Exhibit
4.2
CONVERTIBLE PROMISSORY
NOTE
U.S. $375,000
October 6, 2006
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 US Special Opportunities Trust PLC,
Trust No. W00118000 (hereinafter referred to as “
Payee ”), the principal sum of U.S. $375,000.
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 six percent
(6%). 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 to be accrued during the twelve (12) month period
beginning on the date of issuance of this Note, as set forth above
(the “ Issuance Date ”), shall be prepaid
in cash to Payee on the Issuance Date. Thereafter, accrued
interest shall be due and payable quarterly beginning on December
1, 2007 and continuing on each January 1, April 1, and October 1
thereafter until the entire principal balance and all accrued and
unpaid interest hereunder is paid in full.
2.
Payment of Note
. The principal balance of, and all
accrued unpaid interest on, this Note shall be due and payable on
October 6, 2009 (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.
If this Note is fully prepaid on or before October 6, 2007,
then any prepaid interest shall be refunded to Maker.
4.
Conversion . The outstanding principal balance of this
Note shall be convertible, at the option of Payee in its sole and
absolute discretion, in whole or in part, (i) upon the occurrence
of a Recapitalization (as defined below), or (ii) in connection
with and immediately prior to a Change of Control (as defined
below), in each case into fully paid and nonassessable shares (the
“ Conversion Shares ”) of common stock of
the Company, par value $0.01 per share (the “ Common
Stock ”) at the Conversion Price (as defined below)
in effect on the date of such Recapitalization or Change of
Control, as the case may be. If Payee elects to exercise its
option to convert this Note, the following shall occur:
(a)
Payee shall deliver to Maker a written
notice of such election (the “ Conversion
Notice ”), indicating the amount of principal of this
Note to be converted.
(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’
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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.
5.
Conversion Price; Adjustment for
Issuance of Shares at Less Than the Fair Market Value
. The “ Conversion
Price ” shall equal the Fair Market Value (as defined
below) of the Common Stock on the date of such Recapitalization or
Change of Control, as the case may be. However, if Maker has
issued (such date of issuance, the “ Stock Issue
Date ”) any Additional Common Stock (as defined
below) for a consideration per share less than the Fair Market
Value on the date of such conversion, then (subject to Sections
6 , 7 , 8 and 9 below) the Conversion
Price shall equal the lowest price per share at which any such
shares of Additional Common Stock were issued. In the case of
Additional Common Stock issued without consideration, the
Conversion Price shall be reduced to an amount, and the number of
shares issued upon such 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.
6.
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.
7.
Stock Dividends
. Shares of Common Stock issued as
a dividend or other distribution on any class of capital stock of
Maker shall be deemed to have been issued without
consideration.
8.
Stock Splits, Subdivisions or
Combinations . In the
event of a stock split or subdivision of shares of Common Stock
into a greater number of shares, the Conversion Price shall be
proportionately decreased, and in the event of a combination of
shares of Common Stock into a smaller number of shares, the
Conversion Price shall be proportionately increased, such increase
or decrease, as the case may be, becoming effective at the record
date.
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9.
Exceptions . The term “ Additional Common
Stock ” herein shall mean all shares of Common Stock
hereafter issued by Maker (including Common Stock held in the
treasury of Maker), except (a) Common Stock issued upon the
conversion of this Note; (b) Common Stock issued upon conversion or
exercise of any warrants, options or convertible instruments
outstanding on the date hereof; and (c) Common Stock issued upon
exercise of stock options or similar purchase rights to employees,
directors or consultants of Maker. Any adjustment to the
Conversion Price to be made pursuant to Section 5 above may
be waived (either retroactively or prospectively and either
generally or in a particular instance) in writing by Payee.
10.
Adjustments for Mergers, Sales and
Consolidations . In the
event of any consolidation or merger of the
