and each Subsidiary is duly authorized and empowered to execute, deliver and perform the Security Instruments, including this Agreement, to which it is a party; and all company action on the Borrower's or any Subsidiary's part requisite for the due creation and issuance of the Note and for the due execution, delivery and performance of the Security Instruments, including this Agreement, to which the Borrower or any Subsidiary is a party has been duly and effectively taken. The directors of the Borrower acting pursuant to a duly called and constituted meeting, after proper notice, or pursuant to valid and unanimous written consent, have determined (i) that entry into and performance of this Agreement and each of the other documents to which the Borrower is a party, directly or indirectly benefits the Borrower and (ii) that adequate and fair consideration and reasonably equivalent value have been received by the Borrower to execute and perform this Agreement and each of the other documents to which it is a party. Section 3.03 Binding Obligations. This Agreement does, and the Note and other Security Instruments to which the Borrower and any Subsidiaries or Guarantors are parties upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of the Borrower or the Subsidiary or Guarantors, as the case may be, enforceable in accordance with their terms. Section 3.04 No Legal Bar or Resultant Lien. The Note and the Security Instruments, including this Agreement, to which the Borrower or any Subsidiary or Guarantor is a party, do not and will not violate any provisions of the articles or certificates of incorporation or bylaws of the Borrower or organizational documents of any such Subsidiary, or any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which the Borrower or such Subsidiary or Guarantor is subject, or result in the creation or imposition of any Lien upon any Properties of the Borrower or such Subsidiary or Guarantor, other than those contemplated by this Agreement. Section 3.05 No Consent. The execution, delivery and performance of the Note and the Security Instruments, including this Agreement, to which the Borrower or any Subsidiary or Guarantor is a party do not require the consent or approval of any other Person, including without limitation any regulatory authority or governmental body of the United States or any state thereof or any political subdivision of the United States or any state thereof. 13 Section 3.06 Financial Condition. (a) None of the financial statements, reports and other information furnished or to be furnished by Borrower to Lender with respect to Borrower or any Subsidiary or Guarantor contain, as of their respective dates, any untrue statement of material fact or omit to state any material fact necessary to make the information therein not misleading. Such financial statements and reports were and will be prepared in accordance with GAAP, or in the case of pro forma balance sheets and projections in accordance with appropriate accounting standards, and shall fairly, completely and accurately present the financial condition and results of operations of Borrower, as of the dates and for the periods indicated thereon. (b) The future cash flow projections for Borrower (together with summaries of assumptions with respect thereto) furnished by Borrower to Lender represent the reasonable, good faith opinion of Borrower and its management as to the subject matter thereof and based on assumptions as set forth therein which Borrower has determined to be fair and reasonable in view of current and reasonably foreseeable business conditions. (c) No material adverse change, either in any case or in the aggregate, has occurred in the condition, financial or otherwise, of the Borrower or any Subsidiary or Guarantor, since the date of the most recent financial statements presented by Borrower to Lender, except as disclosed to the Lender in writing. Section 3.07 Investments and Guaranties. Neither the Borrower nor any Subsidiary or Guarantor has made investments in, advances to or guaranties of the obligations of any Person, except as reflected in the Financial Statements or disclosed to the Lender in writing. Section 3.08 Issuance of Stock. There are no outstanding agreements to which Borrower is a party or by which it is bound, calling for the issuance of any stock of Borrower. Section 3.09 Liabilities. Except for liabilities incurred in the normal course of business and indebtedness permitted by Section 5.01, neither the Borrower nor any Subsidiary or Guarantor has any material (individually or in the aggregate) liabilities, direct or contingent, except as disclosed or referred to in the Financial Statements or as disclosed to the Lender in writing. Except as described in the Financial Statements, or as otherwise disclosed to the Lender in writing, there is no litigation, legal or administrative proceeding, investigation or other action of any nature pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or Guarantor which involves the possibility of any judgment or liability not fully covered by insurance, and which may materially and adversely affect the business or the Properties of the Borrower or any Subsidiary or Guarantor or their ability to carry on business as now conducted. Section 3.10 Taxes. Borrower and each Guarantor and Subsidiary have prepared and duly and timely filed with the appropriate governmental agencies all federal, state, and local income, franchise, personal property, excise, severance, payroll, and other tax returns and reports required to be filed and has paid all taxes due with respect to the periods covered thereby, subject to timely filed protests. Neither Borrower nor any Guarantor or Subsidiary has executed or filed with the Internal Revenue Service any agreement extending the period for assessment and collection of any federal tax or is a party to any action or proceeding by any governmental authority for assessment and collection of taxes, and no claim for assessment and collection of taxes that has been asserted against Borrower, any Guarantor, or any Subsidiary remains unpaid. Borrower and each Guarantor and Subsidiary have (i) properly classified all Persons providing services to it as an employee or independent contractor, (ii) properly classified all amounts paid to such Persons, and (iii) timely paid all payroll taxes due on such amounts. All amounts paid by Borrower to Affiliates of Borrower or Affiliates of any Guarantor which are shown as deductible expenses on any tax return of Borrower were properly classified as deductible expenses. 14 Section 3.11 Titles, etc. The Borrower and each Subsidiary and Guarantor have good title to its respective material (individually or in the aggregate) Properties, free and clear of all Liens except those referred to in the Financial Statements and those permitted pursuant to Section 5.02 hereof. Section 3.12 Defaults. Neither the Borrower nor any Subsidiary or Guarantor is in default (in any respect which materially and adversely affects its respective business, Properties, operations or condition, financial or otherwise) under any indenture, mortgage, deed of trust, agreement or other instrument to which the Borrower or any Subsidiary or Guarantor is a party or by which the Borrower or any Subsidiary or Guarantor is bound. No Default hereunder has occurred and is continuing. Section 3.13 Use of Proceeds; Margin Stock. The proceeds of the Note will be used by the Borrower for working capital in Borrower's ordinary course of business. None of such proceeds will be used for, and neither the Borrower nor any Subsidiary are engaged in, the business of extending credit for the purpose of purchasing or carrying any "margin stock" as defined in Regulations G or U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulations G or U. No part of the proceeds of the loans evidenced by the Note will be used for any purpose which violates Regulation X of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 224). All loans evidenced by the Note are and shall be "business loans" as such term is used in the Depository Institutions Deregulation and Monetary Control Act of 1980, as amended, and such loans are for business, commercial, investment or other similar purposes and not primarily for personal, family, household or agricultural use, as such terms are used and defined in Chapter 1 of the Texas Credit Code, Title 79, Texas Revised Civil Statutes. Neither the Borrower nor any Subsidiary nor any Person acting on behalf of the Borrower or any Subsidiary has taken or will take any action which might cause the Note or any of the Security Instruments, including this Agreement, to violate Regulations G or U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. 15 Section 3.14 Compliance with the Law. Neither the Borrower nor any Subsidiary: (a) is in violation of any applicable law, ordinance, or governmental rule or regulation to which the Borrower or any Subsidiary or any of their respective Properties are subject including but not limited to those laws, ordinances and governmental rules and regulations regarding employee wages and overtime; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of their respective Properties or the conduct of their respective businesses; which failure might adversely affect the financial condition of the Borrower or any Subsidiary or Guarantor. Section 3.15 ERISA. The Borrower and its Subsidiaries are in compliance in all material respects with the applicable provisions of ERISA, and no "reportable event," as such term is defined in Section 4043 of ERISA, has occurred with respect to any Plan of the Borrower or any Subsidiary. Section 3.16 Subsidiaries. The Borrower has no Subsidiaries. Section 3.17 Direct Benefit From Loans. The Borrower has received, or, upon the execution and funding thereof, will receive (i) direct benefit from the making and execution of this Agreement and the other documents to which it is a party, and (ii) fair and independent consideration for the entry into, and performance of, this Agreement and the other documents to which it is a party. Section 3.18 RICO. None of the Borrower, its Subsidiaries, or the Guarantors are in violation of any applicable laws, statutes or regulations, including, without limitation, RICO, the violation of which could subordinate Lender's security interest in the Collateral (as that term is defined in the Security Instruments). Section 3.19 Brokers and Finders. No Person has any right, interest, or valid claim against Lender, Borrower, or any Affiliate of Borrower because of any agreement, undertaking, act or omission of Borrower or any Affiliate of Borrower or other Person acting on behalf of Borrower or any Affiliate of Borrower for any commission, fee, or other compensation as a result of the transactions contemplated by this Agreement or the Security Instruments. Borrower hereby expressly acknowledges and recognizes Borrower's responsibility for and agrees to indemnify and hold Lender and Lender's successors and assigns absolutely harmless from and against all costs, expenses, liabilities, loss, damage or obligations incurred by or imposed upon or alleged to be due of Lender or Lender's successors and assigns in connection with the assertion of any claim for brokerage, agency or finder's fees or commissions in connection with the Loan. Section 3.20 Money Laundering; Anti-Terrorism Laws. (a) ISSI is the sole shareholder of Borrower. Borrower and its shareholder will furnish all of the funds for Borrower's the repayment of the Loan, and such funds will not be from any sources that are described in 18 U.S.C.A. ss.ss. 1956 and 1957 as funds or property derived from "specified unlawful activity". 16 (b) None of Borrower, ISSI, Intelli, Rundell, or Beare (nor any person or entity owning an interest in any of the aforementioned entities) (i) is a Prohibited Person, or (ii) has violated any Anti-Terrorism Laws. None of the funds of Borrower, ISSI, Intelli, Rundell, or Beare have been derived from any activity in violation of Anti-Terrorism Laws. ARTICLE IV AFFIRMATIVE COVENANTS A deviation from the provisions of this Article IV shall not constitute a Default under this Agreement if such deviation is consented to in writing (in the manner hereinafter provided in Section 8.02) by the Lender. Without the prior written consent of the Lender, the Borrower will at all times comply with the covenants contained in this Article IV, from the date hereof and for so long as any part of the Note or the Commitment is outstanding. Section 4.01 Financial Statements and Reports. The Borrower, the Subsidiaries, and the Guarantors will promptly furnish to the Lender from time to time upon request such information regarding the business and affairs and financial condition of the Borrower, its Subsidiaries, and the Guarantors as the Lender may reasonably request, and will furnish to the Lender: (a) Annual Financial Statements. As soon as available and in any event within ninety (90) days after the close of each fiscal year of the Borrower, the balance sheets of the Borrower and its Subsidiaries as at the end of such year and the operating statements of the Borrower and its Subsidiaries as at the end of such year (showing income, expenses and surplus), setting forth in each case in comparative form figures for the previous fiscal year, all prepared in accordance with GAAP, certified by the principal financial officer of the Borrower, and audited at Borrower's sole cost and expense by a Certified Public Accountant acceptable to Lender. Further, if an entity Guarantor's financial information is not contained in a balance sheet and operating statement consolidated with the Borrower's financial information and delivered by the Borrower to the Lender, then as soon as available, and in any event within ninety (90) days after the close of each fiscal year of each respective Guarantor which is not a natural person, Borrower, its Subsidiaries, or the Guarantors will deliver to Lender the balance sheets of each respective Guarantor as at the end of such year and the operating statements of each respective Guarantor as at the end of such year (showing income, expenses and surplus), setting forth in each case in comparative form figures for the previous fiscal year, all prepared in accordance with GAAP and each of which operating statement and balance sheet shall be audited by a Certified Public Accountant acceptable to Lender. 17 (b) Annual Budget and Operating Plan. As soon as available and in any event within ninety (90) days after the close of each fiscal year of the Borrower, the annual budget and operating plan of Borrower; (c) Quarterly Reports. As soon as available and in any event within thirty (30) days after the end of each calendar quarter, proof of payment of the Borrower's and each Subsidiaries' payroll taxes; (d) Monthly Financial Statements. As soon as available and in any event within thirty (30) days after the end of each calendar month, the balance sheets of the Borrower and its Subsidiaries as at the end of such month and the operating statements of the Borrower and its Subsidiaries for such month (showing income, expenses and surplus for such month and for the period from the beginning of the fiscal year to the end of such month), all prepared in accordance with GAAP, certified by the principal financial officer of the Borrower; (e) Accounts Aging/Payable. As soon as available, and in any event within ten (10) days after the end of each calendar month, copies of customer statements, together with an aging of all accounts receivable, showing each such account which is thirty (30), sixty (60), ninety (90) and over ninety (90) days past due, and within ten (10) days after the end of each calendar month, an aging of all accounts payable; (f) Inventory Schedule. For so long as the Inventory Advance Amount is less than or equal to $90,000.00, Borrower shall deliver to Lender, on or before the first Business Day of each month, an aged, perpetual Inventory as of the end of the preceding month, showing all Inventory; and, once the conditions in 2.01(b) have been satisfied, Borrower shall deliver to Lender, on or before the first Business Day of each week, an aged, perpetual Inventory schedule as of the end of the preceding week, showing all Inventory; and (g) Weekly Borrowing Base Report and Sales Journal. Once each week, a report in such form as Lender may reasonably request, reflecting (i) the Eligible Accounts of Borrower as of the end of the previous week and calculating the Accounts Advance Amount based thereon, together with cash receipt journals, sales journals and backup for all miscellaneous credits and debits which support such report (as well as copies of checks and invoices for new billings if requested by Lender), and (ii) the Eligible Inventory of Borrower as of the end of the previous week and calculating the Inventory Advance Amount based thereon. Such report shall also reflect the amount of sales and receipts of Borrower during the preceding week, list the Accounts and Inventory which Borrower believes are ineligible for inclusion in Eligible Accounts and Eligible Inventory, and such other information as Lender may reasonably request. At each occasion in which Seller submits its weekly borrowing base report, Borrower's chief financial officer shall complete, execute, and deliver to Lender a document in the form of Schedule "4.01(g)" attached hereto. 18 All such balance sheets, schedules, and other financial statements referred to in this Section 4.01 shall be in such detail as the Lender may reasonably request and shall conform to GAAP, except only for audit adjustments, such changes in accounting principles or practice with which independent certified public accountants concur. Section 4.02 Compliance with Laws; Payment of Taxes and Other Claims. The Borrower will and will cause each Subsidiary to observe and comply with (a) all laws, statutes, codes, acts, ordinances, rules, regulations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers applicable to it and where the failure to observe or comply would have a material adverse effect on Borrower's financial condition; and (b) pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Borrower or any Subsidiary or upon the income or any Property of the Borrower or any Subsidiary as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien upon any or all of the Property of the Borrower or any Subsidiary; provided, however, that, subject to the written approval of the Lender, neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted and if the Borrower or its Subsidiary shall have set up reserves therefor adequate under GAAP. Section 4.03 Maintenance. The Borrower will and will cause each Subsidiary to (i) maintain its corporate existence, rights and franchises; (ii) observe and comply with all valid laws, statutes, codes, acts, ordinances, judgments, injunctions, rules, regulations, certificates, franchises, permits and licenses (including without limitation applicable statutes, regulations, orders and restrictions relating to environmental standards or controls or to energy regulations) of all federal, state, county, municipal and other governmental authorities; (iii) maintain its Properties (and any Properties leased by or consigned to it or held under title retention or conditional sales contracts) in good and workable condition (ordinary wear and tear excepted) at all times and make all repairs, replacements, additions, betterments and improvements to its Properties as are needful and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times; and (iv) maintain and keep books of records and accounts, all in accordance with GAAP, consistently applied, of all dealings and transactions in relation to its business and activity. Section 4.04 Further Assurances. The Borrower will and will cause each Subsidiary to cure promptly any defects in the creation and issuance of the Note and the execution and delivery of the Security Instruments, including this Agreement. The Borrower and the Guarantors shall, each at its own expense, promptly execute and deliver to the Lender upon request all such other and further documents, agreements and instruments to effectuate the agreements of the Borrower or any of its Subsidiaries or the Guarantors in the Security Instruments, including in this Agreement, or to further evidence and more fully describe the collateral intended as security for the Note, or to correct any omissions in the Security Instruments, or more fully to state the security obligations set out herein or in any of the Security Instruments, or to perfect, protect or preserve any Liens created pursuant to any of the Security Instruments, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. 19 Section 4.05 Performance of Obligations. The Borrower will pay the Note according to the reading, tenor and effect thereof; and the Borrower will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Borrower under the Security Instruments, including this Agreement, at the time or times and in the manner specified, and cause each of its Subsidiaries to take such action with respect to their obligations to be performed and discharged under the Security Instruments to which they respectively are parties. Section 4.06 Reimbursement of Expenses. The Borrower will pay all reasonable legal fees incurred by the Lender in connection with the preparation, amendment, interpretation, administration and enforcement of this Agreement and any and all other Security Instruments contemplated hereby. The Borrower will, upon request, promptly reimburse the Lender for all amounts expended, advanced or incurred by the Lender to satisfy any obligation of the Borrower under this Agreement or any other Security Instrument, or to protect the Properties or business of the Borrower or any Subsidiary or to collect the Note, or to enforce the rights of the Lender under this Agreement, the Note, or any other Security Instrument, which amounts will include all court costs, reasonable attorneys' fees, fees of auditors and accountants, and investigation expenses reasonably incurred by the Lender in connection with any such matters, together with interest at either (i) the post-maturity rate specified in Section 2.02 on each such amount from the date that the same is expended, advanced or incurred by the Lender until the date of reimbursement to the Lender, or (ii) if no default shall have occurred and be continuing, the prematurity rate specified in Section 2.02 on each such amount from the date that the same is expended, advanced or incurred by the Lender until the date of written demand or request by the Lender for the reimbursement of same, and thereafter at the applicable post-maturity rate specified in Section 2.02 until the date of reimbursement to the Lender. Section 4.07 Insurance. The Borrower and each Subsidiary now maintains and will continue to maintain with financially sound and reputable insurers, insurance with respect to its respective Properties and businesses against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of companies engaged in the same or similar businesses and similarly situated but in any event, all fixed assets of the Borrower shall be insured for an amount at least equal to the lesser of (i) the full replacement value of the Borrower's and each Subsidiary's Properties, and (ii) the unpaid principal balance of the Note, from time to time outstanding. All such policies shall name the Lender as loss payee or additional insured thereon, as applicable, and shall provide for at least thirty (30) days prior written notice to the Lender prior to the cancellation or modification of each such policy. Upon request of the Lender, the Borrower will furnish or cause to be furnished to the Lender from time to time a summary of the insurance coverage of the Borrower and its Subsidiaries in form and substance satisfactory to the Lender and if requested will furnish the Lender copies of the applicable policies. If, while any Secured Liabilities are outstanding, any proceeds with respect to any casualty loss are paid to the Lender under such policies on account of such casualty loss, and no Event of Default has occurred and is continuing, the Lender will pay over such proceeds in whole or in part to the Borrower, for the purpose of repairing or replacing the Collateral destroyed or damaged, with any such repaired or replaced Collateral to be secured by this Security Agreement. If an Event of Default has occurred and is continuing, the Lender may apply the proceeds as Lender deems fit, subject to applicable law and the terms of the Financing Documents, and may cancel, assign or surrender any such insurance policies. 20 Section 4.08 Right of Inspection. The Borrower will permit and will cause each Subsidiary to permit any officer, employee or agent of the Lender to visit and inspect any of the Properties of the Borrower or any Subsidiary, to conduct collateral reviews at Lender's discretion from time to time during the term of the Loan, to examine the Borrower's or any Subsidiary's books of record and accounts, to take copies and extracts therefrom, and to discuss the affairs, finances and accounts of the Borrower or any Subsidiary with the Borrower's or Subsidiary's current and former officers, employees, accountants and auditors, all at such times (during normal business hours) and as often as the Lender may desire. The Borrower shall reimburse Lender for all of Lender's out-of-pocket expenses in connection with the collateral reviews, in addition to a review fee of $950.00 per auditor per day; provided, however, that Borrower shall not be responsible for more than four (4) days' of audit charges per quarter unless an Event of Default occurred during such quarter. Section 4.09 Notice of Certain Events. The Borrower and Guarantors, as the case may be, shall promptly notify the Lender if the Borrower or any such Guarantor learns of the occurrence of (i) any event which constitutes a Default, together with a detailed statement by a responsible officer of the Borrower or the relevant Guarantor of the steps being taken to cure the effect of such Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness of the Borrower or any Subsidiary or Guarantor or of any security (as defined in the Securities Act of 1933, as amended) of the Borrower or any Subsidiary or Guarantor with respect to a claimed default, together with a detailed statement by a responsible officer of the Borrower or the relevant Guarantor specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Borrower or its Subsidiary or the relevant Guarantor is taking or proposes to take with respect thereto; or (iii) any legal, judicial or regulatory proceedings affecting the Borrower or any Subsidiary or Guarantor or any of the Properties of the Borrower or any Subsidiary or Guarantor in which the amount involved is material and is not covered by insurance or which, if adversely determined, would have a material and adverse effect on the business or the financial condition of the Borrower or any Subsidiary or Guarantor; or (iv) any dispute between the Borrower or any Subsidiary or Guarantor and any governmental or regulatory body or any other Person which, if adversely determined, might materially interfere with the normal business operations of the Borrower or any Subsidiary or Guarantor; or (v) any material adverse changes, either in any case or in the aggregate, in the assets, liabilities, or financial condition of the Borrower or any Subsidiary or Guarantor, from those reflected in the Financial Statements (or, with respect to any Guarantor, the financial statements of such Guarantor required to be delivered to the Lender) or by the facts warranted or represented in any Security Instrument, including this Agreement. Section 4.10 ERISA Information and Compliance. The Borrower will promptly furnish to the Lender (i) if requested by the Lender, promptly after the filing thereof with the United States Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual and other report with respect to each Plan or any trust created thereunder, and (ii) immediately upon becoming aware of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, in connection with any Plan or any trust created thereunder, a written notice signed by the President or the principal financial officer of the Borrower specifying the nature thereof, what action the Borrower or any of its Subsidiaries is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto. The Borrower will fund, or will cause its Subsidiaries to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect for the benefit of employees of the Borrower or any of its Subsidiaries, and comply with all applicable provisions of ERISA. 21 Section 4.11 Blocked Account. Throughout the term of this Agreement, Borrower shall maintain the Blocked Account at a bank acceptable to Lender, which account shall be pledged to Lender and subject to offset in favor of Lender. All receipts from any Property on which Lender has a Lien and daily deposits of all receipts from each respective day shall be deposited in said Blocked Account. Section 4.12 Environmental Requirements. Borrower shall comply with all federal laws, state statutes, municipal ordinances and all other governmental standards, rules and regulations applicable to Borrower or to its Property in respect to occupational health and safety, hazardous waste and substances and environmental matters. Borrower shall promptly notify Lender of its receipt of any notice of a violation or an alleged violation of any such federal laws, state statutes, municipal ordinances or other governmental standards, rules or regulations. Borrower shall indemnify and hold Lender harmless from all loss, cost, damages, claim and expenses (including attorney's fees and court costs) incurred by Lender on account of the Borrower's failure to perform the obligations of this Section. Section 4.13 Financial Covenants. (a) Borrower shall maintain a minimum Tangible Net Worth equal to $200,000.00. Such Tangible Net Worth will be calculated monthly. (b) EBITDA. Borrower will maintain a minimum trailing three (3) month EBITDA of: $200,000.00 at all times during the period beginning January 31, 2005, and ending March 31, 2005; $225,000.00 at all times during the period beginning April 1, 2005, and ending June 30, 2005; and $250,000.00 at all times during the period beginning July 1, 2005, through the Termination Date. Section 4.14 Verification. Borrower hereby authorizes Lender to contact Borrower's account debtors and vendors for purposes of verification of any account debtor's accounts receivable owed to Borrower or of accounts payable owed by Borrower to its vendors, and for such other purposes as Lender deeds necessary or convenient. Borrower shall cooperate with Lender to the maximum extent possible to provide information necessary for Lender to accomplish verification or collection of any Account. If requested by Lender, Borrower agrees to furnish evidence of shipment of the related merchandise and/or performance of services rendered, all in a form satisfactory to Lender, including the original purchase order from the account debtor. Section 4.15 Payoff of Highlands Bank Debt. Borrower hereby covenants and agrees with Lender that Borrower shall pay at Closing from Loan proceeds all of Borrower's approximately $90,000.00 debt owed to Highlands Bank and shall obtain from Highlands Bank fully executed releases or assignments in favor of Lender of all of Highlands Bank's liens on Borrower's Properties, excluding Highlands Bank's liens on specific pieces of equipment or machinery owned by Borrower and financed by Highlands Bank or on real estate owned by Borrower. 22 Section 4.16 Any Additional Funding. In the event that ISSI receives commitments for additional funds (which may be in the form of convertible debt) in an aggregate amount greater than $1,000,000.00, ISSI may apply the first million dollars of proceeds thereof as ISSI deems appropriate, but ISSI shall cause the second million dollars of proceeds raised thereby to be transferred to the Borrower to be used by the Borrower to pay the following obligations: (i) Borrower's outstanding obligations to Rundell in the original principal amount of $150,000.00; (ii) Borrower's outstanding obligations to Bank One, N.A. pursuant to that certain Promissory Note dated January 27, 2004, in the original principal amount of $500,000.00; and (iii) at least $400,000.00 to pay down the Borrower's accounts payable which are at least sixty (60) days past due. ISSI shall ensure that any additional debt incurred by ISSI is subordinated to the ISSI's obligations under the Security Instruments pursuant to a subordination agreement containing such terms and provisions as Lender deems appropriate in Lender's sole discretion. Section 4.17 Release Upon Loan Termination. Upon the termination of this Commitment, Borrower hereby agrees to execute and delivered to Lender a general release in form and substance acceptable to Lender. In recognition of Lender's right to have its attorneys' fees and other expenses incurred in connection with this Agreement secured by the Collateral, notwithstanding payment in full of all Indebtedness by Borrower or other parties, Lender shall not be required to record any terminations or satisfactions of any of Lender's liens on the Collateral unless and until Borrower has executed and delivered to Lender the general release described herein. Borrower understands that this provision constitutes a waiver of Borrower's rights under ss.9-513 of the UCC. ARTICLE V NEGATIVE COVENANTS A deviation from the provisions of this Article V shall not constitute a Default under this Agreement if such deviation is consented to in writing (in the manner hereinafter provided in Section 8.02) by the Lender. Without the prior written consent of the Lender, the Borrower will at all times comply with the covenants contained in this Article V, from the date hereof and for so long as any part of the Note or the Commitment is outstanding. Section 5.01 Debts, Guaranties and Other Obligations. Neither the Borrower nor any Subsidiary or Guarantor will incur, create, assume or in any manner become or be liable in respect of any indebtedness (including obligations for the payment of rentals); and neither the Borrower nor any Subsidiary or Guarantor will guarantee or otherwise in any way become or be responsible for obligations of any other Person, whether by agreement to purchase the indebtedness of any other Person or agreement for the furnishing of funds to any other Person through the purchase or lease of goods, supplies or services (or by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the indebtedness of any other Person, or otherwise, except that the foregoing restrictions within this Section 5.01 shall not apply to: 23 (a) the Note or other Indebtedness to the Lender; (b) liabilities, direct or contingent (including, but not limited to, convertible debt), of the Borrower and its Subsidiaries and Guarantors existing on the Effective Date of this Agreement which are reflected in the Financial Statements (or, with respect to any Guarantor, the financial statements of such Guarantor required to be delivered to the Lender) or have been disclosed to the Lender in writing, but not any renewals and extensions thereof; (c) liabilities in relation to leases and lease agreements to the extent permitted by Section 5.07 hereof; (d) endorsements of negotiable or similar instruments for collection or deposit in the ordinary course of business; (e) trade payables or similar obligations from time to time incurred in the ordinary course of business other than for borrowed money; (f) taxes, assessments or other government charges which are not yet due or are being contested pursuant to Section 4.02 hereof; (g) indebtedness which is subordinated to the Note by terms satisfactory to the Lender, in its sole discretion; (h) the Guaranties dated of even date herewith by the Guarantors for the benefit of the Lender pursuant to which the Guarantors guaranty Borrower's obligations under this Agreement; (i) debt to ISSI in amounts and pursuant to terms approved by Lender; and (j) capital expenditures for purchasing or financing equipment not to exceed an aggregate amount of $150,000.00 per calendar year; provided, however, that Borrower may use funds raised by ISSI and transferred to Borrower pursuant to Section 4.16 for additional capital expenditures to the extent such transferred funds exceed the amounts allocated in Section 4.16 for payment of Borrower's existing obligations. Section 5.02 Liens. Neither the Borrower nor any Subsidiary or Guarantor will create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except: (a) the liens held by the Lender, (b) liens for taxes not yet delinquent or which are being contested in good faith by appropriate proceedings; provided that adequate reserves with respect thereto are being maintained on the books of the Borrower or the relevant Subsidiary in conformity with GAAP, (c) liens (other than liens in favor of taxing entities) in favor of carriers', warehouseman's, mechanics', materialmen's, repairmen's or other like liens arising in the ordinary course of business and not overdue for a period of more than sixty (60) days or which are being contested in good faith by appropriate proceedings, (d) liens securing equipment acquired in the ordinary course of business under equipment leases or vendor-financed purchases, provided that the Borrower or the relevant Subsidiary is current in the payment of all amounts owed under such leases or purchase money financings, (e) nonconsensual liens and rights of financial institutions in checking, savings, money market and similar accounts opened and maintained by the Borrower or the relevant Subsidiary in the ordinary course of business, (f) inchoate liens arising under ERISA to secure the contingent liability of the Borrower or any Subsidiary permitted by Section 4.10 hereof, (g) liens held by the Subordinated Lenders which have been subordinated to Lender in form and substance acceptable to Lender, (h) liens on the Borrower's equipment in favor of The Highlands Bank pursuant to that certain financing statement #19-32968 filed on August 3, 2004, in East Feliciana Parish, Louisiana, and liens held as of the date hereof on the Borrower's real property in favor of The Highlands Bank, and (i) landlord's liens held by any landlord of the Borrower, any Subsidiary, or any Guarantor on inventory or equipment. 24 Section 5.03 Investments, Loans and Advances. Neither the Borrower nor any Subsidiary will make or permit to remain outstanding any loans or advances to or investments in any Person, except that the foregoing restriction shall not apply to: (a) loans, advances or investments the material details of which have been set forth in the Financial Statements or have been otherwise disclosed to the Lender in writing prior to the execution of this Agreement; (b) investments in direct obligations of the United States of America or any agency thereof; (c) investments in certificates of deposit issued by commercial banks in the United States having a combined capital and surplus in excess of One Hundred Million Dollars ($100,000,000.00); and (d) investments in commercial paper with the best rating by Standard & Poor's, Moody's Investors Service, Inc., or any other rating agency satisfactory to the Lender issued by companies in the United States with a combined capital and surplus in excess of One Hundred Million Dollars ($100,000,000.00). Section 5.04 Dividends, Distributions and Redemptions. Unless approved in writing by Lender prior to such event, Borrower shall not declare or pay any dividend, distribution, purchase, redeem or otherwise acquire for value any of its ownership interests now or hereafter outstanding, return any capital to its owners, or make any distribution of its assets to its Affiliates as such. Notwithstanding the foregoing in this Section 5.04 so long as an Event of Default has not occurred and is continuing, Borrower may make monthly distributions or other payments to Affiliates in an aggregate amount equal to the greater of: (i) $40,000.00; or (ii) 40% percent of Borrower's monthly Net Income; provided, however, that the foregoing restriction on distributions and other payments shall not apply to reimbursements made by Borrower to its Affiliates for payments made by such Affiliates on behalf of Borrower for expenses directly related to Borrower on or after the Effective Date hereof. 25 Section 5.05 Sale of Properties. Neither the Borrower nor any Subsidiary or Guarantor will sell, transfer or otherwise dispose of all or any substantial portion or integral part of its Properties except in the ordinary course of business, or enter into any arrangement, directly or indirectly, with any Person whereby the Borrower or any Subsidiary or Guarantor shall sell or transfer any Property, whether now owned or hereafter acquired, and whereby the Borrower or any Subsidiary or Guarantor shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Borrower or any Subsidiary or Guarantor intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 5.06 Nature of Business. The Borrower will not permit any material change to be made in its ownership and/or senior management employment or in the nature and/or character of its business as carried on at the date hereof. Section 5.07 Limitation on Leases. Except as identified on Schedule 5.07, neither the Borrower nor any Subsidiary will create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Property of any kind whatsoever (real or personal), under leases or lease agreements, without the prior written consent of Lender, except (i) leases and lease agreements for equipment used in the operations of the Borrower in an aggregate amount for the Borrower and all Subsidiaries (determined on a consolidated basis) not to exceed $100,000.00 in any fiscal year of the Borrower, and (ii) leases and lease agreements for the real properties listed on Schedule 5.07 attached hereto (collectively, the "Borrower's Facilities"). Section 5.08 Mergers, Consolidations, etc. Neither the Borrower nor any Subsidiary will amend its articles of incorporation or other formation documents, as applicable, or otherwise change its corporate or partnership name or structure, or consolidate with or merge into or acquire any Person, or permit any other Person to consolidate with or merge into or acquire the Borrower or any Subsidiary or acquire the stock of any corporation or form any Subsidiary. Section 5.09 ERISA Compliance. The Borrower will not at any time permit any Plan maintained by it or any Subsidiary to: (a) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended; (b) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA; or (c) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Borrower or any Subsidiary pursuant to Section 4068 of ERISA. 26 Section 5.10 Issuance of Stock. During the term of this Agreement, Borrower will not issue any stock or admit any additional Person as a shareholder of the Borrower without the written consent of Lender. Section 5.11 Changes in Accounting Methods. The Borrower will not make any change in its accounting method as in effect on the date of this Agreement or change its fiscal year ending date from June 30, unless such changes have the prior written approval of the Lender. Section 5.12 Transactions With Affiliates. The Borrower will not, directly or indirectly, enter into any transaction (including, but not limited to, the sale or exchange of property or the rendering of any service) with any Affiliate, other than in the ordinary course of its business and upon substantially the same or better terms as it could obtain in an arm's length transaction with a Person who is not an Affiliate. Section 5.13 Use of Proceeds. The Borrower will not use the proceeds of the Note for purposes other than those set forth in Section 3.13. Section 5.14 RICO. The Borrower will not violate any applicable laws, statutes or regulations, whether federal or state, for which forfeiture of a material portion of its properties is a potential penalty, including, without limitation, RICO. ARTICLE VI EVENTS OF DEFAULT Section 6.01 Events. Any of the following events shall be considered an "Event of Default" as that term is used herein: (a) Principal and Interest Payments. Default is made in the payment or prepayment when due of any installment of principal or interest on the Note or any other Indebtedness; or (b) Collections. Borrower shall divert any payments away from the Blocked Account or shall accept any payments on the Accounts from any account debtors which payments have not been made to the Blocked Account; or (c) Representations and Warranties. Any representation or warranty made by the Borrower, any Subsidiary or any Guarantor in any Security Instrument, including this Agreement, proves to have been incorrect in any material respect as of the date thereof; or any representation, statement (including financial statements), certificate or data furnished or made by the Borrower, any Subsidiary or any Guarantor (or any officer, accountant or attorney of the Borrower or any Subsidiary or any Guarantor) under any Security Instrument, including this Agreement, proves to have been untrue in any material respect, as of the date as of which the facts therein set forth were stated or certified; or 27 (d) Affirmative Covenants. Default is made in the due observance or performance of any of the covenants or agreements contained in Article IV of this Agreement; or (e) Negative Covenants. Default is made in the due observance or performance of any of the covenants or agreements contained in Article V of this Agreement; or (f) [INTENTIONALLY DELETED]; or (g) Other Security Instrument Obligations. Default is made in the due observance or performance by the Borrower, any Subsidiary or any Guarantor of any of the covenants or agreements contained in any Security Instrument other than this Agreement, and such default continues unremedied beyond the expiration of any applicable grace period which may be expressly allowed under such Security Instrument; or (h) Involuntary Bankruptcy Proceedings. A receiver, conservator, custodian, liquidator, creditors' committee, board of inspectors, or trustee of the Borrower, any Subsidiary or any Guarantor, or of any of their Property, is created, engaged, retained, procured, authorized, or appointed in the United States or under any law of any foreign country by the order or decree of any court or agency or supervisory authority having jurisdiction; or the Borrower, any Subsidiary or any Guarantor becomes a debtor under the Bankruptcy Code of the United States or under the law of any foreign country, or is the subject of an order for relief, or becomes a bankrupt or insolvent; or any of the Borrower's, any Subsidiary's or any Guarantor's Property is sequestered, seized, or attached in the United States or under any law of any foreign country by court order or decree; or a complaint, petition, or similar pleading is filed against the Borrower, any Subsidiary or any Guarantor under any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, in the United States or in any foreign country, whether such law is now in existence or hereafter in effect; or (i) Voluntary Petitions. The Borrower, any Subsidiary or any Guarantor files a petition in bankruptcy or reorganization or seeks relief under any provision of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution, or liquidation law of any jurisdiction, in the United States or in any foreign country, whether such law is now in existence or hereafter in effect, or the Borrower, any Subsidiary or any Guarantor is the subject of an order for relief or winding-up petition entered by any bankruptcy court, or the Borrower or any Subsidiary or any Guarantor consents to the filing of any petition against it under any such law in the United States or in any foreign country; or 28 (j) Assignments, Conveyances, or Transfers for Benefit of Creditors. The Borrower, any Subsidiary or any Guarantor makes an assignment, conveyance, or transfer for the benefit of its creditors, or for the purpose of enforcing a lien against its Property, or admits in writing its inability to pay its debts generally as they become due, or is generally not paying its debts as such debts become due, or consents to the appointment of a custodian, receiver, trustee, assignee, or liquidator of all, substantially all, less than substantially all, or any part of its Property for the purpose of enforcing a lien against its Property; or (k) Discontinuance of Business. The Borrower or any Subsidiary or Guarantor discontinues its usual business; or (l) Default on Other Debt or Security. The Borrower, any Subsidiary or any Guarantor fails to make any payment due on any indebtedness or security (as "security" is defined in the Securities Act of 1933, as amended) or any event shall occur or any condition shall exist in respect of any indebtedness or security of the Borrower, any Subsidiary or any Guarantor, or under any agreement securing or relating to such indebtedness or security, the effect of which is (i) to cause or to permit any holder of such indebtedness or other security or a trustee to cause (whether or not such holder or trustee elects to cause) such indebtedness or security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, or (ii) to permit a trustee or the holder of any security (other than common stock or membership interest of the Borrower or of any Subsidiary or Guarantor) to elect (whether or not such holder or trustee does elect) a majority of the managers or directors of the Borrower or of such Subsidiary or Guarantor; or (m) Undischarged Judgments. If judgment for the payment of money in excess of Ten Thousand and No/100 Dollars ($10,000.00) is rendered by any court or other governmental body against the Borrower, any Subsidiary or any Guarantor and the Borrower, Subsidiary or Guarantor does not immediately discharge the same or provide for its immediate discharge in accordance with its terms, or procure a stay of execution thereof within ten (10) days from the date of entry thereof, and within said period of ten (10) days from the date of entry thereof or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal while providing such reserves therefor as may be required under GAAP; or (n) [INTENTIONALLY DELETED]; or (o) Fraudulent Transfers. The Borrower or any Guarantor shall have concealed, removed, or permitted to be concealed or removed, any part of its Property, with intent to hinder, delay or defraud its creditors or any of them, or made or suffered a transfer of any of its Property which may be fraudulent under any bankruptcy, fraudulent transfer or similar law; or shall have made any transfer of its Property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or shall have suffered or permitted, while insolvent, any creditor to obtain a Lien upon any of its Property through legal proceedings or distraint or other process which is not vacated within sixty (60) days from the date thereof; or 29 (p) Forfeiture. The filing of formal charges under a federal or state law for which forfeiture of Borrower's or any of its Subsidiaries' or any Guarantors' Property is a potential penalty. Section 6.02 Remedies. Upon demand or the happening of any Event of Default specified in Section 6.01, (i) the Lender may declare the entire principal amount of all Indebtedness then outstanding including interest accrued thereon to be immediately due and payable (provided, that the occurrence of any event described in Subsections 6.01(h), 6.01(i), 6.01(j), 6.01(k) or 6.01(n) shall automatically accelerate the maturity of the Indebtedness, without the necessity of any action by the Lender) without presentment, demand, protest, notice of protest or dishonor, notice of default, notice of intent to accelerate the maturity thereof, notice of acceleration of the maturity thereof, or other notice of any kind, all of which are hereby expressly waived by the Borrower, each Subsidiary and each Guarantor; (ii) the Lender may enforce all of its rights under the Security Instruments and under applicable law; and (iii) all obligations, if any, of the Lender hereunder, including the Commitment, shall immediately cease and terminate unless and until the Lender shall reinstate same in writing. Section 6.03 Prohibition of Transfer, Assignment and Assumption. This Agreement pertains to the extension of debt financing and financial accommodations for the benefit of the Borrower and the Subsidiaries and cannot be transferred to, assigned to or assumed by any other person or entity either voluntarily or by operation of law. In the event Borrower or any Subsidiary becomes a debtor under the Bankruptcy Code of the United States or under the law of any foreign country, any trustee or debtor in possession may not assume or assign this Agreement nor delegate the performance of any provision hereunder. Section 6.04 Right of Set-off. Upon the occurrence, and during the continuance, of any Event of Default, or if the Borrower becomes insolvent, however evidenced, unless Lender has called the Loan or accelerated the Note, the Lender and any agent bank of the Lender is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender or any agent bank of the Lender to or for the credit or the account of the Borrower against any and all of the Indebtedness of the Borrower, irrespective of whether or not the Lender shall have made any demand under this Agreement or the Note and although such obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have. The rights contained in this Section 6.04 shall inure to the benefit of any participant in any loans made hereunder. 30 ARTICLE VII CONDITIONS The obligation of the Lender to make the loans to be evidenced by the Note is subject to the accuracy of each and every representation and warranty of the Borrower and its Subsidiaries made or referred to in each Security Instrument, including this Agreement, or in any certificate delivered to the Lender pursuant to or in connection with any Security Instrument, including this Agreement, to the performance by the Borrower of its obligations to be performed hereunder on or before the date of the Loan, and to the satisfaction of the following further conditions which must be satisfied as of the date of this Agreement or the respective advances under the Note. Section 7.01 Closing. The delivery of all instruments and certificates referred to in this Article VII not theretofore delivered and for the making of the loans provided for in Article II of this Agreement shall occur on or before November 15, 2004. Section 7.02 Note. The Borrower shall have duly and validly issued, executed and delivered the Note to the Lender. Section 7.03 Organizational Documents. The Lender shall have received a copy, certified as true by the Secretary or Assistant Secretary of the Borrower or the Subsidiary, respectively, of the articles or certificate of incorporation and the bylaws of the Borrower and any Subsidiary which is to execute this Agreement or any Security Instrument pursuant to this Agreement. Section 7.04 Secretary's Certificates. The Lender shall have received, on or before the date of Closing, certificates of the Secretary of the Borrower and any Subsidiary which is to execute any Security Instrument pursuant to this Agreement setting forth (i) resolutions of its board of directors or managers in form and substance satisfactory to the Lender with respect to the authorization of the Note, this Agreement and any other Security Instruments provided herein and the officers authorized to sign such instruments, and (ii) specimen signatures of the officers so authorized. Section 7.05 Opinion of Borrower's Counsel. The Lender shall have received prior to the Closing from counsel for the Borrower and its Subsidiaries, a favorable written opinion satisfactory to the Lender and its counsel, as to the matters contained in Sections 3.01, 3.02, 3.03, 3.04 and 3.05 hereof, and as to such counsel's knowledge of pending or threatened material litigation or governmental or regulatory proceedings against the Borrower or any Subsidiary or any of the Property of the Borrower or any Subsidiary or Guarantor; and as to the validity, creation, attachment and perfection of Liens under any of the Security Instruments; and as to such other matters incident to the transactions herein contemplated as the Lender or its counsel may request. Section 7.06 Counsel of Lender. At the time of the loans hereunder, all legal matters incident to the transactions herein contemplated shall be satisfactory to counsel of the Lender. Section 7.07 No Default. At the time of each loan hereunder, no Default shall have occurred, and there shall not have occurred any condition, event or act which constitutes, or with notice or lapse of time (or both) would constitute a default or event of default under any loan agreement, note agreement or trust indenture to which the Borrower or any Subsidiary or Guarantor is a party. 31 Section 7.08 No Material Adverse Changes. Prior to each loan, there shall have occurred, in the opinion of the Lender, no material adverse changes, either in any case or in the aggregate, in the assets, liabilities, financial condition, business, operations, affairs, management, control or circumstances of the Borrower or any Subsidiary or Guarantor, from those reflected in the Financial Statements (or, with respect to any Guarantor, the financial statements of such Guarantor required to be delivered to the Lender) or by the facts warranted or represented in any Security Instrument, including this Agreement. Section 7.09 Other Security Instruments and Information. The Borrower shall have duly and validly executed and delivered, or caused to be executed and delivered, to the Lender the following instruments, each in form and substance satisfactory to the Lender, in sufficient executed counterparts for recording purposes, as security for the Note and other Indebtedness and shall have delivered the following documents containing information necessary to the preparation and perfection of the liens created by such instruments: (a) Security agreements covering all of the Borrower's cash, accounts receivable, general intangibles, inventory, unencumbered machinery and equipment, chattel paper, intellectual property, instruments, and documents; (b) Financing statements relating to the items described in Subsection (a) and in Section 7.10; (c) [INTENTIONALLY DELETED]; and (d) The Blocked Account Agreement. Section 7.10 Guaranties. The Guarantors shall have duly and validly executed and delivered, or caused to be executed and delivered to the Lender, in form and substance satisfactory to Lender, certain guaranty agreements and certain security agreements granting Lender a lien on all of each Guarantor's assets. The Validity Guarantors shall have duly and validly executed and delivered, or caused to be executed and delivered to Lender, in form and substance satisfactory to Lender, certain validity guaranties regarding the Borrower's accounts receivable. Section 7.11 Recordings. The Security Instruments described in Section 7.09 hereof, including financing statements, security agreements and other notices related thereto, shall have been duly delivered to the appropriate offices for filing, recording or registration, and the Lender shall have received confirmations of receipt thereof from the appropriate filing, recording or registration offices. Section 7.12 [INTENTIONALLY DELETED]. 32 Section 7.13 Closing Fee. Lender shall have received the Closing Fee in immediately available funds. Section 7.14 Additional Matters. The Lender shall have received all exhibits, annexes and schedules herein referenced and such additional reports, certificates, documents, statements, legal opinions, agreements and instruments, in form and substance reasonably satisfactory to the Lender, as the Lender shall have reasonably requested from the Borrower, Guarantors and their counsel. Section 7.15 Revolving Credit Advances. Advances under the Note shall further be subject to the following specific conditions: (a) There shall have been no Default under this Agreement or under any of the other Security Instruments; (b) The Financial Statements and all other financial information required by the Lender shall have been furnished and shall be, as of the date of the requested advance, true, correct, and complete; (c) The financial condition of the Borrower, as shown by the most recent Financial Statement described in Section 4.01(b) hereof, shall be acceptable to the Lender, in its sole discretion; and (d) All of the representations and warranties made by Borrower is this Agreement shall be true and correct as of the date of the requested advance. Section 7.16 Subordination Agreements. Lender shall have received fully-executed Subordination Agreements under terms and conditions acceptable to Lender from each of Borrower's subordinated lenders (collectively, the "Subordinated Lenders"), including, without limitation, an agreement from ISSI providing that, among other items, the intercompany payable of approximately $5,100,000.00 owed by Borrower to ISSI shall not be paid by Borrower without Lender's prior written consent, which consent may be refused at Lender's sole discretion. Section 7.17 [INTENTIONALLY DELETED] Section 7.18 No Liens. Other than liens permitted under Section 5.02, Borrower's Property shall be free of all liens, claims, and encumbrances. Section 7.19 [INTENTIONALLY DELETED] 33 ARTICLE VIII MISCELLANEOUS Section 8.01 Notices. All communications under or in connection with this Agreement or the Note shall be in writing and shall be mailed by registered or certified mail, return receipt requested, postage prepaid, or personally delivered to an officer of the receiving party. All such communications shall be mailed or delivered as follows: (a) If to the Borrower, B&B ARMR Corporation, 14113 Main Street, Norwood, Louisiana 70761, or to such other address or to such individual's or department's attention as it may have furnished the Lender in writing; (b) If to the Lender, Briar Capital, L.P., 1500 City West Boulevard, Suite 225, Houston, Texas 77042, or to such other address or to such individual's or department's attention as it may have furnished to the Borrower in writing. Any notice so addressed and mailed by registered or certified mail, return receipt requested, shall be deemed to be given when so mailed, and any notice so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of the Borrower or the Lender, as the case may be. Section 8.02 Deviation from Covenants. The procedure to be followed by the Borrower to obtain the consent of the Lender to any deviation from the covenants contained in this Agreement or any other Security Instrument shall be as follows: (a) The Borrower shall send a written notice to the Lender setting forth (i) the covenant(s) relevant to the matter, (ii) the requested deviation from the covenant(s) involved, and (iii) the reason for the requested deviation from the covenant(s); and (b) The Lender will within a reasonable time send a written notice to the Borrower, signed by an authorized officer of the Lender, permitting or refusing the request; but in no event will any deviation from the covenants of this Agreement or any other Security Instrument be effective without the written consent of the Lender. Section 8.03 Invalidity. In the event that any one or more of the provisions contained in the Note, this Agreement or in any other Security Instrument shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Note, this Agreement or any other Security Instrument. Section 8.04 Survival of Agreements. All representations and warranties of the Borrower herein, and all covenants and agreements herein not fully performed on or before the Effective Date of this Agreement, shall survive such date. 34 Section 8.05 Successors and Assigns. All covenants and agreements contained by or on behalf of the Borrower or any Subsidiary or any Guarantor in the Note, this Agreement and any other Security Instrument shall bind its successors and assigns or the heirs and personal representatives of any individual Guarantor and shall inure to the benefit of the Lender and its successors and assigns; except that neither the Borrower nor any Guarantor nor any Person acting on behalf of any of them may assign any of their rights hereunder without the prior written consent of Lender. In the event that the Lender sells participations in the Note, or other Indebtedness of the Borrower incurred or to be incurred pursuant to this Agreement, to other lenders, each of such other lenders shall have the rights of set off against such Indebtedness and similar rights or Liens to the same extent as may be available to the Lender. Section 8.06 Renewal, Extension or Rearrangement. All provisions of this Agreement relating to the Note or other Indebtedness shall apply with equal force and effect to each and all promissory notes hereinafter executed which in whole or in part represent a renewal, extension, increase or rearrangement of any part of the Indebtedness originally represented by the Note or of any part of such other Indebtedness. Any provision of this Agreement to be performed during the "term of this Agreement," "term hereof" or similar language, shall include any extension period. Section 8.07 Waivers. No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any right, power or privilege of the Lender under the Note, this Agreement or any other Security Instrument shall operate as a waiver thereof, except as otherwise provided in Section 8.02 hereof. Section 8.08 Cumulative Rights. Rights and remedies of the Lender under the Note, this Agreement and each other Security Instrument shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 8.09 Construction. This Agreement is, and each of the Note will be, a contract made under and shall be construed in accordance with and governed by the laws of the State of Texas. Section 8.10 Interest. It is the intention of the parties hereto to conform strictly to applicable usury laws now in force. Accordingly, if the transactions contemplated hereby would be usurious under applicable law, then, in that event, notwithstanding anything to the contrary in the Note, this Agreement or in any other Security Instrument or agreement entered into in connection with or as security for the Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is contracted for, charged or received under the Note, this Agreement or under any of the other aforesaid Security Instruments or agreements or otherwise in connection with the Note shall under no circumstances exceed the maximum amount of interest permitted by applicable law, and any excess shall be credited on the Note by the holder thereof (or, if the Note shall have been paid in full, refunded to the Borrower); (ii) determination of the rate of interest for determining whether the loans hereunder are usurious shall be made by amortizing, prorating, allocating and spreading, during the full stated term of such loans, all interest at any time contracted for, charged or received from the Borrower in connection with such loans, and any excess shall be cancelled, credited or refunded as set forth in (i) herein; and (iii) in the event that the maturity of the Note is accelerated by reason of an election of the holder thereof resulting from any Default or Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount permitted by applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be cancelled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the Note (or, if the Note shall have been paid in full, refunded to the Borrower). 35 Section 8.11 Multiple Originals. This Agreement may be executed in two (2) or more copies; each fully executed copy shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 8.12 Exhibits and Schedules. All exhibits and schedules to this Agreement are incorporated herein by this reference for all purposes. The exhibits and schedules may be attached hereto, or bound together with or separately from this Agreement, and such binding shall be effective to identify such exhibits and schedules as if attached to this Agreement. Section 8.13 No Triparty Loan. Texas Finance Code, Section 346.003 et seq. (which regulates certain revolving loan accounts and revolving triparty accounts) shall not apply to the loans evidenced by this Agreement or the Note. Section 8.14 Applicable Rate Ceiling. Unless changed in accordance with law, the applicable rate ceiling under Texas law shall be the indicated (weekly) rate ceiling from time to time in effect as provided in Texas Finance Code, Section 306.001 et seq. Section 8.15 Performance and Venue/Jurisdiction/Choice of Law. The obligations of Borrower contained herein are performable at Lender's offices in Houston, Harris County, Texas. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS TO WHICH THE BORROWER IS A PARTY MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF THE BORROWER'S PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER'S ADDRESS SET FORTH IN THE NOTICE PROVISIONS HEREIN, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS AGREEMENT SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION. 36 THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO HEREINABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. Section 8.16 Negotiation of Documents. This Agreement, the Note and all other Security Instruments have been negotiated by the parties at arm's length, each represented by its own counsel, and the fact that the documents have been prepared by the Lender's counsel, after such negotiation, shall not be cause to construe any of such documents against the Lender. Section 8.17 Notices Received by Lender. Any instrument in writing, telex, telegram, telecopy or cable received by the Lender in connection with any loan hereunder, which purports to be dispatched or signed by or on behalf of the Borrower, shall conclusively be deemed to have been signed by such party, and Lender may rely thereon and shall have no obligation, duty or responsibility to determine the validity or genuineness thereof or authority of the Person or Persons executing or dispatching the same. Section 8.18 Debtor-Creditor Relationship. None of the terms of this Agreement or of any other document executed in conjunction herewith or related hereto shall be deemed to give the Lender the rights or powers to exercise control over the business or affairs of the Borrower. The relationship between the Borrower and the Lender created by this Agreement is only that of debtor-creditor, and Lender does not owe Borrower any fiduciary duties. All parties hereby acknowledge and agree that (i) at no time shall Lender be deemed to be a fiduciary of Borrower or its Subsidiaries or Guarantors, (ii) no fiduciary relationship shall exist as between Borrower or its Subsidiaries or Guarantors and Lender as a result of the terms of this Agreement or any of the Security Instruments or otherwise, (iii) at all times the relationship between Borrower and Lender shall be that of debtor and creditor, and (iv) in connection with the implementation of the terms of this Agreement and any applicable Security Document, Lender shall be acting in its own self interest, which at times may conflict with the best interests of the Borrower. Section 8.19 No Third-Party Beneficiaries. This Agreement is for the sole and exclusive benefit of the Borrower and Lender and their successors and permitted assigns. This Agreement does not create, and is not intended to create, any rights in favor of or enforceable by any other Person. This Agreement may be amended or modified by the agreement of the Borrower and Lender, without any requirement or necessity for notice to, or the consent of or approval of any other Person. 37 Section 8.20 Release of Liability. To the maximum extent permitted by law from time to time in effect, Borrower hereby knowingly, voluntarily and intentionally (and after it has consulted with its own attorney) irrevocably and unconditionally agrees that no claim may be made by Borrower against the Lender or any of its affiliates, participants, partners, shareholders, directors, officers, employees, attorneys, accountants, or agents or any of its or their successors and assigns (each an "Indemnitee"), for any actual, direct, special, indirect, consequential or punitive damages in respect of any breach or wrongful conduct (whether the claim is based on contract, tort or statute) arising out of, or related to, the transactions contemplated by any of this Agreement, the Note, the other Security Instruments or any other related documents, or any act, omission, or event occurring in connection herewith or therewith. In furtherance of the foregoing, Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor, and Borrower shall indemnify and hold harmless each Indemnitee of and from any such claims. Upon the full payment of the Indebtedness, and prior to Lender releasing any lien or security interest in Property given to secure the Indebtedness, Borrower, each Subsidiary and the Guarantors shall execute a release agreement, in form and substance satisfactory to Lender, releasing each Indemnitee from any and all claims, demands, actions, causes of action, costs, expenses and liabilities whatsoever, known or unknown, at law or in equity, which the Borrower, each Subsidiary or the Guarantors may have, as of the date of execution of such release or in the future, against the Indemnitees arising out of or in connection with this Agreement or any related documents. Without prejudice to the survival of any other obligations of Borrower under this Agreement and under the other Security Instruments to which Borrower is a party, the obligations of Borrower under this Section 8.20 shall survive the termination of this Agreement and the other Security Instruments and the payment of the Indebtedness. Section 8.21 DTPA Waiver. BORROWER ACKNOWLEDGES AND AGREES, ON ITS OWN BEHALF AND ON BEHALF OF ANY PERMITTED ASSIGNS AND SUCCESSORS HEREAFTER, THAT THE DTPA IS NOT APPLICABLE TO THIS TRANSACTION. ACCORDINGLY, BORROWER'S RIGHTS AND REMEDIES WITH RESPECT TO THE TRANSACTION CONTEMPLATED UNDER THIS AGREEMENT, AND WITH RESPECT TO ALL ACTS OR PRACTICES OF THE LENDER, PAST, PRESENT OR FUTURE, IN CONNECTION WITH SUCH TRANSACTION, SHALL BE GOVERNED BY LEGAL PRINCIPLES OTHER THAN THE DTPA. IN FURTHERANCE THEREOF, BORROWER AGREES AS FOLLOWS: BORROWER WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF BORROWER'S OWN SELECTION, BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER. 38 Section 8.22 Waiver of Trial by Jury. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (I) ARISING UNDER THIS LOAN AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (II) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO. IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTIONS SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. Section 8.23 Final Expression. THIS WRITTEN LOAN AGREEMENT, THE NOTE AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO. Section 8.24 Indemnification. Borrower agrees to indemnify and shall indemnify each Indemnitee from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from this Agreement or any other Security Instrument to which Borrower is a party or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing, and Borrower shall reimburse each Indemnitee upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence, willful misconduct or unlawful acts of such Indemnitee. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS INTENTION OF BORROWER THAT EACH INDEMNITEE SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ALL SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISING OUT OF OR RESULTING FROM THE SOLE, ORDINARY OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE, BUT NOT FROM THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL ACTS OF SUCH INDEMNITEE. Without prejudice to the survival of any other obligations of Borrower under this Agreement and under the other Security Instruments to which Borrower is a party, the obligations of Borrower under this Section 8.24 shall survive the termination of this Agreement and the other Security Instruments and the payment of all amounts owed pursuant to such Security Instruments, and/or the assignment of the Security Instruments. 39 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. LENDER: BORROWER: --------------------------- ----------------------- BRIAR CAPITAL, L.P., B&B ARMR CORPORATION, a a Texas limited partnership Delaware corporation By: Briar Capital General, LLC, a Texas limited liability company, its By: /S/ Peter Beare general partner --------------------- Peter Beare, Chairman By: /S/ Frank Goldberg ------------------- Frank Goldberg, CEO GUARANTORS: VALIDITY GUARANTORS: --------------------------------- -------------------- INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation /S/ C.A. RUNDELL, JR. ------------------------------- C.A. RUNDELL, JR., Individually By: /S/ C.A. RUNDELL, JR. ----------------------------------- /S/ PETER BEARE C.A. Rundell, Jr., Chairman and CEO ------------------------- PETER BEARE, Individually INTELLI-SITE, INC., a Texas corporation /S/ TED WLAZLOWSKI ---------------------------- By: /S/ C.A. RUNDELL, JR. TED WLAZLOWSKI, Individually --------------------------- C.A. Rundell, Jr., Chairman 40 List of Schedules and Exhibits Schedule 4.01(g) Form of Borrowing Base Certificate Schedule 5.07 List of Leases Exhibit 1.1A Form of Blocked Account Agreement Exhibit 1.1B Form of Revolving Promissory Note 41 SCHEDULE "4.01(g)" BORROWING BASE CERTIFICATE In accordance with the Section 4.01(g) of that certain Loan Agreement dated effective as of November 10, 2004, between Briar Capital, L.P. (the "Lender"), and B&B ARMR Corporation (the "Borrower"), the undersigned chief financial officer of the Borrower hereby certifies to Lender that: 1. He is the duly elected, qualified, and acting Chief Financial Officer or agent of Borrower. He is familiar with the facts herein certified and is duly authorized to certify such facts and make and deliver this Borrowing Base Report for and on behalf of Borrower. 2. All representations and warranties made by Borrower in the Loan Agreement (hereinafter defined) and in each of the other Security Instruments are true and correct on and as of the date hereof as if such representations and warranties had been made as of the date hereof. 3. No Default or Event of Default has occurred and is continuing. 4. The financial information contained on the Borrowing Base Report attached hereto is true and correct in all respects. 5. Borrower has performed and complied with all agreements and conditions required in the Security Instruments to be performed or complied with by it on or prior to any further advances under the Loan Agreement. 6. After Briar funds the amount shown under "Requested Advance" on the Borrowing Base Report attached hereto, the aggregate amount of the loan will not exceed the lesser of (i) the Accounts Advance Amount plus the Inventory Advance Amount as defined in the Loan Agreement or (ii) $3,000,000. 7. All information contained in this Borrowing Base Report is true, correct and complete. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement (herein so called) dated effective as of November 10, 2004, executed by Borrower and Briar, as amended. IN WITNESS WHEREOF, this Certificate is executed by the undersigned as of _____________________, 20____. By: ---------------------------------- Printed Name: ------------------------ Title: Chief Financial Officer of B&B ARMR Corporation 42 SCHEDULE "5.07" LIST OF LEASES 43 EXHIBIT "1.1A" FORM OF BLOCKED ACCOUNT AGREEMENT 44 EXHIBIT "1.1B" FORM OF REVOLVING PROMISSORY NOTE 45 EX-4 3 exhibit4-28k111604.txt EXHIBIT 4.2 REVOLVING PROMISSORY NOTE EXHIBIT 4.2 REVOLVING PROMISSORY NOTE $3,000,000.00 Houston, Texas November 10, 2004 FOR VALUE RECEIVED, the undersigned, B&B ARMR CORPORATION, a Delaware corporation ("Maker"), hereby promises to pay to the order of BRIAR CAPITAL, L.P., a Texas limited partnership ("Lender"), at Lender's offices at 1500 City West Boulevard, Suite 225, Houston, Harris County, Texas 77042, in lawful money of the United States of America, the principal sum of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00), or so much thereof as may be advanced and outstanding hereunder. Maker promises to pay interest on the outstanding principal balance of this promissory note (this "Note") from day to day outstanding at a varying rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Nonusurious Interest Rate or (b) the interest rate set forth in Section 2.02(a) of the Loan Agreement. The principal balance of this Note and all accrued interest hereon shall be due and payable as provided in the Loan Agreement. If an Event of Default has occurred, and during the continuance thereof, this Note will bear interest at the rate set forth in Section 2.02(b) of the Loan Agreement. As used in this Note, the term "Loan Agreement" shall mean that certain Loan Agreement dated of even date herewith between Maker and Lender, as the same may be amended, supplemented or modified from time to time. Capitalized terms not otherwise defined herein shall have the meaning assigned to such terms in the Loan Agreement. This Note is secured as provided in the Loan Agreement. Reference is made to the Loan Agreement for additional provisions for the payment and prepayment of this Note and the acceleration of maturity of this Note. The unpaid principal balance hereof shall at no time exceed the sum of Three Million and No/100 Dollars ($3,000,000.00). Advances hereunder may be made by the holder hereof pursuant to the terms of the Loan Agreement. The unpaid principal balance of this Note at any time shall be the total amounts loaned or advanced hereunder by the holder hereof, less the amount of payments or prepayments of principal made hereon by or for the account of Maker. The Maker shall not make, and Lender shall not be required to accept, any prepayments hereon which would reduce the outstanding principal balance hereof below Five Hundred Thousand and No/100 Dollars ($500,000.00) at any time except in the case of payment in full upon maturity. All loans or advances and all payments or prepayments made hereunder on account of principal or interest may be evidenced by Lender, or any subsequent holder, maintaining in accordance with its usual practice an account or accounts evidencing the indebtedness of the Maker resulting from all loans or advances and all payments or prepayments hereunder from time to time and the amounts of principal and interest payable and paid from time to time hereunder, in which event, in any legal action or proceeding in respect of this Note, the entries made in such account or accounts shall be prima facie evidence of the existence and amounts of the obligations of the Maker therein recorded. In the event that the unpaid principal amount hereof at any time, for any reason, exceeds the maximum amount hereinabove specified, Maker covenants and agrees to pay the excess principal amount forthwith upon demand; such excess principal amount shall in all respects be deemed to be included among the loans or advances made pursuant to the other terms of this Note and shall bear interest at the rates hereinabove stated. Notwithstanding anything to the contrary contained herein, no provisions of this Note shall require the payment or permit the collection of interest in excess of the Maximum Nonusurious Interest Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Note or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither Maker nor the sureties, guarantors, successors or assigns of Maker shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Maximum Nonusurious Interest Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Note; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable exceeds the Maximum Nonusurious Interest Rate, Maker and Lender, shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Note so that the interest for the entire term does not exceed the Maximum Nonusurious Interest Rate. If default occurs in the payment of principal or interest under this Note and during the continuance of such default, or upon the occurrence and during the continuance of any other Event of Default, the holder hereof may, at its option, (a) declare the entire unpaid principal of and accrued interest on this Note immediately due and payable without notice, demand or presentment, all of which are hereby waived, and upon such declaration, the same shall become and shall be immediately due and payable, (b) foreclose or otherwise enforce all liens or security interests securing payment hereof, or any part hereof, (c) offset against this Note any sum or sums owed by the holder hereof to Maker and (d) take any and all other actions available to Lender under this Note, the Loan Agreement, the Security Instruments at law, in equity or otherwise. Failure of the holder hereof to exercise any of the foregoing options shall not constitute a waiver of the right to exercise the same upon the occurrence of a subsequent Event of Default. If the holder hereof expends any effort in any attempt to enforce payment of all or any part or installment of any sum due the holder hereunder, or if this Note is placed in the hands of an attorney for collection, or if it is collected through any legal proceedings, Maker agrees to pay all costs, expenses, and fees incurred by the holder, including all reasonable attorneys' fees. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THIS NOTE IS PERFORMABLE IN HARRIS COUNTY, TEXAS. 2 Maker and each surety, guarantor, endorser, and other party ever liable for payment of any sums of money payable on this Note jointly and severally waive notice, presentment, demand for payment, protest, notice of protest and non-payment or dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, diligence in collecting, grace, and all other formalities of any kind, and consent to all extensions without notice for any period or periods of time and partial payments, before or after maturity, and any impairment of any collateral securing this Note, all without prejudice to the holder. The holder shall similarly have the right to deal in any way, at any time, with one or more of the foregoing parties without notice to any other party, and to grant any such party any extensions of time for payment of any of said indebtedness, or to release or substitute part or all of the collateral securing this Note, or to grant any other indulgences or forbearances whatsoever, without notice to any other party and without in any way affecting the personal liability of any party hereunder. This Note shall be construed under and governed by the laws of the State of Texas and applicable federal law, but Texas Finance Code, Section 346.003 et seq. (which regulates certain revolving loan accounts and revolving triparty accounts) shall not apply to the loan evidenced by this Note. Unless changed in accordance with law, the applicable rate ceiling under Texas law shall be the indicated (weekly) rate ceiling from time to time in effect as provided in Texas Finance Code, Section 306.001 et seq. Wherefore, intending to be legally bound hereby, Maker has executed this Note. B&B ARMR CORPORATION, a Delaware corporation By: /S/ Peter Beare --------------------- Peter Beare, Chairman 3 EX-4 4 exhibit4-38k111604.txt EXHIBIT 4.3 SUBORDINATION AGREEMENT EXHIBIT 4.3 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 10th day of November, 2004, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), RENAISSANCE US GROWTH INVESTMENT TRUST PLC, a public limited company registered in England and Wales ("RUSGIT"), RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation ("Renaissance III"), BFS US SPECIAL OPPORTUNITIES TRUST PLC, a public limited company registered in England and Wales ("BFS") (RUSGIT, Renaissance III, and BFS being, collectively, the "Subordinated Lender"), B&B ARMR CORPORATION, a Delaware corporation (the "Company"), INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation ("ISSI"), and INTELLI-SITE, INC., a Texas corporation ("Inteli") (ISSI and Inteli being, collectively, the "Guarantors"). BACKGROUND As an inducement for Briar to enter into a loan arrangement with the Company, the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender, or any of them, has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company or a Guarantor; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company and/or a Guarantor with or by Briar for the benefit of the Company and/or a Guarantor; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Guarantors" shall have the meaning set forth in the first paragraph of this Agreement. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or a Guarantor shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. 2 "Loan Agreement" shall mean that certain Loan Agreement dated effective as of the date hereof between the Company and Briar, as the same has or may be amended, supplemented, modified or restated from time to time. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.4(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Notes and/or other Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, the Subordinated Notes and all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company, a Guarantor, or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "Subordinated Notes" shall mean the promissory notes issued by the Company or a Guarantor, together with any extensions thereof, securities issued in exchange therefor or modifications or amendments thereto or replacements and substitutions therefore, for the benefit of Subordinated Lender including, without limitation, the promissory notes described on Exhibit "A" hereto. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 3 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company, each Guarantor, and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Loan Agreement and to loan funds pursuant thereto, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company, each Guarantor, and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company and each Guarantor shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated; provided, however, that the Company and each Guarantor may make Distributions on the Subordinated Indebtedness in an amount equal to the regular interest payments specified under the Subordinated Lender Agreements to by made by such parties. In the event the Subordinated Lender is notified by Briar of a Default, however, Company and each Guarantor shall make no Distribution, including, without limitation, current interest on any Subordinated Indebtedness, without Briar's prior written consent, until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. 4 (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company, a Guarantor, or any of their Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or a Guarantor or distribution or marshalling of its assets or any composition with creditors of the Company or a Guarantor, whether or not involving insolvency or bankruptcy, or if the Company or a Guarantor shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company or Guarantors on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may reasonably be required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. 5 (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company or the Guarantors and Subordinated Lender, the unconditional and absolute obligation of the Company and Guarantors to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Notes and Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company and/or Guarantor. 6 (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in those certain Subordinated Notes and/or in any other Subordinated Lender Agreement to the extent necessary for the Company and Guarantors to grant to Briar a Lien on all of their assets, including, but not limited to, a Lien on the Collateral. 3. Miscellaneous. 3.1. Provisions of Subordinated Notes. From and after the date hereof, the Company, the Guarantors, and Subordinated Lender shall cause each Subordinated Note to contain a provision to the following effect: "This Note is subject to that certain Subordination Agreement dated as of November 10, 2004, among the Maker, the Payee, and Briar Capital, L.P., under which this Note and the Maker's obligations hereunder are subordinated in the manner set forth therein to the prior payment of certain obligations to the holders of Briar Obligations as defined in said Subordination Agreement." Proof of compliance with the foregoing shall be promptly given to Briar. 3.2. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 7 3.3. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company, the Guarantors, or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company or Guarantors with such provisions, regardless of the actual or imputed knowledge of Briar. 3.4. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company or a Guarantor under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company or Guarantor shall be deemed to apply to the Company or Guarantor as debtor-in-possession and to a trustee for the Company or Guarantor. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company or Guarantor under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company or Guarantor until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 3.5. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.6. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company, nor any Guarantor, nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company or Guarantor thereunder or in respect thereof, without the prior written consent of Briar. 3.7. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company or to a Guarantor from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 8 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 3.9 Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Notes, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.10. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: 9 If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: c/o Renaissance Capital Group 8080 N. Central Expressway, Suite 210-LB59 Dallas, Texas 75206 Attention: Russell Cleveland Telephone: 214.891.8294 Facsimile: 214.891.8291 If to the Company to: B&B ARMR Corporation 14113 Main Street Norwood, Louisiana 70761 Attention: Peter Beare Telephone: 225.629.5234 Facsimile: 225.629.4128 with a copy to: Haynes & Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 Attention: Jeffrey L. Curtis Telephone: 214.651.5006 Facsimile: 214.200.0720 If to the Guarantors to: Integrated Security Systems, Inc. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Attention: C.A. Rundell, Jr. Telephone: 972.444.8280 Facsimile: 972.869.3843 with a copy to: Haynes & Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 Attention: Jeffrey L. Curtis Telephone: 214.651.5006 Facsimile: 214.200.0720 10 3.11. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company or Guarantors, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 3.12. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent any Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 11 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 12 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company, the Guarantors, and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, the Guarantors, or their successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 13 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. LENDER: COMPANY: --------------------------- ----------------------- BRIAR CAPITAL, L.P., B&B ARMR CORPORATION, a a Texas limited partnership Delaware corporation By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ Peter Beare --------------------- Peter Beare, Chairman By: /S/ Frank Goldberg ------------------- Frank Goldberg, CEO GUARANTORS: ---------------------------------- INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO INTELLI-SITE, INC., a Texas corporation By: /S/ C.A. Rundell, Jr. --------------------------- C.A. Rundell, Jr., Chairman [SIGNATURES CONTINUE ON NEXT PAGE] 14 SUBORDINATED LENDER: ------------------------------------------ RENAISSANCE US GROWTH INVESTMENT TRUST PLC, a public limited company registered in England and Wales By: /S/Russell Cleveland --------------------------- Russell Cleveland, Director RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation By: /S/ Russell Cleveland ------------------------------------ Russell Cleveland, President and CEO BFS US SPECIAL OPPORTUNITIES TRUST PLC, a public limited company registered in England and Wales By: /S/ Russell Cleveland --------------------------- Russell Cleveland, Director 15 EXHIBIT "A" LIST OF CERTAIN PROMISSORY NOTES 16 EX-4 5 exhibit4-48k111604.txt EXHIBIT 4.4 SUBORDINATION AGREEMENT EXHIBIT 4.4 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 10th day of November, 2004, among BRIAR CAPITAL, L.P., a Texas limited partnership ("Briar"), C.A. RUNDELL, JR. (the "Subordinated Lender"), and B&B ARMR CORPORATION, a Delaware corporation (the "Company"). BACKGROUND As an inducement for Briar to enter into a loan arrangement with the Company, the Subordinated Lender enters into this Agreement to (i) subordinate the Subordinated Indebtedness to the Briar Obligations, and (ii) subordinate any and all Liens the Subordinated Lender has with respect to the Collateral to Briar's Liens on the Collateral. AGREEMENTS NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1. General Terms. For purposes of this Agreement, the following terms shall have the following meanings: "Briar Agreements" shall mean collectively the Loan Agreement, as well as the other agreements contemplated by or entered into in connection with the Loan Agreement, each as from time to time in effect. "Briar Obligations" shall mean all obligations of any kind owed by the Company to Briar from time to time under or pursuant to any of the Briar Agreements including, without limitation, all charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Company) chargeable to the Company by Briar, and reimbursement, indemnity or other obligations due and payable to Briar. To the greatest extent allowed by law, the Briar Obligations shall continue to constitute Briar Obligations, notwithstanding the fact that such Briar Obligations or any claim for such Briar Obligations is subordinated, avoided or disallowed under the Code or other applicable law. The Briar Obligations shall also include any obligations or indebtedness of the Company incurred in connection with any loan arrangement entered into by the Company in replacement of or in substitution for the Briar Agreements if the terms and conditions of the agreements, documents and instruments related to such alternative financing arrangement, taken as a whole, are not materially more onerous to the Holder of Subordinated Indebtedness than those set forth in the Briar Agreements, as in effect on the date hereof. "Code" shall mean the United States Bankruptcy Code, as amended from time to time. "Collateral" shall mean: (i) all Accounts, Chattel Paper, Contracts, Documents, Equipment, Fixtures, General Intangibles, Instruments and Inventory (all as defined in the UCC) now owned or hereafter acquired by the Company; (ii) the balance of any deposit accounts, reserve accounts, credit balances or other reserves of any kind maintained by the Company with or by Briar for the benefit of the Company; and (iii) all proceeds (including insurance proceeds) and products of the foregoing, in any form. "Creditor Agreements" shall mean, collectively, the Briar Agreements and the Subordinated Lender Agreements. "Creditors" shall mean, collectively, Briar and Subordinated Lender and their respective heirs, legal representatives, successors and assigns. "Default" shall have the meaning set forth in the Loan Agreement. "Distribution" shall mean any payment, whether in cash, in kind, securities or any other property, or security for any such Distribution. "Event" shall have the meaning set forth in Section 2.2(c) hereof. "Holder of Subordinated Indebtedness" shall mean the Subordinated Lender and any other Person(s) at any time or in any manner acquiring any right or interest in any of the Subordinated Indebtedness, and any successor and assigns of such Person. "Liens" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest or lien arising from a mortgage, security agreement, deed of trust, assignment, collateral mortgage, chattel mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment, bailment for security purposes or certificate of title lien. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. 2 "Loan Agreement" shall mean that certain Loan Agreement dated effective as of the date hereof between the Company and Briar, as the same has or may be amended, supplemented, modified or restated from time to time. "Person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof. "Petition" shall have the meaning given to such term in Section 3.3(a) hereof. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Instruments" shall have the meaning given to such term in the Loan Agreement. "Subordinated Indebtedness" shall mean all principal, interest and other amounts payable or chargeable in connection with the Subordinated Lender Agreements. "Subordinated Lender Agreements" shall mean, collectively, all debentures, promissory notes, agreements, documents and instruments now or at any time hereafter executed and/or delivered by Company or any other person to, with or in favor of Subordinated Lender in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, related to the Company's debt in the original principal amount of $150,000.00 to Subordinated Lender. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas. 1.2. Other Terms. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 1.3. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of Creditor Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. Covenants. Company and each Holder of Subordinated Indebtedness hereby covenant that until the Briar Obligations shall have been paid in full and satisfied in cash and the Loan Agreement shall have been irrevocably terminated, all in accordance with the terms of the Loan Agreement, each will comply with such of the following provisions as are applicable to it: 3 2.1. Transfers. Each Holder of Subordinated Indebtedness covenants that any transferee from him of any Subordinated Indebtedness shall, prior to acquiring such interest, execute and deliver a counterpart of this Agreement to each other party hereto. 2.2. Subordination Provisions. To induce Briar to enter into the Loan Agreement and to loan funds pursuant thereto, notwithstanding any other provision of the Subordinated Lender Agreements to the contrary, any Distribution with respect to the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all amounts due and owing upon all Briar Obligations outstanding from time to time, and any and all Liens granted to or arising in favor of Subordinated Lender in and to any or all of the Collateral shall be subordinate and junior in all respects to all Liens granted to or arising in favor of Briar in the Collateral. Specifically, the Company and each Holder of Subordinated Indebtedness hereby agree, without limitation, as follows: (a) Payments. Company shall make no Distribution on any Subordinated Indebtedness without Briar's prior written consent until such time as the Briar Obligations shall have been paid in full in cash and the Loan Agreement shall have been irrevocably terminated. (b) Limitation on Acceleration. No Holder of Subordinated Indebtedness shall be entitled to accelerate the maturity of the Subordinated Indebtedness, exercise any remedies or commence any action or proceeding to recover any amounts due or to become due with respect to Subordinated Indebtedness unless and until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. (c) Prior Payment of Briar Obligations in Bankruptcy, etc. In the event of any insolvency or bankruptcy proceedings relative to the Company or its Property, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, or if the Company shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Event"), then all Briar Obligations shall be paid in full and satisfied in cash and the Loan Agreement irrevocably terminated before any Distribution shall be made on account of any Subordinated Indebtedness. Any such Distribution which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Briar or its representatives, in the proportions in which they hold the same, until amounts owing upon Briar Obligations shall have been paid in full in cash and the Loan Agreement irrevocably terminated. 4 (d) Power of Attorney. To enable Briar to assert and enforce its rights hereunder in any proceeding referred to in Section 2.2(c) or upon the happening of any Event, Briar or any person whom Briar may designate is hereby irrevocably appointed attorney in fact for Subordinated Lender with full power to act in the place and stead of Subordinated Lender including the right to make, present, file and vote such proofs of claim against the Company on account of all or any part of the Subordinated Indebtedness as Briar may deem advisable and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Briar Obligations. Subordinated Lender will execute and deliver to Briar such instruments as may be reasonably required by Briar to enforce any and all Subordinated Indebtedness, to effectuate the aforesaid power of attorney, and to effect collection of any and all dividends or other payments which may be made at any time on account thereof, and Subordinated Lender hereby irrevocably appoints Briar as the lawful attorney and agent of Subordinated Lender to execute financing statements on behalf of Subordinated Lender and hereby further authorizes Briar to file such financing statements in any appropriate public office. (e) Knowledge. Holders of Subordinated Indebtedness shall be charged with knowledge of any of the events described in Section 2.2(a) hereof which would prohibit receiving and/or retaining Distributions and on such account shall be prohibited from (i) receiving or retaining any payment of monies, and (ii) taking any action regarding acceleration or the exercise of remedies. (f) Payments Held in Trust. Should any Distribution or the proceeds thereof, in respect of the Subordinated Indebtedness, be collected or received by Subordinated Lender or any Affiliate (as such term is defined in Rule 405 of Regulation C adopted by the Securities and Exchange Commission pursuant to the Securities Act of 1933) of Subordinated Lender at a time when Subordinated Lender is not permitted to receive any such Distribution or proceeds thereof, including if same is collected or received when there is or would be after giving effect to such payment a Default or an Event of Default under the Loan Agreement, then Subordinated Lender will forthwith deliver, or cause to be delivered, the same to Briar in precisely the form held by Subordinated Lender (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lender, or any such Affiliate, as the property of Briar and shall not be commingled with other property of the Subordinated Lender or any such Affiliate. (g) Subrogation. Subject to the prior payment in full in cash of the Briar Obligations and the irrevocable termination of the Loan Agreement, to the extent that Briar has received any Distribution on the Briar Obligations which, but for this Agreement, would have been applied to the Subordinated Indebtedness, Subordinated Lender shall be subrogated to the then or thereafter rights of Briar including, without limitation, the right to receive any Distribution made on the Briar Obligations, until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be paid in full; and, for the purposes of such subrogation, no Distribution to Briar to which Subordinated Lender would be entitled except for the provisions of this Agreement shall, as between the Company, its creditors (other than Briar) and Subordinated Lender, be deemed to be a Distribution by the Company to or on account of Briar Obligations, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of Subordinated Lender on the one hand, and Briar on the other hand. 5 (h) Scope of Subordination. The provisions of this Agreement are solely to define the relative rights of any Holder of Subordinated Indebtedness and Briar. Nothing in this Agreement shall impair, as between the Company and Subordinated Lender, the unconditional and absolute obligation of the Company to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Lender Agreements in accordance with the terms thereof, subject to the rights of Briar under this Agreement. (i) Briar Priority Lien on Collateral. All Liens granted to or arising in favor of Subordinated Lender, or any of them, in and to any or all of the Collateral shall be subordinate and junior, and are hereby subordinated in all respects, to all Liens granted to or arising in favor of Briar in the Collateral. (j) Effectiveness of Priorities. The priorities of Liens set forth in this Agreement shall be effective notwithstanding the date, manner or order of perfection, or lack of perfection of any of the Liens in favor of Briar or Subordinated Lender, as such priorities relate to the parties hereto. (k) Event of Default. In the event of default in any of the Briar Agreements, Briar may foreclose against the Collateral in accordance with the terms of the Security Instruments, and, after such foreclosure, may seek a judgment for its deficiency (if any) against the Company. (l) Subordinated Lender Standstill. Notwithstanding any documents or agreements executed in connection with the Subordinated Lender Agreements to the contrary, unless and until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof, Subordinated Lender shall not ask, demand or sue for any right or remedy in respect of all or any part of the Collateral, and Subordinated Lender agrees not to take or receive from any party, directly or indirectly, in cash or other property or by set-off or in any other manner, whether pursuant to any enforcement, collection, execution, levy or foreclosure proceeding or otherwise, any part of the Collateral. Without limiting the generality of the foregoing, until Briar shall have received indefeasible payment in full in cash of all Briar Obligations, and any continuing obligations of Briar to the Company under the Briar Agreements shall have terminated pursuant to the respective terms and provisions thereof: (i) Subordinated Lender shall not exercise or otherwise assert any right or remedy in respect of any part of the Collateral or any Lien thereon; and (ii) the sole right of Subordinated Lender with respect to the Collateral shall be to hold a Lien thereon to the extent granted pursuant to any mortgage and to receive proceeds thereof remaining after such payment and termination. (m) Waivers. Subordinated Lender hereby waives any and all provisions contained in any Subordinated Lender Agreement to the extent necessary for the Company to grant to Briar a Lien on all of its assets, including, but not limited to, a Lien on the Collateral. 6 3. Miscellaneous. 3.1. Additional Agreements. In the event that the Briar Obligations are refinanced in full, Subordinated Lender agrees to enter into a subordination agreement on terms substantially similar to this Agreement at the request of Briar or such refinancing party. 3.2. Survival of Rights. The right of Briar to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of the Company or Briar including forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Briar Obligations or noncompliance by the Company with such provisions, regardless of the actual or imputed knowledge of Briar. 3.3. Bankruptcy Financing Issues. (a) This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against the Company under the Code and all converted or succeeding cases in respect thereof. All references herein to the Company shall be deemed to apply to the Company as debtor-in-possession and to a trustee for the Company. If the Company shall become subject to a proceeding under the Code, and if Briar shall desire to permit the use of cash collateral or to provide post-Petition financing from Briar to the Company under the Code, Subordinated Lender agrees as follows: (1) adequate notice to Subordinated Lender shall be deemed to have been provided for such consent or post-Petition financing if Subordinated Lender receive notice thereof three (3) Business Days (or such shorter notice as is given to Briar) prior to the earlier of (a) any hearing on a request to approve such post-petition financing or (b) the date of entry of an order approving same, and (2) no objection will be raised by Subordinated Lender to any such use of cash collateral or such post-Petition financing from Briar. (b) Subordinated Lender shall not join in, solicit any other person to, or act to cause the commencement of, any case involving the Company under any state or federal bankruptcy or insolvency laws or seek the appointment of a receiver for the affairs or property of the Company until such time as the Briar Obligations shall have been paid in full in cash and the Briar Agreements shall have been irrevocably terminated. 3.4. Receipt of Agreements. Subordinated Lender hereby acknowledges that it has delivered to Briar a correct and complete copy of the Subordinated Lender Agreements as in effect on the date hereof. Subordinated Lender, solely for the purposes of this Agreement, hereby acknowledges receipt of a correct and complete copy of each of the Briar Agreements as in effect on the date hereof. 3.5. No Amendment of Subordinated Lender Agreements. So long as the Loan Agreement remains in effect, neither the Company nor any Holder of Subordinated Indebtedness shall enter into any amendment to or modification of any Subordinated Lender Agreements which relates to or affects the principal amount, interest rate, payment terms, or any other material covenant or agreement of the Company thereunder or in respect thereof, without the prior written consent of Briar. 7 3.6. Amendments to Briar Agreements. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Briar from changing the terms of the Briar Agreements, or to otherwise waive, amend or modify the terms and conditions of the Briar Agreements as permitted therein. Each Holder of Subordinated Indebtedness hereby consents to any and all such waivers, amendments, modifications and compromises, and any other renewals, extensions, indulgences, releases of collateral or other accommodations granted by Briar to the Company from time to time, and agrees that none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness. 3.7. Notice of Default and Certain Events. Briar and the Holders of Subordinated Indebtedness shall undertake in good faith to notify the other of the occurrence of any of the following as applicable: (a) the obtaining of actual knowledge of the occurrence of any default under the Subordinated Lender Agreements, or any of them; (b) the acceleration of any Subordinated Indebtedness by any Holder of Subordinated Indebtedness; (c) the granting by Briar of any waiver of any Event of Default under the Loan Agreement or the granting by any Holder of Subordinated Indebtedness of any waiver of any "default" or "event of default" under the Subordinated Lender Agreements; or (d) The payment in full by the Company (whether as a result of refinancing or otherwise) of all Briar Obligations. The failure of any party to give such notice shall not affect the subordination of the Subordinated Indebtedness as provided in this Agreement. 3.8. Acknowledgement of Termination. Promptly following inquiry from any Holder of Subordinated Indebtedness, Briar or any assignee, as the case may be, shall (i) confirm in writing to the Holder of Subordinated Indebtedness that Briar, or such assignee, is the holder of the Briar Obligations and (ii) inform the Holder of Subordinated Indebtedness in writing either (A) that this Agreement remains in effect, or (B) that the Loan Agreement has been irrevocably terminated and the Briar Obligations satisfied in full. 3.9. Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) on the earlier of actual receipt thereof or three (3) days following posting thereof by certified or registered mail, postage prepaid, or (c) upon actual receipt thereof when sent by a recognized overnight delivery service or (d) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice: 8 If to Briar: Briar Capital, L.P. 1500 City West Boulevard, Suite 225 Houston, Texas 77042 Attention: Steve Rosencranz Telephone: 832.251.1500, ext. 223 Facsimile: 713.532.3430 with a copy to: Boyar & Miller 4265 San Felipe, Suite 1200 Houston, Texas 77027 Attention: Gary W. Miller, Esq. Telephone: 713.850.7766 Facsimile: 713.552.1758 If to Subordinated Lender: C.A. Rundell, Jr. 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Telephone: 214.978.6400 Facsimile: 214.978.6401 with a copy to: Haynes & Boone, LLP 901 Main Street, Suite 3100 Dallas, Texas 75202 Attention: Jeffrey L. Curtis Telephone: 214.651.5006 Facsimile: 214.200.0720 3.10. Books and Records. Subordinated Lender shall (a) make notations on the books of Subordinated Lender beside all accounts or on other statements evidencing or recording any Subordinated Indebtedness to the effect that such Subordinated Indebtedness is subject to the provisions of this Agreement, (b) furnish Briar, upon request from time to time, a statement of the account between Subordinated Lender and the Company, and (c) give Briar, upon its request, full and free access to Subordinated Lender's books pertaining only to such accounts with the right to make copies thereof. 3.11. Binding Effect; Other. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective heirs, legal representatives, successors and assigns, shall be irrevocable and shall remain in full force and effect until the Briar Obligations shall have been satisfied or paid in full in cash and the Loan Agreement shall have been irrevocably terminated, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any amount paid by or on behalf of the Company with regard to the Briar Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for the Company or any substantial part of its property, or otherwise, all as though such payments had not been made. No action which Briar or the Company may take or refrain from taking with respect to the Briar Obligations, including any amendments thereto, shall affect the provisions of this Agreement or the obligations of Subordinated Lender hereunder. Any waiver or amendment hereunder must be evidenced by a signed writing of the party to be bound thereby and shall only be effective in the specific instance. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof. 9 4. Representations and Warranties. (a) Subordinated Lender represents and warrants to Briar that Subordinated Lender is the holder of the Subordinated Indebtedness. Subordinated Lender agrees that it shall not assign or transfer any of the Subordinated Indebtedness without (i) prior notice being given to Briar and (ii) such assignment or transfer being made expressly subject to the terms of this Agreement. Subordinated Lender further warrants to Briar that it has full right, power and authority to enter into this Agreement and, to the extent Subordinated Lender is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. (b) Briar represents and warrants to Subordinated Lender that Briar is the holder of the Briar Obligations. Briar agrees that it shall not assign or transfer any of the Briar Obligations without (i) prior notice being given to Subordinated Lender and (ii) such assignment or transfer being made expressly subject to the terms and provisions of this Agreement. Briar further warrants to Subordinated Lender that it has full right, power and authority to enter into this Agreement and, to the extent Briar is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties. 5. Proceedings. ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY WITH RESPECT TO THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF TEXAS, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT EACH PARTY THERETO ACCEPTS FOR THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BRIAR TO BRING PROCEEDINGS AGAINST SUBORDINATED LENDER OR THE COMPANY IN ANY COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY SUBORDINATED LENDER OR THE COMPANY AGAINST BRIAR INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE CITY OF HOUSTON, STATE OF TEXAS; PROVIDED THAT NOTWITHSTANDING THE FOREGOING, IF IN ANY JUDICIAL PROCEEDING BY OR AGAINST SUBORDINATED LENDER OR THE COMPANY THAT IS BROUGHT IN ANY OTHER COURT SUCH COURT DETERMINES THAT BRIAR IS AN INDISPENSABLE PARTY, SUBORDINATED LENDER OR THE COMPANY SHALL BE ENTITLED TO JOIN OR INCLUDE EACH PARTY HERETO IN SUCH PROCEEDINGS IN SUCH OTHER COURT. SUBORDINATED LENDER AND THE COMPANY WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 10 6. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF ANY CREDITOR, BRIAR OR THE COMPANY OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENTS OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THEIR CONSENT TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 7. Company Acknowledgement. The Company agrees that (i) nothing contained in this Agreement shall be deemed to amend, modify, supercede or otherwise alter the terms of the respective agreements between the Company and each Creditor, and (ii) this Agreement is solely for the benefit of the Creditors and shall not give the Company, its successors or assigns or any other person, any rights vis-a-vis any Creditor. 8. Counterparts; Facsimile. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above. BRIAR: -------------------- BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ Frank Goldberg ------------------- Frank Goldberg, CEO COMPANY: -------------------- B&B ARMR CORPORATION, a Delaware corporation By: /S/ Peter Beare --------------------- Peter Beare, Chairman SUBORDINATED LENDER: -------------------- /S/ C.A. RUNDELL, JR. --------------------- C.A. RUNDELL, JR., Individually 12 EX-4 6 exhibit4-58k111604.txt EXHIBIT 4.5 GUARANTY AGREEMENT EXHIBIT 4.5 GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty"), dated as of November 10, 2004, is made by INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation ("Guarantor"), whose address is 8200 Springwood Drive, Suite 230, Irving, Texas 75063, in favor of BRIAR CAPITAL, L.P., a Texas limited partnership (together with its successors and assigns, collectively, "Lender"). PRELIMINARY STATEMENTS A. In accordance with that certain Loan Agreement dated of even date herewith (as amended, modified or supplemented from time to time, the "Loan Agreement"), between B&B ARMR CORPORATION, a Delaware corporation ("Borrower"), and Lender, Lender has agreed to, among other things, extend to Borrower certain credit facilities not to exceed $3,000,000 under certain conditions. B. In satisfaction of the requirements under the Loan Agreement, Guarantor has agreed to enter into this Guaranty to guarantee, among other things, the Secured Liabilities of Borrower under the Loan Agreement. C. Guarantor's shareholders and directors reasonably believe that Guarantor's execution of this Guaranty will benefit Guarantor. NOW, THEREFORE, in consideration of the premises and in order to induce Lender to enter into and extend credit pursuant to the Loan Agreement, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by Guarantor, Guarantor hereby agrees as follows: SECTION 1. Defined Terms; Interpretation. 1.01 Defined Terms. (a) Those initial capitalized terms and phrases used in this Guaranty but not defined in this Guaranty shall have the meanings ascribed to such terms in the Loan Agreement. (b) As used in this Guaranty, the following terms shall have the following meanings: "Borrower" has the meaning specified in paragraph A of the Preliminary Statements. "Event of Default" has the meaning specified in the Loan Agreement. "Financing Documents" means the Loan Agreement, the Security Documents, and any other agreement, deed, document or letter setting out the terms of or constituting any indebtedness of any Obligor to Lender, together with any documents ancillary or relating to all or any of them. "Guaranteed Obligations" has the meaning specified in Section 2(a). "Guarantor" has the meaning specified in the Introduction. "Guaranty" has the meaning specified in the Introduction. "Indemnitees" has the meaning specified in Section 19. "Lender" has the meaning specified in the Introduction. "Loan Agreement" has the meaning specified in paragraph A of the Preliminary Statements. "Note" shall have the meaning ascribed to such term in the Loan Agreement. "Obligor" means Borrower, Guarantor and any other Person that has or that will have any liability (actual or contingent) and whether alone or jointly with any other Person and whether as principal debtor, guarantor or surety or otherwise (or as the equivalent obligor under the laws of any jurisdiction) to Lender for the payment or repayment of any amounts outstanding or capable of becoming outstanding under the Financing Documents. "Person" means any natural person, corporation, partnership, firm, association, trust, unincorporated organization, limited liability company, governmental authority or other entity, whether acting in an individual, fiduciary or other capacity. "Secured Liabilities" means all present and future obligations and liabilities (whether actual or contingent and whether now or hereafter owed jointly or severally or as principal debtor, guarantor, surety or otherwise or as the equivalent obligor under the laws of any jurisdiction) of each Obligor to Lender under all or any of the Financing Documents together with: (a) costs, charges and expenses incurred by Lender in connection with or the protection, preservation or enforcement of Lender's rights under the Financing Documents; (b) any refinancing, novation, refunding, deferral, modification, renewal or extension of or increase in any of those obligations or liabilities; (c) any further advances which may be made by Lender to any Obligor under any agreement expressed to be supplemental to any of the Financing Documents and all interest, fees and costs in connection therewith; (d) any claim for damages or restitution in the event of rescission of any of those obligations or liabilities or otherwise in connection with the Financing Documents; 2 (e) any claim against any Obligor flowing from the recovery by an Obligor of a payment or discharge in respect of any of those obligations or liabilities on grounds of preference or otherwise; (f) all other amounts now or in the future owed by an Obligor to Lender; and (g) any amounts which would be included in any of the foregoing but for any discharge, non-provability, unenforceability or non-allowability of the same in any insolvency, bankruptcy or other proceedings. "Security Documents" means each of the documents (including security agreements, guaranties, mortgages, deeds of trust, pledges and other security documents) executed by all or any Obligor from time to time including this Guaranty and any other agreements intended to provide Lender with security for any Secured Liabilities of any Obligor to Lender or to guarantee such Secured Liabilities. 1.02 Interpretation. (a) In this Guaranty, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Guaranty as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Guaranty, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) of Section 1.02(a) is intended to authorize any assignment not otherwise permitted by this Guaranty or the Loan Agreement; (v) reference to any agreement (including this Guaranty), document or instrument means such agreement, document or instrument as amended, modified, supplemented or extended and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of this Guaranty, and references to any note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement for such note; (vi) unless the context indicates otherwise, reference to any Section, clause, paragraph, Schedule or Exhibit means such Section, clause or paragraph of this Guaranty or such Schedule or Exhibit to this Guaranty; 3 (vii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; the word "or" is not exclusive; and the word "all" includes "and" and the word "any" includes "all"; (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Section and other headings in this Guaranty are for convenience only and shall not affect the construction of this Guaranty. (c) No provision of this Guaranty shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 2. Guaranty. (a) Guarantor hereby absolutely, unconditionally and irrevocably, guarantees (as primary obligor and not merely as surety) the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Secured Liabilities, whether for principal, interest (including interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to any Obligor under any bankruptcy or insolvency proceeding), fees, commissions, expenses (including court costs and reasonable counsel fees and expenses), and agrees to pay all costs and expenses, if any, incurred by Lender in connection with enforcing any rights under this Guaranty. The obligations of Guarantor to Lender under this Guaranty are referred to in this Guaranty as the "Guaranteed Obligations"; provided, that the Guaranteed Obligations of Guarantor under this Guaranty shall not exceed an amount that is $1.00 less than that amount that would render Guarantor's obligations under this Guaranty subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state or foreign law. (b) Guarantor agrees that the Secured Liabilities may at any time and from time to time exceed the Guaranteed Obligations of Guarantor without impairing this Guaranty or affecting the rights and remedies of Lender. (c) No payment made by any Obligor or any other guarantor (other than Guarantor making such payment) or any other Person or received or collected by Lender from any Obligor, any such other guarantor (other than Guarantor making such payment) or any other Person (other than Guarantor making such payment) by virtue of any action or proceeding or any set-off or appropriation or application at any time in reduction of or in payment of the Secured Liabilities shall be deemed to modify, reduce, release or otherwise affect the liability of Guarantor for the Guaranteed Obligations under this Guaranty. 4 (d) This Guaranty is an absolute, unconditional, present and continuing guaranty of payment and performance and not of collectibility and is in no way conditioned upon any attempt to collect from any other Obligor or any other action, occurrence or circumstance whatsoever. SECTION 3. Continuing Guaranty. Guarantor guarantees that the Guaranteed Obligations will be paid promptly within five (5) days upon written demand by Lender strictly in accordance with the terms of this Guaranty. Subject to the termination of this Guaranty after the payment in full of all Guaranteed Obligations in accordance with Section 14, the obligations of Guarantor under this Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Guaranty, notwithstanding: (a) any extension, renewal, modification, settlement, compromise, waiver or release in respect of any Guaranteed Obligations; (b) any extension, renewal, amendment, modification, rescission, waiver or release in respect of any Financing Document; (c) any release, exchange, substitution, non-perfection or invalidity of, or failure to exercise rights or remedies with respect to, any direct or indirect security for any Guaranteed Obligations, including the release of any other guarantor or other Person liable on any obligations of an Obligor under the Financing Documents; (d) any change in the existence, structure or ownership of any Obligor or any other guarantor or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Obligor, any guarantor or any of their respective assets; (e) the existence of any claim, defense, set-off or other rights or remedies which any other guarantor at any time may have against any Obligor, or any Obligor or any other guarantor may have at any time against Lender or any other Person, whether in connection with this Guaranty, the Financing Documents, the transactions contemplated hereby or thereby or any other transaction; (f) any invalidity or unenforceability for any reason of this Guaranty or the other Financing Documents, or any provision of law purporting to prohibit the payment or performance by any Obligor or any other guarantor of the Guaranteed Obligations or the Financing Documents, or of any other obligation to Lender; (g) any failure to give notice of the occurrence of an Event of Default; or (h) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 5 SECTION 4. Effect of Debtor Relief Laws. If, after receipt of any payment of, or proceeds of any security applied (or intended to be applied) to the payment of, all or any part of the Guaranteed Obligations, Lender is for any reason compelled to surrender such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be under applicable law avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-off or a diversion of trust funds, or (b) for any other reason under applicable law, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over Lender or any of its properties, or (ii) any settlement or compromise of any such claim effected by Lender with any such claimant (including any Obligor), then the Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of any instrument evidencing any Guaranteed Obligations or otherwise; and Guarantor shall be liable to pay Lender, and hereby does indemnify Lender and hold Lender harmless for the amount of such payment or proceeds so surrendered and all expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by Lender in the defense of any claim made against it that any payment or proceeds received by Lender in respect of all or part of the Guaranteed Obligations must be surrendered. The provisions of this Section 4 shall survive the termination of this Guaranty, and any satisfaction or discharge of any Obligor by virtue of any payment, court order or any foreign, federal or state law. If an Event of Default shall at any time have occurred and be continuing and declaration of such Event of Default shall at such time be prevented by reason of the pendency against any Obligor of a case or proceeding under a bankruptcy or insolvency law, Guarantor agrees that, for purposes of this Guaranty and its obligations hereunder, the Secured Liabilities shall be deemed to have been declared in default in accordance with the terms of the Loan Agreement or other applicable Financing Documents, and Guarantor shall forthwith pay the amounts specified by Lender to be paid thereunder, any interest thereon and any other amounts guaranteed under this Guaranty without further notice or demand. SECTION 5. Subrogation. Notwithstanding any payment or payments made by Guarantor under this Guaranty, or any set-off or application by Lender of any security or of any credits or claims, so long as any Obligation exists under any Financing Document, Guarantor hereby agrees that it will not, before the Secured Liabilities have been paid in full, assert or exercise any rights of Lender or Guarantor against any other Obligor to recover the amount of any payment made by Guarantor to Lender under this Guaranty by way of any claim, remedy or subrogation, reimbursement, exoneration, contribution, indemnity, participation or otherwise arising by contract, by statute, under common law or otherwise, and Guarantor hereby agrees that it shall, before the Secured Liabilities have been paid in full, have no right of recourse to or any claim against assets or property of any other Obligor, all of such rights being expressly waived by Guarantor. If any amount shall nevertheless be paid to Guarantor by any other Obligor or another guarantor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of Lender and shall forthwith be paid to Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. 6 SECTION 6. Subordination. Guarantor hereby subordinates all indebtedness owing to it from each Obligor to all indebtedness of each Obligor to Lender, and agrees that upon the occurrence and continuance of an Event of Default, Guarantor shall not be entitled to accept any payment of the same until payment in full of the Secured Liabilities under the Financing Documents, and Guarantor shall not, under any circumstance whatsoever, attempt to set-off or reduce any obligations under this Guaranty because of such indebtedness. If any amount shall nevertheless be paid to Guarantor by any other Obligor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of Lender and, on demand by Lender, shall forthwith be paid to Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. SECTION 7. Waiver. Except for the limited notice provided in Section 3 of this Guaranty, Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and waives presentment, demand of payment, notice of intent to accelerate, notice of acceleration, notice of dishonor or nonpayment and any requirement that Lender institute suit, collection proceedings or take any other action to collect the Guaranteed Obligations, including any requirement that Lender protect, secure, perfect or insure any lien against any property subject thereto or exhaust any right or take any action against any Obligor or any other Person or any collateral (it being the intention of Lender that this Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for Lender, in order to enforce any payment by Guarantor under this Guaranty, to mitigate damages or to institute suit or exhaust its rights and remedies against any Obligor or any other Person, including others liable to pay any Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. Guarantor hereby waives marshaling of assets and liabilities, notice by Lender of any indebtedness or liability to which Lender applies or may apply any amounts received by Lender, and of the creation, advancement, increase, existence, extension, renewal, rearrangement and/or modification of the Guaranteed Obligations. SECTION 8. Representations and Warranties. Guarantor hereby represents and warrants as follows: (a) that Guarantor has had full and complete access to the Loan Agreement and the other Financing Documents and has reviewed same and is aware of their contents; (b) that Guarantor has the power and authority to execute, deliver and perform its obligations hereunder and under the other Financing Documents to which it is a party. The Financing Documents to which Guarantor is a party have been duly and validly executed and delivered by Guarantor and constitute valid and legally binding agreements of Guarantor enforceable in accordance with the respective terms thereof, except, in each case, as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally and general principles of equity; (c) that no authorization, consent, approval, license or exception of or filing or registration with any court or government department, commission, board, bureau, agency or instrumentality, is necessary for the valid execution, delivery or performance by Guarantor of this Guaranty or any other Financing Document to which it is a party; and 7 (d) that the execution, delivery and performance of this Guaranty and the other Financing Documents to which it is a party does not (i) result in breach of, or constitute a default under, any contract, lease, instrument or other agreement to which Guarantor presently is a party, or (ii) result in or require the creation or imposition of, any mortgage, deed of trust, pledge, lien, security interest (other than pursuant to this Guaranty or such other Financing Document) or other share or encumbrance of any nature upon or with respect to any of Guarantor's property or interests, be they tangible or intangible. Guarantor is not in violation of or in default under any material indenture, agreement, lease or instrument. SECTION 9. Affirmative Covenants. Guarantor covenants and agrees to promptly execute and deliver to Lender upon reasonable notice and request all such other documents, agreements and instruments in compliance with the covenants and agreements of Guarantor herein as Lender may reasonably request from time to time. Without limiting the generality of the foregoing, Guarantor will, so long as this Guaranty is in effect, furnish, or cause to be furnished, to Lender: (i) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Guarantor, a copy of the audited financial statements of Guarantor and its subsidiaries, if any, for such fiscal year containing, on a consolidated and consolidating basis, balance sheets and statements of income, retained earnings, and cash flow as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all prepared in accordance with GAAP, audited by an independent certified public accountant acceptable to the Lender, and certified by Guarantor that such financial statements have been prepared in accordance with GAAP, and (i) are true and correct, (ii) fairly present the financial condition of Guarantor and (iii) reflect the consistent application of accounting principles used to prepare such financial statements as well as such other financial statements of Guarantor previously delivered to Lender. (ii) Tax Returns. As soon as available, and in any event within sixty (60) days after filing, a copy of the income tax return filed by Guarantor after the end of each fiscal year. SECTION 10. Amendments. The terms of this Guaranty may be waived, altered or amended only by an instrument in writing duly executed by Guarantor and Lender. Any such amendment or waiver shall be binding upon Lender, each holder of any of the Secured Liabilities and Guarantor. SECTION 11. Addresses for Notices. All communications under or in connection with this Guaranty shall be in writing and shall be mailed by registered or certified mail, return receipt requested, postage prepaid, or personally delivered to an officer of the receiving party. All such communications shall be mailed or delivered as follows: 8 (a) If to the Guarantor, to the address set forth at the beginning of this Guaranty, or to such other address or to such individual's or department's attention as it may have furnished the Lender in writing; (b) If to the Lender, Briar Capital, L.P., 1500 City West Boulevard, Suite 225, Houston, Texas 77042, or to such other address or to such individual's or department's attention as it may have furnished to the Guarantor in writing. Any notice so addressed and mailed by registered or certified mail, return receipt requested, shall be deemed to be given when so mailed, and any notice so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of the Borrower or the Lender, as the case may be. SECTION 12. No Waiver, Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise of any right under this Guaranty preclude any other or further exercise thereof or the exercise of any other right. The remedies in this Guaranty provided are cumulative and not exclusive of any remedies provided by law. SECTION 13. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default or default under the Financing Documents, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Guarantor against any and all of the obligations of Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not Lender shall have made any demand under this Guaranty and although such obligations may be contingent and unmatured. Lender agrees promptly to notify Guarantor after any such set-off and application, provided the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section 13 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which Lender may have. SECTION 14. Continuing Guaranty; Successors and Assigns; Transfer of the Financing Documents. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until payment in full of the Guaranteed Obligations, (b) be binding upon Guarantor, its successors, transferees and assigns, provided, however, that Guarantor shall not assign or transfer its rights or obligations under this Guaranty without the prior written consent of Lender, and (c) inure to the benefit of and be enforceable by Lender and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c) of this Section 14, Lender may assign or otherwise transfer all or a portion of its interests, rights and obligations under the Financing Documents to which it is a party. Any assignment in violation of this Section 14 shall be void and without force or effect. SECTION 15. Separability. Should any clause, sentence, paragraph, subsection or section of this Guaranty be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Guaranty, and the parties hereto agree that the part or parts of this Guaranty so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom by the parties hereto, and the remainder will have the same force and effectiveness as if such stricken part or parts had never been included herein. 9 SECTION 16. Usury. Notwithstanding any other provisions contained in this Guaranty, no provision of this Guaranty shall require or permit the collection from Guarantor of interest in excess of the maximum non-usurious rate of interest permitted by applicable foreign, federal or state law. SECTION 17. Survival. All warranties and representations made by Guarantor herein or in any certificate or other instrument executed and delivered by Guarantor under this Guaranty shall be considered to have been relied upon by Lender and shall survive the execution and delivery of this Guaranty, regardless of any investigation made by or on behalf of any thereof. All statements in any such certificate or other instrument shall constitute warranties and representations by Guarantor under this Guaranty. SECTION 18. Limitation by Law. All rights, remedies and powers provided in this Guaranty may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Guaranty are intended to be subject to all applicable mandatory provisions of law which may be controlling from time to time and to be limited to the extent necessary so that they will not render this Guaranty invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. SECTION 19. Indemnity. Guarantor agrees to indemnify and shall indemnify Lender and its affiliates, directors, officers, employees and agents (such indemnified Persons called the "Indemnitees") from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from this Guaranty or any other Financing Document to which Guarantor is a party or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing, and Guarantor shall reimburse each Indemnitee, upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence, willful misconduct or unlawful acts of such Indemnitee. WITHOUT LIMITING ANY PROVISION OF THIS GUARANTY, IT IS THE EXPRESS INTENTION OF GUARANTOR THAT EACH INDEMNITEE SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ALL SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISING OUT OF OR RESULTING FROM THE SOLE, ORDINARY OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE, BUT NOT FROM THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL ACTS OF SUCH INDEMNITEE. Without prejudice to the survival of any other obligations of Guarantor under this Guaranty and under the other Financing Documents to which Guarantor is a party, the obligations of Guarantor under this Section 19 shall survive the termination of this Guaranty and the other Financing Documents and the payment of the Secured Liabilities or the assignment of the Financing Documents. 10 SECTION 20. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. SECTION 21. SUBMISSION TO JURISDICTION. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY AND THE OTHER FINANCING DOCUMENTS EXECUTED BY GUARANTOR MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS GUARANTY, GUARANTOR HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. GUARANTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT PURSUANT TO SECTION 11 OF THIS GUARANTY, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS GUARANTY SHALL AFFECT THE RIGHT OF LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST GUARANTOR IN ANY OTHER JURISDICTION. (b) GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) OF THIS SECTION 21 AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. SECTION 22. WAIVER OF JURY TRIAL. GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS GUARANTY OR ARISING FROM OR RELATING TO THIS GUARANTY, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 11 SECTION 23. FINAL EXPRESSION. THIS WRITTEN GUARANTY REPRESENTS THE FINAL AGREEMENT OF THE GUARANTOR REGARDING THE SUBJECT MATTER HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE GUARANTOR AND ANY OTHER PARTY REGARDING THE SUBJECT MATTER HEREOF. [SIGNATURE FOLLOWS ON NEXT PAGE] 12 IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered to be effective as of the date first above written. INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO 13 EX-4 7 exhibit4-68k111604.txt EXHIBIT 4.6 GUARANTOR SECURITY AGREEMENT EXHIBIT 4.6 GUARANTOR SECURITY AGREEMENT THIS GUARANTOR SECURITY AGREEMENT (this "Security Agreement") is made as of the date set forth on the signature page hereof by and between INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation, whose chief executive office, chief place of business and mailing address is 8200 Springwood Drive, Suite 230, Irving, Texas 75063 (the "Company"), and BRIAR CAPITAL, L.P., a Texas limited partnership, whose address is 1500 City West Boulevard, Suite 225, Houston, Harris County, Texas 77042 (the "Lender"). W I T N E S S E T H: WHEREAS, B&B ARMR Corporation, a Delaware corporation ("Borrower") has executed a Revolving Promissory Note dated of even date herewith in the original principal amount of up to $3,000,000 (the "Revolving Promissory Note" and sometimes referred to herein as the "Note") in favor of the Lender; WHEREAS, the Company has executed a Guaranty Agreement on even date herewith (the "Guaranty Agreement"), pursuant to which the Company promised to guaranty payment of certain obligations, which obligations are more particularly set forth in the Guaranty Agreement; WHEREAS, it is a condition precedent to the obligation of the Lender to fund under the Note that the Company shall have entered into this Security Agreement for the purpose of securing the payment and performance by the Company of its obligations under the Guaranty Agreement; WHEREAS, the Company expects to receive a material benefit from the Borrower receiving the Loan; NOW, THEREFORE, to induce the Lender to accept the Note from the Borrower, and in consideration thereof and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. Defined Terms. (a) Unless otherwise defined in this Security Agreement, terms defined in Chapter 9 of the UCC are used in this Security Agreement as defined in Chapter 9 of the UCC. (b) As used in this Security Agreement, the following terms shall have the following meanings: "Borrower Security Agreement" means that certain security agreement dated of even date herewith by and between Borrower and Lender. "Collateral" has the meaning specified in Section 2. "Equipment" means all "equipment" (as defined in the UCC) wherever located, now or hereafter existing and all parts thereof and all accessions thereto. "Event of Default" has the meaning specified in Section 10. "Financing Documents" means the Borrower Security Agreement, the Guarantor Security Agreements, the Loan Agreement, the Note, the Guaranty Agreements and any other documents entered into in connection with the Lender loaning monies to the Borrower under the Note. "Guarantor Security Agreements" means the respective Guarantor Security Agreements dated of even date herewith between Lender and: (i) Integrated Security Systems, Inc. and (ii) Intelli-Site, Inc.; all as amended from time to time, pursuant to which certain assets of such companies are pledged to Lender to secure the Secured Liabilities as defined in the respective Guarantor Security Agreements. "Guarantors" means Integrated Security Systems, Inc. and Intelli-Site, Inc. "Guaranty Agreements" means those certain Guaranty Agreements dated of even date herewith executed by each of the Guarantors, as each may be amended or supplemented from time to time. "Inventory" means all "inventory" (as defined in the UCC) in all of its forms, wherever located, now or hereafter existing and whether acquired by purchase, merger or otherwise, including (a) all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished and (b) all raw materials, work in process, all finished goods and all materials and supplies used, consumed or to be used or consumed in the manufacture, packing, shipping, advertising, selling, leasing or production of such inventory, including (whether or not included in such UCC definition) goods in which the Company has an interest in mass or joint or other interest or right of any kind and goods that are returned to or repossessed by the Company and all accessions thereto and products thereof and all documents of title therefor. "Loan Agreement" means that certain Loan Agreement dated as of even date herewith between Borrower and Lender, as amended or supplemented from time to time. "Note" means that certain Revolving Credit Note dated of even date herewith in the original principal amount of up to $3,000,000 executed by the Borrower in favor of the Lender. "Perfection Certificate" means a certificate substantially in the form of Exhibit A to this Security Agreement, completed and supplemented with the schedules and attachments contemplated by such form of certificate to the satisfaction of the Lender, and duly executed by an officer or other authorized representative of the Company. "Permitted Collateral Liens" means (a) the Security Interest, (b) liens for taxes not yet delinquent or which are being contested in good faith by appropriate proceedings; provided that adequate reserves with respect thereto are being maintained on the books of the Company in conformity with GAAP, (c) liens (other than liens in favor of landlords or taxing entities) in favor of carriers', warehouseman's, mechanics', materialmen's, repairmen's or other like liens arising in the ordinary course of business and not overdue for a period of more than sixty (60) days or which are being contested in good faith by appropriate proceedings, (d) liens in favor of landlords of the Company, provided that all such liens must be subordinated to Lender's Security Interest, (e) liens securing equipment acquired in the ordinary course of business under equipment leases or vendor-financed purchases, provided that the Company is current in the payment of all amounts owed under such leases or purchase money financings, (f) nonconsensual liens and rights of financial institutions in checking, savings, money market and similar accounts opened and maintained by the Company in the ordinary course of business, and (g) liens subordinated to Lender pursuant to security agreements acceptable to Lender. 2 "Proceeds" means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, Collateral, including, without limitation, all claims of the Company against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. "Receivables" means all "accounts", "chattel paper", "instruments", "documents", "general intangibles" (including "payment intangibles") (as each such term is defined in the UCC) and other obligations owed to the Company of any kind, now or hereafter existing, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and whether or not evidenced by a written agreement, and all rights now or hereafter existing in and to all security agreements, leases, and other contracts including support agreements (as such term is defined in the UCC) (all such written or unwritten agreements, security agreements, leases and other contracts, including all support agreements, being the "Related Contracts"), securing or otherwise relating to any such accounts, chattel paper, instruments, documents, general intangibles or other obligations. "Secured Liabilities" means all present and future obligations and liabilities (whether actual or contingent and whether now or hereafter owed jointly or severally or as principal debtor, guarantor, surety or otherwise or as the equivalent obligor under the laws of any jurisdiction) of the Guarantors or the Borrower to the Lender, including, without limitation, under any of the Financing Documents, together with: (i) all costs, charges and expenses incurred by the Lender in connection with or arising out of the protection, preservation or enforcement of the Lender's rights under the Financing Documents; (ii) any modification, renewal or extension of or increase in any of those obligations or liabilities; (iii) any claim for damages or restitution in the event of rescission of any of those obligations or liabilities or otherwise in connection with the Financing Documents; (iv) any claim against the Borrower or the Company flowing from the recovery by the Borrower or the Company of a payment or discharge in respect of any of those obligations or liabilities on grounds of preference or otherwise; (v) all other amounts now or in the future owed by the Borrower to the Lender; and 3 (vi) any amounts that would be included in any of the foregoing but for any discharge, non-provability, unenforceability or non-allowability of the same in any insolvency, bankruptcy or other proceedings. "Security Interest" means the security interest granted in accordance with Section 2, as well as all other security interests created or assigned as additional Collateral for the Secured Liabilities in accordance with the provisions of this Security Agreement or otherwise. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Security Agreement relating to such perfection or effect of perfection or non-perfection. 2. Security Interest. (a) In order to secure the full and punctual payment of the Secured Liabilities in accordance with the terms thereof, including, without limitation, to secure the performance of all of the obligations of the Company under the Guaranty and this Security Agreement, the Company hereby grants and assigns to the Lender a continuing security interest in and to all right, title and interest of the Company in all of the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) Equipment; (ii) Inventory; (iii) Receivables; (iv) Related Contracts; and (v) All Proceeds of or substitutions for all or any of the Collateral described in Clauses (i), (ii), (iii) and (iv) of this Section 2(a). (b) The Security Interest is granted as security only and shall not subject the Lender to, or transfer or in any way affect or modify, any obligation or liability of the Company with respect to any of the Collateral or any transaction in connection therewith. (c) The inclusion of Proceeds in this Security Agreement does not authorize the Company to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized by the Financing Documents. 3. Representations and Warranties. The Company represents and warrants as follows: (a) The exact legal name of the Company, as the legal name appears in the Company's articles of incorporation (or similar organizational document filed with the State of its origin) as of the date of this Security Agreement, is as set forth in the introductory paragraph of this Security Agreement. The Company has no other tradename except as listed on the Perfection Certificate. 4 (b) The place of business or, if the Company has more than one place of business, the chief executive office is located at the address of the Company specified in the Perfection Certificate. (c) All of the Company's Inventory and Equipment is located at the places specified in paragraph 2(c) of the Perfection Certificate attached to this Security Agreement. Except as set forth on the Perfection Certificate, the Company has exclusive possession and control of the Inventory and Equipment. (d) The office where the Company keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, is located at the address of the Company specified in paragraph 2(b) of the Perfection Certificate. None of the Receivables is evidenced by a promissory note or other instrument. (e) The Company owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the Permitted Collateral Liens. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed relating to Permitted Collateral Liens. (f) This Security Agreement creates a valid and perfected first priority security interest in the Collateral (except with respect to Permitted Collateral Liens), securing the payment of the Secured Liabilities, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. (g) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Company of the security interest granted hereby or for the execution, delivery or performance of this Security Agreement by the Company, or (ii) for the perfection of or the exercise by the Lender of their rights and remedies under this Security Agreement, including without limitation, the filing of a UCC-1 financing statement. (h) The Company is "located" (as such term is defined and used in the UCC) in its jurisdiction of incorporation specified in the Perfection Certificate. (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the Company's jurisdiction of incorporation, qualified to do business in all jurisdictions in which the nature of the business conducted by the Company makes such qualification necessary and where failure so to qualify would otherwise have a material adverse effect on the Company's financial condition, or the Company's ability to perform all the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. (j) The Company is not in violation of any applicable law, which violations, individually or in the aggregate, would affect the Company's performance of any obligation under this Security Agreement or the other Financing Documents to which the Company is a party; there is no litigation before any court or governmental authority now pending or (to the Company's knowledge after reasonable inquiry) threatened against the Company which, if adversely determined, could reasonably be expected to have a material adverse effect on the Company's financial condition, or ability to perform all the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. 5 (k) The Company is the holder of all governmental approvals, permits and licenses required to permit the Company to conduct its business as currently conducted and to enter into and perform the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. (l) None of the execution and delivery of this Security Agreement, the consummation of the transactions contemplated in this Security Agreement or the other Financing Documents to which the Company is a party, or compliance with the terms and provisions of this Security Agreement or the other Financing Documents to which the Company is a party will conflict with or result in a breach of, or require any consent under, the Company's charter or bylaws, or any applicable law, or any agreement or instrument to which the Company is a party or by which the Company is bound or to which the Company or any of the Company's respective assets are subject, or constitute a default under any such agreement or instrument. (m) The Company has all necessary power and authority to execute, deliver and perform the Company's respective obligations under this Security Agreement and the other Financing Documents to which the Company is a party; the Company's execution, delivery and performance of this Security Agreement and the other Financing Documents to which the Company is a party has been duly authorized by all necessary action on the Company's part; and this Security Agreement and the other Financing Documents to which the Company is a party have been duly and validly executed and delivered by the Company and each constitutes the Company's legal, valid and binding obligation, enforceable in accordance with its and their terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 4. Places of Business. The Company will notify the Lender promptly of the addition or discontinuance of any place of business or any change in the address of its principal or any other place of business. None of the Collateral shall be removed from the locations specified herein or in the Perfection Certificate, as from time to time supplemented, unless the Lender is given thirty (30) days prior written notice of such removal, which notice shall state the location or locations to which said Collateral will be removed. The Company warrants that all of the Collateral is and shall continue to be located at the locations set forth herein, in the Perfection Certificate or such other locations of which the Lender receives notice in accordance with this Section. 5. Encumbrances. The Company will not create, incur, assume, or suffer to exist now or at any time throughout the duration of the term of this Security Agreement, any lien, security interest or other encumbrances against the Collateral, whether now owned or hereafter acquired, except for liens in favor of the Lender, any Permitted Collateral Liens, and any other liens allowed in writing by the Lender. If such a lien, security interest or other encumbrance is not a Permitted Collateral Lien, then the Company will notify the Lender of any lien, security interest or other encumbrance securing an obligation against the Collateral, and will defend the Collateral against such claim, lien, security interest or other encumbrance adverse to the Lender. 6 6. Maintenance of Collateral. The Company shall preserve the Collateral for the benefit of the Lender. Without limiting the generality of the foregoing, the Company shall: (a) make all such repairs, replacements, additions and improvements to its Equipment as in its judgment are necessary to permit the Company's business to be properly and advantageously conducted at all times; (b) preserve all beneficial contract rights to the extent commercially reasonable and related to the Collateral; (c) in conjunction with, and at the direction of, the Lender, take commercially reasonable steps to collect all Receivables; and (d) pay all taxes, assessments or other charges on the Collateral when due, unless the amount or validity of such taxes, assessments or charges are being contested in good faith by appropriate proceedings and reserves have been provided on its books with respect thereto in conformity with generally accepted accounting principles. Nothing contained herein shall be construed to prohibit the Company from buying and selling Inventory or Equipment in the ordinary course of business; provided, however, any Equipment sold is replaced by new Equipment. 7. Additional Provisions Concerning the Collateral. (a) The Company authorizes the Lender to file, without the signature of the Company, where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral, all in the discretion of the Lender. (b) The Company hereby irrevocably appoints the Lender as its attorney-in-fact (which power of attorney is coupled with an interest) and proxy, with full authority in the place and stead of the Company and in its name or otherwise, from time to time in the Lender's discretion, to take any action or execute any instrument which the Lender may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (i) to obtain and adjust insurance required to be paid to the Lender pursuant to Section 8 hereof; (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse, and collect any checks, drafts or other instruments, documents, and chattel paper in connection with clause (i) or clause (ii) above; (iv) to sign the Company's name on any invoice or bill of lading relating to any account, on drafts against customers, on schedules and assignments of accounts, on notices of assignment, financing statements and other public records, on verification of accounts and on notices to customers (including notices directing customers to make payment directly to the Lender); (v) during the continuation of an Event of Default hereunder, to notify the postal authorities to change the address for delivery of its mail to an address designated by the Lender, to receive, open and process all mail addressed to the Company; (vi) to send requests for verification of accounts to customers; and (vii) to file any claims or take any action or institute any proceedings which the Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Lender with respect to any of the Collateral. The Company hereby ratifies and approves in advance all acts of said attorney; and so long as the attorney acts in good faith and without gross negligence it shall have no liability to the Company for any act or omission as to such attorney. 7 (c) If the Company fails to perform any agreement contained herein, the Lender may perform, or cause performance of, such agreement or obligation, and the costs and expenses of the Lender incurred in connection therewith shall be payable by the Company immediately upon demand by Lender, and shall bear interest at the rate set forth in Section 2.02(b) of the Loan Agreement. (d) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. (e) Anything herein to the contrary notwithstanding, (i) the Company shall remain liable under any contracts and agreements relating to the Collateral, to the extent set forth therein, to perform all of its obligations thereunder, to the same extent as if this Security Agreement had not been executed; (ii) the exercise by the Lender of any of its rights hereunder shall not release the Company from any of its obligations under the contracts and agreements relating to the Collateral; and (iii) the Lender shall not have any obligation or liability by reason of this Security Agreement under any contracts and agreements relating to the Collateral, nor shall the Lender be obligated to perform any of the obligations or duties of the Company thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. (f) The Company will maintain (A) the location of its place of business and its chief executive office (if it has more than one place of business) and (B) the location where the Company keeps or holds any Collateral or records relating thereto at (1) the applicable locations described in the Perfection Certificate, or (2) at locations within other States if, prior to such relocation, the Company shall have given the Lender not less than thirty (30) days' notice thereof. (g) Until the Secured Liabilities are paid in full, the Company agrees that the Company will (i) preserve the Company's corporate existence and not, in one transaction or a series of related transactions, convert to a different type of entity, merge into or consolidate with any other entity, or sell all or substantially all of its assets; (ii) not change the state of the Company's incorporation; and (iii) not change the Company's name or identity in any manner, unless in the case of this clause (iii) only, the Company shall have given the Lender not less than forty-five (45) days prior notice thereof. 8. Insurance. The Company shall maintain insurance covering the Collateral with financially sound and reputable insurers satisfactory to the Lender against such risks as are customarily insured by a business in the same or a similar industry and similarly situated for an amount not less than the full replacement value of such Collateral. In addition, the Company shall maintain errors and omissions insurance with financially sound and reputable insurers satisfactory to the Lender. All such insurance policies covering property on and after the date such property becomes subject to the Security Interest shall be written so as to be payable in the event of loss to the Lender, and shall provide for at least thirty (30) days prior written notice to the Lender prior to the cancellation or modification of each such policy. At the request of the Lender, all insurance policies covering property subject to the Security Interest shall be furnished to and held by the Lender. If, while any Secured Liabilities are outstanding, any proceeds with respect to any casualty loss are paid to the Lender under such policies on account of such casualty loss, and no default has occurred and is continuing, the Lender will pay over such proceeds in whole or in part to the Company, for the purpose of repairing or replacing the Collateral destroyed or damaged, with any such repaired or replaced Collateral to be secured by this Security Agreement. If an Event of Default has occurred and is continuing, the Lender may apply the proceeds as Lender deems fit, subject to applicable law and the terms of the Financing Documents, and may cancel, assign or surrender any such insurance policies. 8 9. Fixtures. It is the intention of the parties hereto that none of the Equipment, machinery or other property securing the Secured Liabilities hereunder shall become fixtures. 10. Default. Any one or more of the following events shall constitute an event of default (an "Event of Default"): (a) any representation or warranty made or deemed made by the Company in this Security Agreement or any other Financing Documents shall prove to have been incorrect, false, incomplete or misleading; or (b) any representation or warranty made or deemed made by the Borrower in any of the Financing Documents shall prove to have been incorrect, false, incomplete or misleading; or (c) the Company shall breach or fail to perform or observe any term, covenant or agreement contained in this Security Agreement or any other Financing Document and such failure shall continue beyond any grace period contained in this Security Agreement or any other Financing Document, as may be applicable; or (d) the Borrower shall breach or fail to perform or observe any term, covenant or agreement contained in any Financing Document and such failure shall continue beyond any grace period contained in any such applicable Financing Document; or (e) the occurrence and continuance of an "Event of Default" under the Loan Agreement. 11. Remedies. (a) Upon the occurrence of an Event of Default and at any time or times during the continuance thereof, unless such Event of Default shall have been cured within the applicable time period, if any, or waived in writing by the Lender, and subject to the provisions of applicable law, the Lender may exercise any one or more of the following remedies: (i) The Lender shall have full power and authority to sell or otherwise dispose of the Collateral or any part thereof. Any such sale or other disposition, subject to the provisions of applicable law, may be by public or private proceedings and may be made by one or more contracts, as a unit or in parcels, at such time and place, by such method, in such manner and on such terms as the Lender may determine. Except as required by law, such sale or other disposition and such notice will be deemed to have been sufficiently given if such notice is hand-delivered or mailed postage prepaid, at least ten (10) days before the time of such sale or other disposition, to the Company at its address as specified in the Security Agreement. To the extent permitted by law, the Lender may buy any or all of the Collateral upon any sale thereof. To the extent permitted by law, upon any such sale or sales, the Collateral so purchased shall be held by the purchaser absolutely free from any claims or rights of whatsoever kind or nature, including any claim of redemption and any similar rights being hereby expressly waived and released by the Company. In connection with any such sale, the Lender shall be permitted to limit its warranties to the maximum extent provided in the UCC. After deducting all reasonable costs and expenses of collection, custody, sale or other disposition or delivery (including legal costs and reasonable attorneys' fees) and all other charges due against the Collateral, the residue of the proceeds of any such sale or other disposition shall be applied to the payment of the Secured Liabilities, except as otherwise provided by law or directed by any court of competent jurisdiction, and any surplus after the payment in full of the Secured Liabilities shall be returned to the Company, except as otherwise provided by law or any such court. The Company shall be liable for any deficiency in payment of the Secured Liabilities, including all reasonable costs and expenses of collection, custody, sale or other disposition or delivery and all other charges due against the Collateral, as herein enumerated. 9 (ii) The Lender may notify an account debtor of the Company to make payment to the Lender whether the Company or the Lender were previously making collections on any of the accounts receivable; and the Lender may also take control of any proceeds from any Collateral. (iii) At any time whether or not an Event of Default has occurred, with or without notice, the Lender is authorized to offset and charge against any other credits and obligations ever owed by the Lender to the Company, any amount for which the Company may become obligated to the Lender at any time, whether under the Financing Documents or otherwise. The obligations secured by the Security Interest granted and by the Lender's right of offset includes all obligations of any kind or type now or hereafter arising, owed by the Company to the Lender, whether liquidated or unliquidated, direct or indirect, contingent or not. (iv) The Lender may commence proceedings in any court of competent jurisdiction for the appointment of a receiver (which term shall include a receiver-manager) of the Collateral or of any part thereof or may by instrument in writing appoint any person to be a receiver of the Collateral or any part thereof and may remove any receiver so appointed by the Lender and appoint another in his stead; and any such receiver appointed by instrument in writing shall have power (a) to take possession of the Collateral or any part thereof, (b) to carry on the business of the Company, (c) to borrow money on the security of the Collateral in priority to this Security Agreement to the extent required for the maintenance, preservation or protection of the Collateral or any part thereof or for the carrying on of the business of the Company, and (d) to sell lease or otherwise dispose of the whole or any part of the Collateral at public auction, by public tender or by private sale, either for cash or upon credit, at such time and upon such terms and conditions as the receiver may determine; provided that any such receiver shall be deemed the agent of the Company and the Lender shall not be in any way responsible for any misconduct or negligence of any such receiver. (v) The Lender shall have all other rights and remedies of a secured party provided under the UCC. (vi) The Lender shall have all other rights and remedies allowed at law and/or in equity. 10 (b) It is provided, however, that in the Lender's efforts in collection on the Collateral, the Company shall be liable and responsible for any deficiency. 12. Limitation on Duty of the Lender in Respect of Collateral. The powers conferred on the Lender under this Security Agreement are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for reasonable care in the custody of any Collateral in the Lender's possession and the accounting for moneys actually received by the Lender under this Security Agreement, the Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in the Lender's possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property, it being understood that the Lender shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other bailee selected by the Lender in good faith. Except as otherwise expressly provided in this Section 12, the Company has the risk of loss of the Collateral. Further, the Lender has no duty to collect any income accruing on the Collateral or to preserve any rights relating to the Collateral. The Lender shall have no obligation to clean up or otherwise prepare the Collateral for sale. 13. Concerning Lender. In furtherance and not in derogation of the rights, privileges and immunities of the Lender set forth in the other Financing Documents: (a) The Lender is authorized to take all such action as is provided to be taken by the Lender under this Security Agreement and all other action reasonably incidental thereto. As to any matters not expressly provided for in this Security Agreement (including the timing and methods of realization upon the Collateral), the Lender shall act or refrain from acting in the Lender's sole discretion. (b) The Lender shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on the Lender's part under this Security Agreement. The Lender shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Security Agreement by the Company. 14. Payment of Taxes, Charges, Etc. The Lender, at its option, after notice to the Company, may discharge any taxes, charges, assessments, security interest, liens or other encumbrances upon the Collateral or otherwise protect the value thereof. All such expenditures incurred by the Lender shall become payable by the Company to the Lender upon demand, shall bear interest at the highest legal rate from the date incurred to the date of payment, and shall be secured by the Collateral. 15. Waivers. To the extent permitted by law, the Company hereby waives demand for payment, notice of dishonor or protest and all other notices of any kind in connection with the Secured Liabilities except notices required hereby, by law or by any other agreement between the Company and the Lender. The Lender may release, supersede, exchange or modify any Collateral or security which it may from time to time hold and may release, surrender or modify the liability of any third party without giving notice hereunder to the Company. Such modifications, changes, renewals, releases or other actions shall in no way affect the Company's obligations hereunder. 11 16. Transfer Expenses, Etc. The Company will pay, indemnify and hold the Lender harmless from and against all costs and expenses (including taxes, if any) arising out of or incurred in connection with any transfer of Collateral into or out of the name of the Lender and all reasonable costs and expenses, including reasonable legal fees, of the Lender arising out of or incurred in connection with this Security Agreement. 17. Termination. This Security Interest shall terminate following the full payment, satisfaction, or discharge of all Secured Liabilities. Upon such termination, the Lender will deliver to the Company appropriate UCC termination statements with respect to Collateral so released from the Security Interest for filing with each filing officer with which UCC financing statements have been filed by the Lender to perfect the Security Interest in such Collateral. 18. Successors and Assigns. This Security Agreement shall be binding upon and inure to the benefit of the Company and the Lender and their respective successors and assigns. 19. Severability of Provisions. Any provision of any Financing Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of such Financing Document or affecting the validity or enforceability of such Financing Document or affecting the validity or enforceability of such provision in any other jurisdiction. 20. Submission to Jurisdiction. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURITY AGREEMENT AND THE OTHER FINANCING DOCUMENTS TO WHICH THE COMPANY IS A PARTY MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS SECURITY AGREEMENT, THE COMPANY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF THE COMPANY'S PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY PURSUANT TO SECTION 22, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS SECURITY AGREEMENT SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH THE COMPANY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS SECURITY AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) OF THIS SECTION 20 AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 12 21. Waiver of Jury Trial. THE COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS SECURITY AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS SECURITY AGREEMENT OR ARISING FROM OR RELATING TO ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS SECURITY AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 22. Notice. Any notice or communication required or permitted hereunder shall be deemed to be delivered, whether actually received or not, when deposited in the United States mail, postage fully prepaid, registered or certified mail, and addressed to the intended recipient at the address set forth on the signature page of this Security Agreement. Any address for notice may be changed by written notice delivered as provided herein. 23. Governing Law. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF TEXAS, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS, OR REMEDIES UNDER THIS SECURITY AGREEMENT, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS. 24. Controlling Agreement. This Security Agreement, as a Financing Document, is one of the "Security Instruments" referred to in the Loan Agreement. To the extent of any conflict with the terms, provisions, representation or warranties of this Security Agreement and the Loan Agreement, the Loan Agreement controls. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the date indicated below each signature. COMPANY: INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Date: November 10, 2004 LENDER: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ Frank Goldberg ------------------- Frank Goldberg, CEO Address: 1500 City West Boulevard Suite 225 Houston, Texas 77042 Fax No.: (832) 251-1500 Telephone No.: (713) 532-3430 Date: November 10, 2004 14 PERFECTION CERTIFICATE The undersigned, the Chairman and Chief Executive Officer of INTEGRATED SECURITY SYSTMES, INC., a Delaware corporation (the "Grantor"), hereby certifies, in connection with the Security Agreement, dated as of November 10, 2004 (the "Security Agreement"; initial capitalized terms used but not defined in this Perfection Certificate shall have the meanings ascribed to such terms in the Security Agreement), executed by Grantor in favor of BRIAR CAPITAL, L.P., a Texas limited partnership ("the Lender"), to the Lender as follows: 1. Name. (a) The exact legal name of Grantor, as the legal name appears in Grantor's articles of incorporation as of the date of this Perfection Certificate, is as follows: INTEGRATED SECURITY SYSTEMS, INC. (b) The following is a list of all other names (including trade names or similar appellations) used by Grantor or any of its divisions or other business units at any time since its date of incorporation: NONE. (c) The jurisdiction of organization of Grantor is Delaware; its organizational identification number issued by the State of Delaware is 2282300; and its federal taxpayer identification number is 75-2422983. 2. Current Location. (a) The only place of business of Grantor, or if Grantor has more than one, its chief executive office, is located at the following address: Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Mailing Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (b) The following are all the locations where Grantor maintains any books or records relating to any Collateral (if more than one location, please attach additional pages including all addresses): Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (c) The following are all the locations where Grantor maintains any Inventory or Equipment (if more than two locations, please attach additional pages including all addresses): Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 15 (d) The following are all the locations outside the State of Texas where Grantor maintains or has maintained any Inventory, Equipment or other tangible personal property or any office since its incorporation: Street Address: None. EXECUTED this 10th day of November, 2004. INTEGRATED SECURITY SYSTEMS, INC., a Delaware corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO 16 EX-4 8 exhibit4-78k111604.txt EXHIBIT 4.7 GUARANTY AGREEMENT EXHIBIT 4.7 GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty"), dated as of November 10, 2004, is made by INTELLI-SITE, INC., a Texas corporation ("Guarantor"), whose address is 8200 Springwood Drive, Suite 230, Irving, Texas 75063, in favor of BRIAR CAPITAL, L.P., a Texas limited partnership (together with its successors and assigns, collectively, "Lender"). PRELIMINARY STATEMENTS A. In accordance with that certain Loan Agreement dated of even date herewith (as amended, modified or supplemented from time to time, the "Loan Agreement"), between B&B ARMR CORPORATION, a Delaware corporation ("Borrower"), and Lender, Lender has agreed to, among other things, extend to Borrower certain credit facilities not to exceed $3,000,000 under certain conditions. B. In satisfaction of the requirements under the Loan Agreement, Guarantor has agreed to enter into this Guaranty to guarantee, among other things, the Secured Liabilities of Borrower under the Loan Agreement. C. Guarantor's shareholders and directors reasonably believe that Guarantor's execution of this Guaranty will benefit Guarantor. NOW, THEREFORE, in consideration of the premises and in order to induce Lender to enter into and extend credit pursuant to the Loan Agreement, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by Guarantor, Guarantor hereby agrees as follows: SECTION 1. Defined Terms; Interpretation. 1.01 Defined Terms. (a) Those initial capitalized terms and phrases used in this Guaranty but not defined in this Guaranty shall have the meanings ascribed to such terms in the Loan Agreement. (b) As used in this Guaranty, the following terms shall have the following meanings: "Borrower" has the meaning specified in paragraph A of the Preliminary Statements. "Event of Default" has the meaning specified in the Loan Agreement. "Financing Documents" means the Loan Agreement, the Note, the Security Documents, and any other agreement, deed, document or letter setting out the terms of or constituting any indebtedness of any Obligor to Lender, together with any documents ancillary or relating to all or any of them. "Guaranteed Obligations" has the meaning specified in Section 2(a). "Guarantor" has the meaning specified in the Introduction. "Guaranty" has the meaning specified in the Introduction. "Indemnitees" has the meaning specified in Section 19. "Lender" has the meaning specified in the Introduction. "Loan Agreement" has the meaning specified in paragraph A of the Preliminary Statements. "Note" shall have the meaning ascribed to such term in the Loan Agreement. "Obligor" means Borrower, Guarantor and any other Person that has or that will have any liability (actual or contingent) and whether alone or jointly with any other Person and whether as principal debtor, guarantor or surety or otherwise (or as the equivalent obligor under the laws of any jurisdiction) to Lender for the payment or repayment of any amounts outstanding or capable of becoming outstanding under the Financing Documents. "Person" means any natural person, corporation, partnership, firm, association, trust, unincorporated organization, limited liability company, governmental authority or other entity, whether acting in an individual, fiduciary or other capacity. "Secured Liabilities" means all present and future obligations and liabilities (whether actual or contingent and whether now or hereafter owed jointly or severally or as principal debtor, guarantor, surety or otherwise or as the equivalent obligor under the laws of any jurisdiction) of each Obligor to Lender under all or any of the Financing Documents together with: (a) costs, charges and expenses incurred by Lender in connection with or the protection, preservation or enforcement of Lender's rights under the Financing Documents; (b) any refinancing, novation, refunding, deferral, modification, renewal or extension of or increase in any of those obligations or liabilities; (c) any further advances which may be made by Lender to any Obligor under any agreement expressed to be supplemental to any of the Financing Documents and all interest, fees and costs in connection therewith; (d) any claim for damages or restitution in the event of rescission of any of those obligations or liabilities or otherwise in connection with the Financing Documents; (e) any claim against any Obligor flowing from the recovery by an Obligor of a payment or discharge in respect of any of those obligations or liabilities on grounds of preference or otherwise; 2 (f) all other amounts now or in the future owed by an Obligor to Lender; and (g) any amounts which would be included in any of the foregoing but for any discharge, non-provability, unenforceability or non-allowability of the same in any insolvency, bankruptcy or other proceedings. "Security Documents" means each of the documents (including security agreements, guaranties, mortgages, deeds of trust, pledges and other security documents) executed by all or any Obligor from time to time including this Guaranty and any other agreements intended to provide Lender with security for any Secured Liabilities of any Obligor to Lender or to guarantee such Secured Liabilities. 1.02 Interpretation. (a) In this Guaranty, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Guaranty as a whole and not to any particular Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Guaranty, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause (iv) of Section 1.02(a) is intended to authorize any assignment not otherwise permitted by this Guaranty or the Loan Agreement; (v) reference to any agreement (including this Guaranty), document or instrument means such agreement, document or instrument as amended, modified, supplemented or extended and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of this Guaranty, and references to any note includes any note issued in renewal, rearrangement, reinstatement, enlargement, amendment, modification, extension, substitution or replacement for such note; (vi) unless the context indicates otherwise, reference to any Section, clause, paragraph, Schedule or Exhibit means such Section, clause or paragraph of this Guaranty or such Schedule or Exhibit to this Guaranty; (vii) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; the word "or" is not exclusive; and the word "all" includes "and" and the word "any" includes "all"; 3 (viii) with respect to the determination of any period of time, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, ordinance, statute, code, rule, regulation, interpretation or judgment means such law, ordinance, statute, code, rule, regulation, interpretation or judgment as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Section and other headings in this Guaranty are for convenience only and shall not affect the construction of this Guaranty. (c) No provision of this Guaranty shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 2. Guaranty. (a) Guarantor hereby absolutely, unconditionally and irrevocably, guarantees (as primary obligor and not merely as surety) the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Secured Liabilities, whether for principal, interest (including interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to any Obligor under any bankruptcy or insolvency proceeding), fees, commissions, expenses (including court costs and reasonable counsel fees and expenses), and agrees to pay all costs and expenses, if any, incurred by Lender in connection with enforcing any rights under this Guaranty. The obligations of Guarantor to Lender under this Guaranty are referred to in this Guaranty as the "Guaranteed Obligations"; provided, that the Guaranteed Obligations of Guarantor under this Guaranty shall not exceed an amount that is $1.00 less than that amount that would render Guarantor's obligations under this Guaranty subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state or foreign law. (b) Guarantor agrees that the Secured Liabilities may at any time and from time to time exceed the Guaranteed Obligations of Guarantor without impairing this Guaranty or affecting the rights and remedies of Lender. (c) No payment made by any Obligor or any other guarantor (other than Guarantor making such payment) or any other Person or received or collected by Lender from any Obligor, any such other guarantor (other than Guarantor making such payment) or any other Person (other than Guarantor making such payment) by virtue of any action or proceeding or any set-off or appropriation or application at any time in reduction of or in payment of the Secured Liabilities shall be deemed to modify, reduce, release or otherwise affect the liability of Guarantor for the Guaranteed Obligations under this Guaranty. 4 (d) This Guaranty is an absolute, unconditional, present and continuing guaranty of payment and performance and not of collectibility and is in no way conditioned upon any attempt to collect from any other Obligor or any other action, occurrence or circumstance whatsoever. SECTION 3. Continuing Guaranty. Guarantor guarantees that the Guaranteed Obligations will be paid promptly within five (5) days upon written demand by Lender strictly in accordance with the terms of this Guaranty. Subject to the termination of this Guaranty after the payment in full of all Guaranteed Obligations in accordance with Section 14, the obligations of Guarantor under this Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Guaranty, notwithstanding: (a) any extension, renewal, modification, settlement, compromise, waiver or release in respect of any Guaranteed Obligations; (b) any extension, renewal, amendment, modification, rescission, waiver or release in respect of any Financing Document; (c) any release, exchange, substitution, non-perfection or invalidity of, or failure to exercise rights or remedies with respect to, any direct or indirect security for any Guaranteed Obligations, including the release of any other guarantor or other Person liable on any obligations of an Obligor under the Financing Documents; (d) any change in the existence, structure or ownership of any Obligor or any other guarantor or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Obligor, any guarantor or any of their respective assets; (e) the existence of any claim, defense, set-off or other rights or remedies which any other guarantor at any time may have against any Obligor, or any Obligor or any other guarantor may have at any time against Lender or any other Person, whether in connection with this Guaranty, the Financing Documents, the transactions contemplated hereby or thereby or any other transaction; (f) any invalidity or unenforceability for any reason of this Guaranty or the other Financing Documents, or any provision of law purporting to prohibit the payment or performance by any Obligor or any other guarantor of the Guaranteed Obligations or the Financing Documents, or of any other obligation to Lender; (g) any failure to give notice of the occurrence of an Event of Default; or (h) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 5 SECTION 4. Effect of Debtor Relief Laws. If, after receipt of any payment of, or proceeds of any security applied (or intended to be applied) to the payment of, all or any part of the Guaranteed Obligations, Lender is for any reason compelled to surrender such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be under applicable law avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-off or a diversion of trust funds, or (b) for any other reason under applicable law, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over Lender or any of its properties, or (ii) any settlement or compromise of any such claim effected by Lender with any such claimant (including any Obligor), then the Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of any instrument evidencing any Guaranteed Obligations or otherwise; and Guarantor shall be liable to pay Lender, and hereby does indemnify Lender and hold Lender harmless for the amount of such payment or proceeds so surrendered and all expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by Lender in the defense of any claim made against it that any payment or proceeds received by Lender in respect of all or part of the Guaranteed Obligations must be surrendered. The provisions of this Section 4 shall survive the termination of this Guaranty, and any satisfaction or discharge of any Obligor by virtue of any payment, court order or any foreign, federal or state law. If an Event of Default shall at any time have occurred and be continuing and declaration of such Event of Default shall at such time be prevented by reason of the pendency against any Obligor of a case or proceeding under a bankruptcy or insolvency law, Guarantor agrees that, for purposes of this Guaranty and its obligations hereunder, the Secured Liabilities shall be deemed to have been declared in default in accordance with the terms of the Loan Agreement or other applicable Financing Documents, and Guarantor shall forthwith pay the amounts specified by Lender to be paid thereunder, any interest thereon and any other amounts guaranteed under this Guaranty without further notice or demand. SECTION 5. Subrogation. Notwithstanding any payment or payments made by Guarantor under this Guaranty, or any set-off or application by Lender of any security or of any credits or claims, so long as any Obligation exists under any Financing Document, Guarantor hereby agrees that it will not, before the Secured Liabilities have been paid in full, assert or exercise any rights of Lender or Guarantor against any other Obligor to recover the amount of any payment made by Guarantor to Lender under this Guaranty by way of any claim, remedy or subrogation, reimbursement, exoneration, contribution, indemnity, participation or otherwise arising by contract, by statute, under common law or otherwise, and Guarantor hereby agrees that it shall, before the Secured Liabilities have been paid in full, have no right of recourse to or any claim against assets or property of any other Obligor, all of such rights being expressly waived by Guarantor. If any amount shall nevertheless be paid to Guarantor by any other Obligor or another guarantor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of Lender and shall forthwith be paid to Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. SECTION 6. Subordination. Guarantor hereby subordinates all indebtedness owing to it from each Obligor to all indebtedness of each Obligor to Lender, and agrees that upon the occurrence and continuance of an Event of Default, Guarantor shall not be entitled to accept any payment of the same until payment in full of the Secured Liabilities under the Financing Documents, and Guarantor shall not, under any circumstance whatsoever, attempt to set-off or reduce any obligations under this Guaranty because of such indebtedness. If any amount shall nevertheless be paid to Guarantor by any other Obligor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of Lender and, on demand by Lender, shall forthwith be paid to Lender to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. 6 SECTION 7. Waiver. Except for the limited notice provided in Section 3 of this Guaranty, Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and waives presentment, demand of payment, notice of intent to accelerate, notice of acceleration, notice of dishonor or nonpayment and any requirement that Lender institute suit, collection proceedings or take any other action to collect the Guaranteed Obligations, including any requirement that Lender protect, secure, perfect or insure any lien against any property subject thereto or exhaust any right or take any action against any Obligor or any other Person or any collateral (it being the intention of Lender that this Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for Lender, in order to enforce any payment by Guarantor under this Guaranty, to mitigate damages or to institute suit or exhaust its rights and remedies against any Obligor or any other Person, including others liable to pay any Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. Guarantor hereby waives marshaling of assets and liabilities, notice by Lender of any indebtedness or liability to which Lender applies or may apply any amounts received by Lender, and of the creation, advancement, increase, existence, extension, renewal, rearrangement and/or modification of the Guaranteed Obligations. SECTION 8. Representations and Warranties. Guarantor hereby represents and warrants as follows: (a) that Guarantor has had full and complete access to the Loan Agreement and the other Financing Documents and has reviewed same and is aware of their contents; (b) that Guarantor has the power and authority to execute, deliver and perform its obligations hereunder and under the other Financing Documents to which it is a party. The Financing Documents to which Guarantor is a party have been duly and validly executed and delivered by Guarantor and constitute valid and legally binding agreements of Guarantor enforceable in accordance with the respective terms thereof, except, in each case, as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally and general principles of equity; (c) that no authorization, consent, approval, license or exception of or filing or registration with any court or government department, commission, board, bureau, agency or instrumentality, is necessary for the valid execution, delivery or performance by Guarantor of this Guaranty or any other Financing Document to which it is a party; and (d) that the execution, delivery and performance of this Guaranty and the other Financing Documents to which it is a party does not (i) result in breach of, or constitute a default under, any contract, lease, instrument or other agreement to which Guarantor presently is a party, or (ii) result in or require the creation or imposition of, any mortgage, deed of trust, pledge, lien, security interest (other than pursuant to this Guaranty or such other Financing Document) or other share or encumbrance of any nature upon or with respect to any of Guarantor's property or interests, be they tangible or intangible. Guarantor is not in violation of or in default under any material indenture, agreement, lease or instrument. 7 SECTION 9. Affirmative Covenants. Guarantor covenants and agrees to promptly execute and deliver to Lender upon reasonable notice and request all such other documents, agreements and instruments in compliance with the covenants and agreements of Guarantor herein as Lender may reasonably request from time to time. Without limiting the generality of the foregoing, Guarantor will, so long as this Guaranty is in effect, furnish, or cause to be furnished, to Lender: (i) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Guarantor, a copy of the audited financial statements of Guarantor and its subsidiaries, if any, for such fiscal year containing, on a consolidated and consolidating basis, balance sheets and statements of income, retained earnings, and cash flow as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all prepared in accordance with GAAP, audited by an independent certified public accountant acceptable to the Lender, and certified by Guarantor that such financial statements have been prepared in accordance with GAAP, and (i) are true and correct, (ii) fairly present the financial condition of Guarantor and (iii) reflect the consistent application of accounting principles used to prepare such financial statements as well as such other financial statements of Guarantor previously delivered to Lender. (ii) Tax Returns. As soon as available, and in any event within sixty (60) days after filing, a copy of the income tax return filed by Guarantor after the end of each fiscal year. SECTION 10. Amendments. The terms of this Guaranty may be waived, altered or amended only by an instrument in writing duly executed by Guarantor and Lender. Any such amendment or waiver shall be binding upon Lender, each holder of any of the Secured Liabilities and Guarantor. SECTION 11. Addresses for Notices. All communications under or in connection with this Guaranty shall be in writing and shall be mailed by registered or certified mail, return receipt requested, postage prepaid, or personally delivered to an officer of the receiving party. All such communications shall be mailed or delivered as follows: (a) If to the Guarantor, to the address set forth at the beginning of this Guaranty, or to such other address or to such individual's or department's attention as it may have furnished the Lender in writing; 8 (b) If to the Lender, Briar Capital, L.P., 1500 City West Boulevard, Suite 225, Houston, Texas 77042, or to such other address or to such individual's or department's attention as it may have furnished to the Guarantor in writing. Any notice so addressed and mailed by registered or certified mail, return receipt requested, shall be deemed to be given when so mailed, and any notice so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of the Borrower or the Lender, as the case may be. SECTION 12. No Waiver, Remedies. No failure on the part of Lender to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise of any right under this Guaranty preclude any other or further exercise thereof or the exercise of any other right. The remedies in this Guaranty provided are cumulative and not exclusive of any remedies provided by law. SECTION 13. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default or default under the Financing Documents, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Guarantor against any and all of the obligations of Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not Lender shall have made any demand under this Guaranty and although such obligations may be contingent and unmatured. Lender agrees promptly to notify Guarantor after any such set-off and application, provided the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section 13 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which Lender may have. SECTION 14. Continuing Guaranty; Successors and Assigns; Transfer of the Financing Documents. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until payment in full of the Guaranteed Obligations, (b) be binding upon Guarantor, its successors, transferees and assigns, provided, however, that Guarantor shall not assign or transfer its rights or obligations under this Guaranty without the prior written consent of Lender, and (c) inure to the benefit of and be enforceable by Lender and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c) of this Section 14, Lender may assign or otherwise transfer all or a portion of its interests, rights and obligations under the Financing Documents to which it is a party. Any assignment in violation of this Section 14 shall be void and without force or effect. SECTION 15. Separability. Should any clause, sentence, paragraph, subsection or section of this Guaranty be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Guaranty, and the parties hereto agree that the part or parts of this Guaranty so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom by the parties hereto, and the remainder will have the same force and effectiveness as if such stricken part or parts had never been included herein. 9 SECTION 16. Usury. Notwithstanding any other provisions contained in this Guaranty, no provision of this Guaranty shall require or permit the collection from Guarantor of interest in excess of the maximum non-usurious rate of interest permitted by applicable foreign, federal or state law. SECTION 17. Survival. All warranties and representations made by Guarantor herein or in any certificate or other instrument executed and delivered by Guarantor under this Guaranty shall be considered to have been relied upon by Lender and shall survive the execution and delivery of this Guaranty, regardless of any investigation made by or on behalf of any thereof. All statements in any such certificate or other instrument shall constitute warranties and representations by Guarantor under this Guaranty. SECTION 18. Limitation by Law. All rights, remedies and powers provided in this Guaranty may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Guaranty are intended to be subject to all applicable mandatory provisions of law which may be controlling from time to time and to be limited to the extent necessary so that they will not render this Guaranty invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. SECTION 19. Indemnity. Guarantor agrees to indemnify and shall indemnify Lender and its affiliates, directors, officers, employees and agents (such indemnified Persons called the "Indemnitees") from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from this Guaranty or any other Financing Document to which Guarantor is a party or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing, and Guarantor shall reimburse each Indemnitee, upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence, willful misconduct or unlawful acts of such Indemnitee. WITHOUT LIMITING ANY PROVISION OF THIS GUARANTY, IT IS THE EXPRESS INTENTION OF GUARANTOR THAT EACH INDEMNITEE SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ALL SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISING OUT OF OR RESULTING FROM THE SOLE, ORDINARY OR CONTRIBUTORY NEGLIGENCE OF SUCH INDEMNITEE, BUT NOT FROM THE GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR UNLAWFUL ACTS OF SUCH INDEMNITEE. Without prejudice to the survival of any other obligations of Guarantor under this Guaranty and under the other Financing Documents to which Guarantor is a party, the obligations of Guarantor under this Section 19 shall survive the termination of this Guaranty and the other Financing Documents and the payment of the Secured Liabilities or the assignment of the Financing Documents. SECTION 20. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. 10 SECTION 21. SUBMISSION TO JURISDICTION. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY AND THE OTHER FINANCING DOCUMENTS EXECUTED BY GUARANTOR MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS GUARANTY, GUARANTOR HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. GUARANTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT PURSUANT TO SECTION 11 OF THIS GUARANTY, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS GUARANTY SHALL AFFECT THE RIGHT OF LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST GUARANTOR IN ANY OTHER JURISDICTION. (b) GUARANTOR HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) OF THIS SECTION 21 AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN ANY INCONVENIENT FORUM. SECTION 22. WAIVER OF JURY TRIAL. GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS GUARANTY OR ARISING FROM OR RELATING TO THIS GUARANTY, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. SECTION 23. FINAL EXPRESSION. THIS WRITTEN GUARANTY REPRESENTS THE FINAL AGREEMENT OF THE GUARANTOR REGARDING THE SUBJECT MATTER HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE GUARANTOR AND ANY OTHER PARTY REGARDING THE SUBJECT MATTER HEREOF. [SIGNATURE FOLLOWS ON NEXT PAGE] 11 IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered to be effective as of the date first above written. INTELLI-SITE, INC., a Texas corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO 12 EX-4 9 exhibit4-88k111604.txt EXHIBIT 4.8 GUARANTOR SECURITY AGREEMENT EXHIBIT 4.8 GUARANTOR SECURITY AGREEMENT THIS GUARANTOR SECURITY AGREEMENT (this "Security Agreement") is made as of the date set forth on the signature page hereof by and between INTELLI-SITE, INC., a Texas corporation, whose chief executive office, chief place of business and mailing address is 8200 Springwood Drive, Suite 230, Irving, Texas 75063 (the "Company"), and BRIAR CAPITAL, L.P., a Texas limited partnership, whose address is 1500 City West Boulevard, Suite 225, Houston, Harris County, Texas 77042 (the "Lender"). W I T N E S S E T H: WHEREAS, B&B ARMR Corporation, a Delaware corporation ("Borrower") has executed a Revolving Promissory Note dated of even date herewith in the original principal amount of up to $3,000,000 (the "Revolving Promissory Note" and sometimes referred to herein as the "Note") in favor of the Lender; WHEREAS, the Company has executed a Guaranty Agreement on even date herewith (the "Guaranty Agreement"), pursuant to which the Company promised to guaranty payment of certain obligations, which obligations are more particularly set forth in the Guaranty Agreement; WHEREAS, it is a condition precedent to the obligation of the Lender to fund under the Note that the Company shall have entered into this Security Agreement for the purpose of securing the payment and performance by the Company of its obligations under the Guaranty Agreement; WHEREAS, the Company expects to receive a material benefit from the Borrower receiving the Loan; NOW, THEREFORE, to induce the Lender to accept the Note from the Borrower, and in consideration thereof and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. Defined Terms. (a) Unless otherwise defined in this Security Agreement, terms defined in Chapter 9 of the UCC are used in this Security Agreement as defined in Chapter 9 of the UCC. (b) As used in this Security Agreement, the following terms shall have the following meanings: "Borrower Security Agreement" means that certain security agreement dated of even date herewith by and between Borrower and Lender. "Collateral" has the meaning specified in Section 2. "Equipment" means all "equipment" (as defined in the UCC) wherever located, now or hereafter existing and all parts thereof and all accessions thereto. "Event of Default" has the meaning specified in Section 10. "Financing Documents" means the Borrower Security Agreement, the Guarantor Security Agreements, the Loan Agreement, the Note, the Guaranty Agreements and any other documents entered into in connection with the Lender loaning monies to the Borrower under the Note. "Guarantor Security Agreements" means the respective Guarantor Security Agreements dated of even date herewith between Lender and: (i) Integrated Security Systems, Inc. and (ii) Intelli-Site, Inc.; all as amended from time to time, pursuant to which certain assets of such companies are pledged to Lender to secure the Secured Liabilities as defined in the respective Guarantor Security Agreements. "Guarantors" means Integrated Security Systems, Inc. and Intelli-Site, Inc. "Guaranty Agreements" means those certain Guaranty Agreements dated of even date herewith executed by each of the Guarantors, as each may be amended or supplemented from time to time. "Inventory" means all "inventory" (as defined in the UCC) in all of its forms, wherever located, now or hereafter existing and whether acquired by purchase, merger or otherwise, including (a) all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished and (b) all raw materials, work in process, all finished goods and all materials and supplies used, consumed or to be used or consumed in the manufacture, packing, shipping, advertising, selling, leasing or production of such inventory, including (whether or not included in such UCC definition) goods in which the Company has an interest in mass or joint or other interest or right of any kind and goods that are returned to or repossessed by the Company and all accessions thereto and products thereof and all documents of title therefor. "Loan Agreement" means that certain Loan Agreement dated as of even date herewith between Borrower and Lender, as amended or supplemented from time to time. "Note" means that certain Revolving Credit Note dated of even date herewith in the original principal amount of up to $3,000,000 executed by the Borrower in favor of the Lender. "Perfection Certificate" means a certificate substantially in the form of Exhibit A to this Security Agreement, completed and supplemented with the schedules and attachments contemplated by such form of certificate to the satisfaction of the Lender, and duly executed by an officer or other authorized representative of the Company. "Permitted Collateral Liens" means (a) the Security Interest, (b) liens for taxes not yet delinquent or which are being contested in good faith by appropriate proceedings; provided that adequate reserves with respect thereto are being maintained on the books of the Company in conformity with GAAP, (c) liens (other than liens in favor of landlords or taxing entities) in favor of carriers', warehouseman's, mechanics', materialmen's, repairmen's or other like liens arising in the ordinary course of business and not overdue for a period of more than sixty (60) days or which are being contested in good faith by appropriate proceedings, (d) liens in favor of landlords of the Company, provided that all such liens must be subordinated to Lender's Security Interest, (e) liens securing equipment acquired in the ordinary course of business under equipment leases or vendor-financed purchases, provided that the Company is current in the payment of all amounts owed under such leases or purchase money financings, (f) nonconsensual liens and rights of financial institutions in checking, savings, money market and similar accounts opened and maintained by the Company in the ordinary course of business, and (g) liens subordinated to Lender pursuant to security agreements acceptable to Lender. 2 "Proceeds" means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, Collateral, including, without limitation, all claims of the Company against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. "Receivables" means all "accounts", "chattel paper", "instruments", "documents", "general intangibles" (including "payment intangibles") (as each such term is defined in the UCC) and other obligations owed to the Company of any kind, now or hereafter existing, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and whether or not evidenced by a written agreement, and all rights now or hereafter existing in and to all security agreements, leases, and other contracts including support agreements (as such term is defined in the UCC) (all such written or unwritten agreements, security agreements, leases and other contracts, including all support agreements, being the "Related Contracts"), securing or otherwise relating to any such accounts, chattel paper, instruments, documents, general intangibles or other obligations. "Secured Liabilities" means all present and future obligations and liabilities (whether actual or contingent and whether now or hereafter owed jointly or severally or as principal debtor, guarantor, surety or otherwise or as the equivalent obligor under the laws of any jurisdiction) of the Guarantors or the Borrower to the Lender, including, without limitation, under any of the Financing Documents, together with: (i) all costs, charges and expenses incurred by the Lender in connection with or arising out of the protection, preservation or enforcement of the Lender's rights under the Financing Documents; (ii) any modification, renewal or extension of or increase in any of those obligations or liabilities; (iii) any claim for damages or restitution in the event of rescission of any of those obligations or liabilities or otherwise in connection with the Financing Documents; (iv) any claim against the Borrower or the Company flowing from the recovery by the Borrower or the Company of a payment or discharge in respect of any of those obligations or liabilities on grounds of preference or otherwise; (v) all other amounts now or in the future owed by the Borrower to the Lender; and 3 (vi) any amounts that would be included in any of the foregoing but for any discharge, non-provability, unenforceability or non-allowability of the same in any insolvency, bankruptcy or other proceedings. "Security Interest" means the security interest granted in accordance with Section 2, as well as all other security interests created or assigned as additional Collateral for the Secured Liabilities in accordance with the provisions of this Security Agreement or otherwise. "UCC" means the Uniform Commercial Code in effect from time to time in the State of Texas; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Security Agreement relating to such perfection or effect of perfection or non-perfection. 2. Security Interest. (a) In order to secure the full and punctual payment of the Secured Liabilities in accordance with the terms thereof, including, without limitation, to secure the performance of all of the obligations of the Company under the Guaranty and this Security Agreement, the Company hereby grants and assigns to the Lender a continuing security interest in and to all right, title and interest of the Company in all of the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) Equipment; (ii) Inventory; (iii) Receivables; (iv) Related Contracts; and (v) All Proceeds of or substitutions for all or any of the Collateral described in Clauses (i), (ii), (iii) and (iv) of this Section 2(a). (b) The Security Interest is granted as security only and shall not subject the Lender to, or transfer or in any way affect or modify, any obligation or liability of the Company with respect to any of the Collateral or any transaction in connection therewith. (c) The inclusion of Proceeds in this Security Agreement does not authorize the Company to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized by the Financing Documents. 3. Representations and Warranties. The Company represents and warrants as follows: (a) The exact legal name of the Company, as the legal name appears in the Company's articles of incorporation (or similar organizational document filed with the State of its origin) as of the date of this Security Agreement, is as set forth in the introductory paragraph of this Security Agreement. The Company has no other tradename except as listed on the Perfection Certificate. 4 (b) The place of business or, if the Company has more than one place of business, the chief executive office is located at the address of the Company specified in the Perfection Certificate. (c) All of the Company's Inventory and Equipment is located at the places specified in paragraph 2(c) of the Perfection Certificate attached to this Security Agreement. Except as set forth on the Perfection Certificate, the Company has exclusive possession and control of the Inventory and Equipment. (d) The office where the Company keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, is located at the address of the Company specified in paragraph 2(b) of the Perfection Certificate. None of the Receivables is evidenced by a promissory note or other instrument. (e) The Company owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the Permitted Collateral Liens. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed relating to Permitted Collateral Liens. (f) This Security Agreement creates a valid and perfected first priority security interest in the Collateral (except with respect to Permitted Collateral Liens), securing the payment of the Secured Liabilities, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. (g) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by the Company of the security interest granted hereby or for the execution, delivery or performance of this Security Agreement by the Company, or (ii) for the perfection of or the exercise by the Lender of their rights and remedies under this Security Agreement, including without limitation, the filing of a UCC-1 financing statement. (h) The Company is "located" (as such term is defined and used in the UCC) in its jurisdiction of incorporation specified in the Perfection Certificate. (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the Company's jurisdiction of incorporation, qualified to do business in all jurisdictions in which the nature of the business conducted by the Company makes such qualification necessary and where failure so to qualify would otherwise have a material adverse effect on the Company's financial condition, or the Company's ability to perform all the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. (j) The Company is not in violation of any applicable law, which violations, individually or in the aggregate, would affect the Company's performance of any obligation under this Security Agreement or the other Financing Documents to which the Company is a party; there is no litigation before any court or governmental authority now pending or (to the Company's knowledge after reasonable inquiry) threatened against the Company which, if adversely determined, could reasonably be expected to have a material adverse effect on the Company's financial condition, or ability to perform all the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. 5 (k) The Company is the holder of all governmental approvals, permits and licenses required to permit the Company to conduct its business as currently conducted and to enter into and perform the Company's obligations under this Security Agreement and the other Financing Documents to which the Company is a party. (l) None of the execution and delivery of this Security Agreement, the consummation of the transactions contemplated in this Security Agreement or the other Financing Documents to which the Company is a party, or compliance with the terms and provisions of this Security Agreement or the other Financing Documents to which the Company is a party will conflict with or result in a breach of, or require any consent under, the Company's charter or bylaws, or any applicable law, or any agreement or instrument to which the Company is a party or by which the Company is bound or to which the Company or any of the Company's respective assets are subject, or constitute a default under any such agreement or instrument. (m) The Company has all necessary power and authority to execute, deliver and perform the Company's respective obligations under this Security Agreement and the other Financing Documents to which the Company is a party; the Company's execution, delivery and performance of this Security Agreement and the other Financing Documents to which the Company is a party has been duly authorized by all necessary action on the Company's part; and this Security Agreement and the other Financing Documents to which the Company is a party have been duly and validly executed and delivered by the Company and each constitutes the Company's legal, valid and binding obligation, enforceable in accordance with its and their terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 4. Places of Business. The Company will notify the Lender promptly of the addition or discontinuance of any place of business or any change in the address of its principal or any other place of business. None of the Collateral shall be removed from the locations specified herein or in the Perfection Certificate, as from time to time supplemented, unless the Lender is given thirty (30) days prior written notice of such removal, which notice shall state the location or locations to which said Collateral will be removed. The Company warrants that all of the Collateral is and shall continue to be located at the locations set forth herein, in the Perfection Certificate or such other locations of which the Lender receives notice in accordance with this Section. 5. Encumbrances. The Company will not create, incur, assume, or suffer to exist now or at any time throughout the duration of the term of this Security Agreement, any lien, security interest or other encumbrances against the Collateral, whether now owned or hereafter acquired, except for liens in favor of the Lender, any Permitted Collateral Liens, and any other liens allowed in writing by the Lender. If such a lien, security interest or other encumbrance is not a Permitted Collateral Lien, then the Company will notify the Lender of any lien, security interest or other encumbrance securing an obligation against the Collateral, and will defend the Collateral against such claim, lien, security interest or other encumbrance adverse to the Lender. 6 6. Maintenance of Collateral. The Company shall preserve the Collateral for the benefit of the Lender. Without limiting the generality of the foregoing, the Company shall: (a) make all such repairs, replacements, additions and improvements to its Equipment as in its judgment are necessary to permit the Company's business to be properly and advantageously conducted at all times; (b) preserve all beneficial contract rights to the extent commercially reasonable and related to the Collateral; (c) in conjunction with, and at the direction of, the Lender, take commercially reasonable steps to collect all Receivables; and (d) pay all taxes, assessments or other charges on the Collateral when due, unless the amount or validity of such taxes, assessments or charges are being contested in good faith by appropriate proceedings and reserves have been provided on its books with respect thereto in conformity with generally accepted accounting principles. Nothing contained herein shall be construed to prohibit the Company from buying and selling Inventory or Equipment in the ordinary course of business; provided, however, any Equipment sold is replaced by new Equipment. 7. Additional Provisions Concerning the Collateral. (a) The Company authorizes the Lender to file, without the signature of the Company, where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral, all in the discretion of the Lender. (b) The Company hereby irrevocably appoints the Lender as its attorney-in-fact (which power of attorney is coupled with an interest) and proxy, with full authority in the place and stead of the Company and in its name or otherwise, from time to time in the Lender's discretion, to take any action or execute any instrument which the Lender may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (i) to obtain and adjust insurance required to be paid to the Lender pursuant to Section 8 hereof; (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse, and collect any checks, drafts or other instruments, documents, and chattel paper in connection with clause (i) or clause (ii) above; (iv) to sign the Company's name on any invoice or bill of lading relating to any account, on drafts against customers, on schedules and assignments of accounts, on notices of assignment, financing statements and other public records, on verification of accounts and on notices to customers (including notices directing customers to make payment directly to the Lender); (v) during the continuation of an Event of Default hereunder, to notify the postal authorities to change the address for delivery of its mail to an address designated by the Lender, to receive, open and process all mail addressed to the Company; (vi) to send requests for verification of accounts to customers; and (vii) to file any claims or take any action or institute any proceedings which the Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Lender with respect to any of the Collateral. The Company hereby ratifies and approves in advance all acts of said attorney; and so long as the attorney acts in good faith and without gross negligence it shall have no liability to the Company for any act or omission as to such attorney. 7 (c) If the Company fails to perform any agreement contained herein, the Lender may perform, or cause performance of, such agreement or obligation, and the costs and expenses of the Lender incurred in connection therewith shall be payable by the Company immediately upon demand by Lender, and shall bear interest at the rate set forth in Section 2.02(b) of the Loan Agreement. (d) The powers conferred on the Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. (e) Anything herein to the contrary notwithstanding, (i) the Company shall remain liable under any contracts and agreements relating to the Collateral, to the extent set forth therein, to perform all of its obligations thereunder, to the same extent as if this Security Agreement had not been executed; (ii) the exercise by the Lender of any of its rights hereunder shall not release the Company from any of its obligations under the contracts and agreements relating to the Collateral; and (iii) the Lender shall not have any obligation or liability by reason of this Security Agreement under any contracts and agreements relating to the Collateral, nor shall the Lender be obligated to perform any of the obligations or duties of the Company thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. (f) The Company will maintain (A) the location of its place of business and its chief executive office (if it has more than one place of business) and (B) the location where the Company keeps or holds any Collateral or records relating thereto at (1) the applicable locations described in the Perfection Certificate, or (2) at locations within other States if, prior to such relocation, the Company shall have given the Lender not less than thirty (30) days' notice thereof. (g) Until the Secured Liabilities are paid in full, the Company agrees that the Company will (i) preserve the Company's corporate existence and not, in one transaction or a series of related transactions, convert to a different type of entity, merge into or consolidate with any other entity, or sell all or substantially all of its assets; (ii) not change the state of the Company's incorporation; and (iii) not change the Company's name or identity in any manner, unless in the case of this clause (iii) only, the Company shall have given the Lender not less than forty-five (45) days prior notice thereof. 8. Insurance. The Company shall maintain insurance covering the Collateral with financially sound and reputable insurers satisfactory to the Lender against such risks as are customarily insured by a business in the same or a similar industry and similarly situated for an amount not less than the full replacement value of such Collateral. In addition, the Company shall maintain errors and omissions insurance with financially sound and reputable insurers satisfactory to the Lender. All such insurance policies covering property on and after the date such property becomes subject to the Security Interest shall be written so as to be payable in the event of loss to the Lender, and shall provide for at least thirty (30) days prior written notice to the Lender prior to the cancellation or modification of each such policy. At the request of the Lender, all insurance policies covering property subject to the Security Interest shall be furnished to and held by the Lender. If, while any Secured Liabilities are outstanding, any proceeds with respect to any casualty loss are paid to the Lender under such policies on account of such casualty loss, and no default has occurred and is continuing, the Lender will pay over such proceeds in whole or in part to the Company, for the purpose of repairing or replacing the Collateral destroyed or damaged, with any such repaired or replaced Collateral to be secured by this Security Agreement. If an Event of Default has occurred and is continuing, the Lender may apply the proceeds as Lender deems fit, subject to applicable law and the terms of the Financing Documents, and may cancel, assign or surrender any such insurance policies. 8 9. Fixtures. It is the intention of the parties hereto that none of the Equipment, machinery or other property securing the Secured Liabilities hereunder shall become fixtures. 10. Default. Any one or more of the following events shall constitute an event of default (an "Event of Default"): (a) any representation or warranty made or deemed made by the Company in this Security Agreement or any other Financing Documents shall prove to have been incorrect, false, incomplete or misleading; or (b) any representation or warranty made or deemed made by the Borrower in any of the Financing Documents shall prove to have been incorrect, false, incomplete or misleading; or (c) the Company shall breach or fail to perform or observe any term, covenant or agreement contained in this Security Agreement or any other Financing Document and such failure shall continue beyond any grace period contained in this Security Agreement or any other Financing Document, as may be applicable; or (d) the Borrower shall breach or fail to perform or observe any term, covenant or agreement contained in any Financing Document and such failure shall continue beyond any grace period contained in any such applicable Financing Document; or (e) the occurrence and continuance of an "Event of Default" under the Loan Agreement. 11. Remedies. (a) Upon the occurrence of an Event of Default and at any time or times during the continuance thereof, unless such Event of Default shall have been cured within the applicable time period, if any, or waived in writing by the Lender, and subject to the provisions of applicable law, the Lender may exercise any one or more of the following remedies: (i) The Lender shall have full power and authority to sell or otherwise dispose of the Collateral or any part thereof. Any such sale or other disposition, subject to the provisions of applicable law, may be by public or private proceedings and may be made by one or more contracts, as a unit or in parcels, at such time and place, by such method, in such manner and on such terms as the Lender may determine. Except as required by law, such sale or other disposition and such notice will be deemed to have been sufficiently given if such notice is hand-delivered or mailed postage prepaid, at least ten (10) days before the time of such sale or other disposition, to the Company at its address as specified in the Security Agreement. To the extent permitted by law, the Lender may buy any or all of the Collateral upon any sale thereof. To the extent permitted by law, upon any such sale or sales, the Collateral so purchased shall be held by the purchaser absolutely free from any claims or rights of whatsoever kind or nature, including any claim of redemption and any similar rights being hereby expressly waived and released by the Company. In connection with any such sale, the Lender shall be permitted to limit its warranties to the maximum extent provided in the UCC. After deducting all reasonable costs and expenses of collection, custody, sale or other disposition or delivery (including legal costs and reasonable attorneys' fees) and all other charges due against the Collateral, the residue of the proceeds of any such sale or other disposition shall be applied to the payment of the Secured Liabilities, except as otherwise provided by law or directed by any court of competent jurisdiction, and any surplus after the payment in full of the Secured Liabilities shall be returned to the Company, except as otherwise provided by law or any such court. The Company shall be liable for any deficiency in payment of the Secured Liabilities, including all reasonable costs and expenses of collection, custody, sale or other disposition or delivery and all other charges due against the Collateral, as herein enumerated. 9 (ii) The Lender may notify an account debtor of the Company to make payment to the Lender whether the Company or the Lender were previously making collections on any of the accounts receivable; and the Lender may also take control of any proceeds from any Collateral. (iii) At any time whether or not an Event of Default has occurred, with or without notice, the Lender is authorized to offset and charge against any other credits and obligations ever owed by the Lender to the Company, any amount for which the Company may become obligated to the Lender at any time, whether under the Financing Documents or otherwise. The obligations secured by the Security Interest granted and by the Lender's right of offset includes all obligations of any kind or type now or hereafter arising, owed by the Company to the Lender, whether liquidated or unliquidated, direct or indirect, contingent or not. (iv) The Lender may commence proceedings in any court of competent jurisdiction for the appointment of a receiver (which term shall include a receiver-manager) of the Collateral or of any part thereof or may by instrument in writing appoint any person to be a receiver of the Collateral or any part thereof and may remove any receiver so appointed by the Lender and appoint another in his stead; and any such receiver appointed by instrument in writing shall have power (a) to take possession of the Collateral or any part thereof, (b) to carry on the business of the Company, (c) to borrow money on the security of the Collateral in priority to this Security Agreement to the extent required for the maintenance, preservation or protection of the Collateral or any part thereof or for the carrying on of the business of the Company, and (d) to sell lease or otherwise dispose of the whole or any part of the Collateral at public auction, by public tender or by private sale, either for cash or upon credit, at such time and upon such terms and conditions as the receiver may determine; provided that any such receiver shall be deemed the agent of the Company and the Lender shall not be in any way responsible for any misconduct or negligence of any such receiver. (v) The Lender shall have all other rights and remedies of a secured party provided under the UCC. 10 (vi) The Lender shall have all other rights and remedies allowed at law and/or in equity. (b) It is provided, however, that in the Lender's efforts in collection on the Collateral, the Company shall be liable and responsible for any deficiency. 12. Limitation on Duty of the Lender in Respect of Collateral. The powers conferred on the Lender under this Security Agreement are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. Except for reasonable care in the custody of any Collateral in the Lender's possession and the accounting for moneys actually received by the Lender under this Security Agreement, the Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in the Lender's possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property, it being understood that the Lender shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other bailee selected by the Lender in good faith. Except as otherwise expressly provided in this Section 12, the Company has the risk of loss of the Collateral. Further, the Lender has no duty to collect any income accruing on the Collateral or to preserve any rights relating to the Collateral. The Lender shall have no obligation to clean up or otherwise prepare the Collateral for sale. 13. Concerning Lender. In furtherance and not in derogation of the rights, privileges and immunities of the Lender set forth in the other Financing Documents: (a) The Lender is authorized to take all such action as is provided to be taken by the Lender under this Security Agreement and all other action reasonably incidental thereto. As to any matters not expressly provided for in this Security Agreement (including the timing and methods of realization upon the Collateral), the Lender shall act or refrain from acting in the Lender's sole discretion. (b) The Lender shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on the Lender's part under this Security Agreement. The Lender shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Security Agreement by the Company. 14. Payment of Taxes, Charges, Etc. The Lender, at its option, after notice to the Company, may discharge any taxes, charges, assessments, security interest, liens or other encumbrances upon the Collateral or otherwise protect the value thereof. All such expenditures incurred by the Lender shall become payable by the Company to the Lender upon demand, shall bear interest at the highest legal rate from the date incurred to the date of payment, and shall be secured by the Collateral. 15. Waivers. To the extent permitted by law, the Company hereby waives demand for payment, notice of dishonor or protest and all other notices of any kind in connection with the Secured Liabilities except notices required hereby, by law or by any other agreement between the Company and the Lender. The Lender may release, supersede, exchange or modify any Collateral or security which it may from time to time hold and may release, surrender or modify the liability of any third party without giving notice hereunder to the Company. Such modifications, changes, renewals, releases or other actions shall in no way affect the Company's obligations hereunder. 11 16. Transfer Expenses, Etc. The Company will pay, indemnify and hold the Lender harmless from and against all costs and expenses (including taxes, if any) arising out of or incurred in connection with any transfer of Collateral into or out of the name of the Lender and all reasonable costs and expenses, including reasonable legal fees, of the Lender arising out of or incurred in connection with this Security Agreement. 17. Termination. This Security Interest shall terminate following the full payment, satisfaction, or discharge of all Secured Liabilities. Upon such termination, the Lender will deliver to the Company appropriate UCC termination statements with respect to Collateral so released from the Security Interest for filing with each filing officer with which UCC financing statements have been filed by the Lender to perfect the Security Interest in such Collateral. 18. Successors and Assigns. This Security Agreement shall be binding upon and inure to the benefit of the Company and the Lender and their respective successors and assigns. 19. Severability of Provisions. Any provision of any Financing Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of such Financing Document or affecting the validity or enforceability of such Financing Document or affecting the validity or enforceability of such provision in any other jurisdiction. 20. Submission to Jurisdiction. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURITY AGREEMENT AND THE OTHER FINANCING DOCUMENTS TO WHICH THE COMPANY IS A PARTY MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY, TEXAS AND, BY EXECUTION AND DELIVERY OF THIS SECURITY AGREEMENT, THE COMPANY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF THE COMPANY'S PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY PURSUANT TO SECTION 22, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING IN THIS SECURITY AGREEMENT SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH THE COMPANY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS SECURITY AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) OF THIS SECTION 20 AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 12 21. Waiver of Jury Trial. THE COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS SECURITY AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS SECURITY AGREEMENT OR ARISING FROM OR RELATING TO ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS SECURITY AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 22. Notice. Any notice or communication required or permitted hereunder shall be deemed to be delivered, whether actually received or not, when deposited in the United States mail, postage fully prepaid, registered or certified mail, and addressed to the intended recipient at the address set forth on the signature page of this Security Agreement. Any address for notice may be changed by written notice delivered as provided herein. 23. Governing Law. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF TEXAS, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS, OR REMEDIES UNDER THIS SECURITY AGREEMENT, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS. 24. Controlling Agreement. This Security Agreement, as a Financing Document, is one of the "Security Instruments" referred to in the Loan Agreement. To the extent of any conflict with the terms, provisions, representation or warranties of this Security Agreement and the Loan Agreement, the Loan Agreement controls. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the date indicated below each signature. COMPANY: INTELLI-SITE, INC., a Texas corporation By: /S/ C.A. Rundell, Jr. ----------------------------------- C.A. Rundell, Jr., Chairman and CEO Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Date: November 10, 2004 LENDER: BRIAR CAPITAL, L.P., a Texas limited partnership By: Briar Capital General, LLC, a Texas limited liability company, its general partner By: /S/ Frank Goldberg ------------------- Frank Goldberg, CEO Address: 1500 City West Boulevard Suite 225 Houston, Texas 77042 Fax No.: (832) 251-1500 Telephone No.: (713) 532-3430 Date: November 10, 2004 14 EXHIBIT "A" PERFECTION CERTIFICATE The undersigned, the Chairman and Chief Executive Officer of INTELLI-SITE, INC., a Texas corporation (the "Grantor"), hereby certifies, in connection with the Security Agreement, dated as of November 10, 2004 (the "Security Agreement"; initial capitalized terms used but not defined in this Perfection Certificate shall have the meanings ascribed to such terms in the Security Agreement), executed by Grantor in favor of BRIAR CAPITAL, L.P., a Texas limited partnership ("the Lender"), to the Lender as follows: 1. Name. (a) The exact legal name of Grantor, as the legal name appears in Grantor's articles of incorporation as of the date of this Perfection Certificate, is as follows: INTELLI-SITE, INC. (b) The following is a list of all other names (including trade names or similar appellations) used by Grantor or any of its divisions or other business units at any time since its date of incorporation: INNOVATIVE SECURITY SYSTEMS, INC. (name change effective October 2, 1998) (c) The jurisdiction of organization of Grantor is Texas; its organizational identification number issued by the State of Texas is 0126417200; its state taxpayer identification number is 17524868027; and its federal taxpayer identification number is 75-2486802. 2. Current Location. (a) The only place of business of Grantor, or if Grantor has more than one, its chief executive office, is located at the following address: Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 Mailing Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (b) The following are all the locations where Grantor maintains any books or records relating to any Collateral (if more than one location, please attach additional pages including all addresses): Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 (c) The following are all the locations where Grantor maintains any Inventory or Equipment (if more than two locations, please attach additional pages including all addresses): Street Address: 8200 Springwood Drive, Suite 230 Irving, Texas 75063 15 (d) The following are all the locations outside the State of Texas where Grantor maintains or has maintained any Inventory, Equipment or other tangible personal property or any office since its incorporation: Street Address: None. EXECUTED this 10th day of November, 2004. INTELLI-SITE, INC., a Texas corporation By: /S/ C.A. Rundell, Jr. --------------------------- C.A. Rundell, Jr., Chairman 16 -----END PRIVACY-ENHANCED MESSAGE-----