Exhibit 4.1
CONVERTIBLE PROMISSORY
NOTE
U.S. $500,000
December 14, 2005
For value received, Integrated Security
Systems, Inc., a Delaware corporation (hereinafter referred to as
“Maker”), promises to pay to the order of Frost
National Bank FBO Renaissance Capital Growth & Income Fund III,
Inc., Trust No. W00740000 (hereinafter referred to as
“Payee”), the principal sum of U.S. $500,000. The
principal of and interest on this Convertible Promissory Note (the
“Note”) shall be due and payable in lawful money of the
United States of America by wire transfer of immediately available
funds.
1.
Interest . Interest shall accrue on the unpaid principal
balance due under this Note at an annual rate equal to eight
percent (8%). Interest shall accrue from and including the
date of this Note until, but not including, the day on which it is
paid in full. In no event shall the interest charged
hereunder exceed the maximum rate of interest allowed from time to
time by law. Interest shall be due and payable quarterly
beginning on January 1, 2006 and continuing on each April 1, July 1
and October 1 until the entire principal balance and all accrued
and unpaid interest hereunder is paid in full. Such interest
shall, at the option of Maker, be payable in cash or in shares of
Common Stock, par value $0.01 per share (the “Common
Stock”), of Maker at a price per share equal to the then
current Conversion Price (defined below).
2.
Payment of Note
. The principal balance of, and all
accrued unpaid interest on, this Note shall be due and payable on
December 14, 2008 (the “Maturity Date”).
3.
Prepayment . This Note may be prepaid in whole or in part
at any time, at the option of Maker, without premium or
penalty.
4.
Call . Maker has the right to call, in whole or in
part, the outstanding amount of this Note if the market price of
the Common Stock of Maker exceeds $0.60 per share, as adjusted
pursuant to Section 9 of this Note, for a period of 60 days.
Payee will have 30 days written notice before this Note will
be redeemed.
5.
Conversion . This Note shall be convertible, at the option
of Payee in its sole and absolute discretion, in whole or in part
and at any time or from time to time, into fully paid and
nonassessable shares (the “Conversion Shares”) of
Common Stock at the conversion price of $0.25 per share (as
adjusted from time to time pursuant to the terms of this Note, the
“Conversion Price”). If Payee elects to exercise
its option, then the following shall occur:
(a)
Payee shall deliver to Maker a notice of
such election (the “Conversion Notice”), indicating the
amount of principal of this Note to be converted (such amount to be
converted referred to herein as the “Converted
Amount”).
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(b)
Upon its receipt of the Conversion
Notice, the Maker shall immediately issue and deliver to Payee or
its designated affiliates a certificate or certificates for the
number of shares of Common Stock, registered in Payee’s or
its designated affiliates’ name(s), to which Payee shall be
entitled upon such conversion, bearing such legends as may be
required by applicable state and federal securities laws.
(c)
If this Note is converted in whole, Payee
shall deliver this Note to Maker marked “Canceled,” and
Maker shall immediately pay to Payee all accrued and unpaid
interest then due and owing on the date of such conversion.
If this Note is converted in part, Maker shall immediately
pay to Payee all accrued and unpaid interest then due and owing on
the date of such conversion, and Payee shall deliver to Maker a
replacement Note for any outstanding principal amount not
converted, dated the date of such conversion, with the same
Maturity Date and provisions as contained in this Note.
(d)
No fractional shares will be issued on
conversion of this Note.
6.
Adjustment for Issuance of Shares at
Less Than the Conversion Price . If and whenever after the date hereof any
Additional Common Stock (herein defined) shall be issued by Maker
(the “Stock Issue Date”) for a consideration per share
less than the then current Conversion Price, then in each such case
the Conversion Price in effect immediately prior to such issuance
shall be reduced to a price determined by multiplying such then
current Conversion Price by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (assuming the full exercise and
conversion of all then outstanding securities that are exercisable
for or convertible into shares of Common Stock, whether vested or
unvested, whether contingent or uncontingent, and whether
exercisable or not yet exercisable) plus the number of shares of
Common Stock that the aggregate consideration received by Maker for
such issuance would purchase at the then current Conversion Price;
and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issuance
(assuming the full exercise and conversion of all then outstanding
securities that are exercisable for or convertible into shares of
Common Stock, whether vested or unvested, whether contingent or
uncontingent, and whether exercisable or not yet exercisable) plus
the number of shares of Additional Common Stock so issued. In
the case of Additional Common Stock issued without consideration,
the Conversion Price in effect on such Stock Issue Date shall be
reduced to an amount, and the number of shares issued upon
conversion shall be increased in an amount, so as to maintain for
the Payee the right to convert this Note into shares of Common
Stock equal in amount to the same percentage interest in the Common
Stock of the Company as this Note was convertible immediately
preceding the Stock Issue Date.
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7.
Sale of Shares . In case of the issuance of Additional Common
Stock for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the
gross amount of the cash paid to Maker for such shares, before
deducting any underwriting compensation or discount in the sale,
underwriting or purchase thereof by underwriters or dealers or
others performing similar services or for any expenses incurred in
connection therewith. In case of the issuance of any shares
of Additional Common Stock for a consideration part or all of which
shall be other than cash, the amount of the consideration therefor,
other than cash, shall be deemed to be the then fair market value
of the property received, as determined in good faith by
Maker’s Board of Directors.
8.
Stock Dividends
. Shares of Common Stock issued as
a dividend or other distribution on any class of capital
