ISECURETRAC CORP - 10-Q filing on 2011-08-15

Series C 8% Cumulative, Compounding Exchangeable Preferred Stock

6 Months Ended

Jun. 30, 2011

Temporary Equity Series C [Abstract]

Series C 8% Cumulative, Compounding Exchangeable Preferred Stock

Note 7. Series C 8% Cumulative, Compounding Exchangeable Preferred Stock

On June 27, 2005, the Company issued 1,000,000 shares of its $0.01 par value Series C 8% Cumulative, Compounding Exchangeable Preferred Stock (the “Series C Preferred Stock”). The Series C Preferred Stock is exchangeable for 4,782,609 shares of common stock and warrants to acquire 6,287,045 shares of common stock at an exercise price of $2.30 per share at anytime at the discretion of the preferred stockholder.

On June 30, 2011, the Company amended the terms of the Series C Preferred Stock to:

eliminate the right of the holders of Series C Preferred Stock to cause the Company to redeem their shares of Series C Preferred Stock for cash on the tenth anniversary of the issue date of the Series C Preferred Stock. Prior to the amendment, the Series C Preferred Stock was redeemable in cash on the tenth anniversary of the original issue date at the election of the holder as further described below

provide that dividends on the Series C Preferred Stock shall be payable in additional shares of Series C Preferred Stock, rather than cash, in an amount per share equal to 0.08 shares of Series C Preferred Stock per annum compounded annually.

provide that the holders of the Series C Preferred Stock will vote with the holders of the Series D Preferred Stock, as single class, with respect to the appointment of four of the seven directors of the Company until the earliest date on which either (i) less than an aggregate of 500,000 shares of Series C Preferred Stock and Series D Preferred Stock remain outstanding or (ii) the holders of record of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting as a single class, elect to eliminate their right to appoint such directors. The right to appoint these four directors was previously exercised exclusively by the holders of the Series C Preferred Stock – Mykonos. Mykonos and Crestpark, the holder of all issued and outstanding shares of Series D Preferred Stock, are affiliated companies which are majority owned and controlled by the same entity.

The amended certificate of designation also designated 2,800,000 shares of the total 5,000,000 authorized shares of the Company’s preferred stock as Series C Preferred Stock. Previously, only 1,000,000 shares of the Company’s authorized preferred stock was designated as Series C Preferred Stock.

An additional 588,163 shares of Series C Preferred Stock were issued to Mykonos for payment of all dividends and associated compounded interest through June 30, 2011. Accordingly, as of June 30, 2011 the Company had issued and outstanding 1,588,163 shares of Series C Preferred Stock.

The above amendments result in the classification of the Series C Preferred Stock as Stockholders' Equity in the Company's Consolidated Balance Sheet at June 30, 2011. In addition, subsequent to June 30, 2011, as a result of the amendments, the periodic accretion noted below, which was increasing the carrying amount of the Series C Preferred Stock, is no longer required. The Company is also not expected to incur interest expense on future accrued but unpaid dividends since the dividends will be paid through the issuance of additional shares of Series C Preferred Stock.

The following paragraphs outline the original terms of the Series C Preferred Stock which were in effect through June 30, 2011.

If, after June 27, 2010, the closing price of the common stock exceeds $20.00 per share for at least 120 consecutive trading days, the Company can require the conversion of the Series C Preferred Stock into common stock in accordance with the above exchange provisions.

The Series C Preferred Stock is redeemable on the tenth anniversary of the original issue date. The redemption price per share of the Series C Preferred Stock will equal the per share original issue price ($11.00 per share) plus an amount equal to all accrued but unpaid dividends thereon (and any interest payable thereon). The interest method will be utilized to accrete the carrying amount of the Series C Preferred Stock over the ten year period to the earliest redemption date so that the carrying amount will equal the redemption amount at the earliest possible redemption date. Due to the accumulated deficit position of the Company, the periodic accretion will be charged to Additional Paid-In Capital. Prior to the amended designation through June 30, 2011, the Company had accrued Series C Preferred Stock dividends totaling $6,469,790 and accretion to redemption value of the Series C Preferred Stock totaling $1,148,739. Of these amounts, $322,628 and $49,966, respectively, were accrued during the three months ended June 30, 2011.

Upon any liquidation of the Company, no distribution can be made to the holders of shares of common stock or other stock ranking junior to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock have received an amount per share equal to the per share original issue price plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, multiplied by a factor of 105%.

Except as otherwise required by law, the holders of shares of Series C Preferred Stock vote together with the holders of shares of the common stock of the Company on all matters submitted to the stockholders of the Company and not as a separate class, and each share of Series C Preferred Stock entitles the holder thereof to 11 votes or the equivalent amount of voting power thereof as determined by the Board of Directors. In addition, until such time that less than 500,000 shares of Series C Preferred Stock are outstanding, the Series C Preferred Stockholders have the ability to appoint a majority of the Company’s directors.