EXHIBIT 4.4
THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON
CONVERSION OF THIS
NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON
CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY
SATISFACTORY TO INTEGRATED SECURITY
SYSTEMS, INC. THAT
SUCH REGISTRATION IS NOT
REQUIRED.
SECURED CONVERTIBLE MINIMUM BORROWING NOTE
FOR VALUE RECEIVED, each of INTEGRATED SECURITY SYSTEMS, INC.,
a
Delaware corporation (the "Parent"), and
the other companies listed on Exhibit A
attached hereto (such other companies
together with the Parent, each a "Company"
and collectively, the "Companies"), jointly and severally,
promises to pay to
LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services
Limited, P.O. Box 309
GT,
Ugland House, South Church Street, George Town, Grand Cayman,
Cayman Islands,
Fax: 345-949-8080 (the "Holder") or its registered assigns or successors in
interest, the sum of One Million Dollars
($1,000,000),
or, if different,
the
aggregate principal amount of all Loans (as defined in
the Security
Agreement
referred to below), together with any accrued and
unpaid interest
hereon, on
July 29, 2008 (the "Maturity Date") if not
sooner paid.
Capitalized terms used herein without definition shall have the
meanings ascribed to such terms in the
Security Agreement
among the
Companies
and the Holder dated as of the date hereof (as amended, modified and/or
supplemented from time to time, the
"Security Agreement").
The following terms
shall apply to this Minimum Borrowing Note
(this "Note"):
ARTICLE I
CONTRACT RATE
1.1
Contract Rate. Subject to Sections 4.2 and 5.10, interest
payable on the outstanding principal amount of this Note (the "Principal
Amount") shall accrue at a rate per annum
equal to the "prime rate" published in
The Wall Street Journal from time to time
(the "Prime Rate"),
plus one and one
half percent (1.50%) (the "Contract Rate").
The Contract Rate shall be increased
or decreased as the case may be for each
increase or decrease
in the Prime Rate
in an amount equal to such increase or decrease in the Prime
Rate; each change
to be effective as of the day of the change in the Prime Rate. Subject to
Section 1.2, the Contract Rate shall not at any time be less
than six percent
(6.0%). Interest shall be (i) calculated on the basis of a 360
day year, and
(ii) payable monthly, in arrears, commencing on August 1, 2005 on the first
business day of each consecutive calendar
month thereafter through and including
the Maturity Date and on the Maturity Date, whether by acceleration or
otherwise.
<PAGE>
1.2
Contract Rate Adjustments and Payments. The Contract Rate
shall be calculated on the last
business day of each
calendar month
hereafter
(other than for increases or decreases in the Prime Rate which shall be
calculated and become effective in accordance with the terms of Section 1.1)
until the Maturity Date (each a "Determination Date") and shall be subject to
adjustment as set forth herein. If (i) the Parent shall have
registered
the
shares of the Common Stock underlying the conversion of each
Minimum Borrowing
Note and each Warrant on a registration statement declared effective by the
Securities and Exchange Commission (the "SEC"),
and (ii) the market
price (the
"Market Price") of the Common Stock as reported by Bloomberg, L.P. on the
Principal Market for the five (5) trading days immediately preceding a
Determination Date exceeds the then applicable Fixed Conversion Price by at
least twenty-five percent (25%), the Contract Rate
for the succeeding
calendar
month shall automatically be reduced by 200 basis
points (200 b.p.) (2%)
for
each incremental twenty-five percent (25%) increase in the
Market Price of the
Common Stock above the then applicable
Fixed Conversion
Price.
Notwithstanding
the foregoing (and anything to the contrary
contained herein), in no event shall
the Contract Rate at any time be less than
zero percent (0%).
ARTICLE II
LOANS; PAYMENTS UNDER THIS NOTE
2.1 Loans.
All Loans evidenced by
this Note shall be made in
accordance with the terms and provisions of
the Security Agreement.
2.2 No
Effective
Registration.
Notwithstanding
anything to
the contrary herein, the Holder shall not
be required to accept shares of Common
Stock as payment following a conversion by
the Holder if there fails to exist an
effective current Registration Statement (as defined in the
Registration Rights
Agreement) covering the shares of Common
Stock to be issued, or
if an Event of
Default hereunder exists and is continuing,
unless such requirement is otherwise
waived in writing by the Holder in whole or
in part at the Holder's option.
2.3
Optional Redemption in
Cash. The Companies will have the
option of prepaying this Note ("Optional
Redemption") by paying
to the Holder a
sum of money equal to one hundred thirty
percent (130%) of the principal amount
of this Note, together with all accrued but
unpaid interest thereon and any and
all other sums due, accrued or payable to the Holder
arising under this Note,
the Security Agreement, or any other Ancillary Agreement (the "Redemption
Amount") outstanding on the Redemption Payment Date (as defined
below). The
Company shall deliver to the Holder a
written notice of redemption (the "Notice
of Redemption") specifying the date for such Optional Redemption (the
"Redemption Payment Date"), which date shall be ten (10) days
after the date of
the Notice of Redemption (the "Redemption
Period"). A Notice of Redemption shall
not be effective with respect to any portion of
this Note for which the Holder
has previously delivered a Notice of Conversion
(defined below) pursuant to
Section 3.1, or for conversions elected to be made by the Holder
pursuant to
Section 3.1 during the Redemption Period. The Redemption Amount shall be
determined as if such Holder's conversion elections had been completed
immediately prior to the date of the Notice of
Redemption.
On the Redemption
Payment Date, the Redemption Amount (plus any additional interest and fees
accruing on the Notes during the Redemption
Period) must be
irrevocably paid in
full in immediately available funds to the Holder. In the event the Companies
fail to pay the Redemption Amount on the Redemption Payment Date, then such
Redemption Notice shall be null and
void.
2
<PAGE>
ARTICLE III
CONVERSION RIGHTS AND FIXED CONVERSION PRICE
3.1
Optional Conversion. Subject to the terms of this Article
III, the Holder shall have the right, but
not the obligation, at
any time until
the Maturity Date, or during an Event of Default (as
defined in Article
IV),
and, subject to the limitations set forth
in Section 3.2 hereof,
to convert all
or any portion of the outstanding
Principal Amount and/or accrued interest
and
fees due and payable into fully paid and nonassessable shares of the Common
Stock at the Fixed Conversion Price. For
purposes hereof, subject to Section 3.6
hereof, the initial "Fixed Conversion Price" means $0.25. The
shares of Common
Stock to be issued upon such conversion are herein referred to as the
"Conversion Shares."
3.2
Conversion Limitation. Notwithstanding anything contained
herein to the contrary, the Holder shall not be entitled
to convert pursuant to
the terms of this Note an amount that would
be convertible
into that number
of
Conversion Shares which would exceed the
difference
between (i) 4.99% of
the
outstanding shares of Common Stock and (ii)
the number of shares of Common Stock
beneficially owned by the Holder. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section
13(d) of the Exchange Act and Regulation
13d-3 thereunder. The Conversion Shares
limitation described in this Section 3.2 shall
automatically
become null and
void following notice to any Company upon the occurrence and during the
continuance of an Event of Default,
or upon 75 days prior
notice to the Parent.
Notwithstanding anything contained herein to the contrary,
the provisions of
this Section 3.2 are irrevocable and may not be waived by the
Holder or any
Company.
3.3
Mechanics of Holder's
Conversion. In the
event that the
Holder elects to convert this Note into Common Stock, the Holder shall give
notice of such election by delivering an executed and completed notice of
conversion in substantially the form of Exhibit A hereto (appropriately
completed) ("Notice of Conversion") to the
Parent and such Notice of Conversion
shall provide a breakdown in reasonable
detail of the Principal Amount, accrued
interest and fees that are being converted. On each Conversion Date (as
hereinafter defined) and in accordance with
its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount,
accrued interest
and fees as entered in its records and
shall provide written
notice thereof to
the Parent within two (2) Business Days
after the Conversion
Date. Each date on
which a Notice of Conversion is delivered or telecopied to the Parent in
accordance with the provisions hereof shall be deemed a
Conversion Date
(the
"Conversion Date"). Pursuant to the terms of the Notice of Conversion, the
Parent will issue instructions to the transfer agent accompanied by, to the
extent reasonably requested by the Holder, an
opinion of counsel within one (1)
Business Day of the date of the delivery to the Parent of the Notice of
Conversion and shall cause the transfer agent to transmit the certificates
representing the Conversion Shares to the
Holder by crediting the account of the
Holder's designated broker with the
Depository Trust Corporation ("DTC") through
its Deposit Withdrawal Agent Commission ("DWAC") system within three (3)
Business Days after receipt by the Parent of the Notice of Conversion (the
"Delivery Date"). In the case of the
exercise of the conversion rights set forth
herein the conversion privilege shall be deemed to have been
exercised and the
Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the
Parent of the Notice of Conversion. The
Holder shall be treated for all purposes as
the record holder of the Conversion
Shares, unless the Holder provides the Parent written instructions to the
contrary.
3
<PAGE>
3.4 Late Payments.
Each Company
understands that a
delay in
the delivery of the Conversion Shares in the form required pursuant to this
Article beyond the Delivery Date could
result in economic loss to the Holder. As
compensation to the Holder for such loss,
in addition to all
other rights and
remedies which the Holder may have under
this Note, applicable law or otherwise,
the Companies shall, jointly and severally,
pay late payments to
the Holder for
any late issuance of Conversion
Shares in the form
required pursuant to this
Article III upon conversion of this Note, in the amount equal to $250 per
Business Day after the Delivery Date. The Companies shall, jointly and
severally, make any payments incurred under this Section in immediately
available funds upon demand.
3.5
Conversion Mechanics.
The number of shares of Common
Stock to be issued upon each conversion of this Note shall be determined by
dividing that portion of the principal and
interest and fees to be converted, if
any, by the then app
