<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20594
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1997 ---------------------------------------------- 2-31080 -------
(For fiscal year ended) (Commission File No.)
NATIONAL INDUSTRIAL SECURITY CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
Delaware 86-0214815
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation of Organization) Identification No.)
225 East Kirkham Road St. Louis, Missouri 63119
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip)
(314) 962-1414
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.16 2/3 per share
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Registration S-B contained in this form, and no disclosure will be contained,
to the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Aggregate market value of Common Stock held by non-affiliates of Registrant as
of March 1, 1998: $71,591.00
Issuer's revenues for fiscal year 1997 $709,400
The number of shares of Common Stock outstanding as of March 1, 1998 6,994,100
Total number of pages, including cover page -- 21
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The portions of this report listed below have been incorporated by
reference from the Company's Proxy Statement. All references herein to the
"Proxy Statement" refer to the definitive Proxy Statement of the Company to
be filed with the Securities and Exchange Commission within 120 days after
the close of the Company's fiscal year (December 31, 1997).
PART III
ITEM 10 - DIRECTORS AND Proxy Statement - "Information
EXECUTIVE OFFICERS Concerning Nominees"
OF THE REGISTRANT
ITEM 11 - EXECUTIVE Proxy Statement - "Renumeration
COMPENSATION of Officers and Directors"
ITEM 12 - SECURITY OWNERSHIP Proxy Statement:
OF CERTAIN BENEFICIAL (a) "Voting"
OWNERS AND MANAGEMENT (b) "Stock Ownership"
ITEM 13 - CERTAIN RELATIONSHIPS Proxy Statement:
AND RELATED "Other Transactions"
TRANSACTIONS
With the exception of those portions of the Proxy Statement which are
expressly incorporated by reference in this Form 10-KSB Report, the Proxy
Statement is not to be deemed filed as part of this Report.
2
<PAGE> 3
NATIONAL INDUSTRIAL SECURITY CORPORATION
----------------------------------------
FORM 10-KSB
-----------
PART 1
------
ITEM 1 - BUSINESS
- -----------------
The Company is a Delaware corporation originally organized in 1967. The
Company primarily provides security guard services to industrial, commercial,
governmental, healthcare and other institutional clients in the St. Louis
metropolitan area. The Company also provides monitored alarm system services.
During the past three years, the Company has derived approximately 99% of its
total revenues from the services provided by its uniformed security guards.
Accordingly, the Company does not report under more than one segment.
The Company's corporate offices are in St. Louis, Missouri. The Company
currently employs approximately 50 security guards in St. Louis, and has
an office staff of 4 persons. The Company has not engaged in any
overseas operations nor does it have foreign customers.
The security guard business of the Company is highly competitive both on the
basis of price and service. The Company competes in its market with several
established nationwide security firms which are considerably larger, have
greater financial resources and a more diversified business range than the
Company. The Company's knowledge of the local market and low cost structure
allows the Company to compete effectively in the St. Louis guard service market.
The Company does not experience any significant seasonal fluctuations.
Transactions with three major clients of the Company accounted for approximately
62% of the Company's total revenues for 1997.
ITEM 2 - PROPERTIES
- -------------------
The Company's corporate offices are located at 225 East Kirkham Road,
St. Louis, Missouri 63144. The Company leases 1,500 square feet. The present
lease expires in August 1998 and is not material in term or amount.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or to which any of their property is the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of stockholders, through the solicitation
of proxies or otherwise.
3
<PAGE> 4
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
- -------------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
MARKET INFORMATION
The Company's Common Stock has traded in the "Over the Counter" market
during the past ten (10) years. The Company's stock currently trades in the NASD
"OTC Bulletin Board," the NASD automated system for reporting non-NASDAQ quotes.
There are currently four (4) market makers for the Company's stock. The stock
historically trades at a very low volume and frequently experiences periods
where there are no shares being traded. Approximately 1,706,000 shares of the
company's currently outstanding stock have been registered. As of December 31,
1997, there were approximately 439 holders of the Company's common stock.
The following table sets forth the high and low bid prices for the
Company's stock as reported by inter-dealer market quotations in the Market
Chronicle of the National Quotation Bureau. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Calendar Market Bid Price Dividend
Quarter High Low Declared
======================================================================
<S> <C> <C> <C> <C>
1996 1st $.06 $.06 None
2nd $.09 $.06 None
3rd $.09 $.06 None
4th $.04 $.03 None
- ----------------------------------------------------------------------
1997 1st $.06 $.03 None
2nd $.08 $.055 None
3rd $.06 $.055 None
4th $.07 $.055 None
</TABLE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The Company is a Missouri-based corporation providing security guard
and related security services to industrial, commercial, governmental,
healthcare and other institutional clients.
4
<PAGE> 5
1997 RESULTS OF OPERATIONS
--------------------------
During 1997, the Company's revenues decreased 34% to $709,400 from
$1,081,639 in 1996. The decline in revenues was primarily due to the loss
of clients due to competitive bidding, client restructuring, relocations,
and budget reductions. The decreased revenues resulted in a loss from
operations of $15,886 in 1997 compared with profit from operations of
$16,293 in 1996 after depreciation and amortization expense of $13,130 in
1997 and $4,062 in 1996.
During 1997, the Company had a net cash increase of $9,638 from
operations, and net cash decrease of $13,000 in financing operations, for
a total net cash decrease of $3,362.
The Company is continuing to reduce expenses to a level to provide
profitable operations.
1996 RESULTS OF OPERATIONS
--------------------------
During 1996, the Company's revenues decreased 21% to $1,081,639 from
$1,363,107 in 1995. The decline in revenues was primarily due to the loss
of clients due to competitive bidding. The Company has added two smaller
clients that has partially offset the previous loss of customers. The two
new clients are smaller in size and revenues than the clients lost. The
Company has reduced expenses to offset the decrease in revenues. The
reduction of expenses offset decreased revenues and resulted in a profit
from operations of $16,293 in 1996 compared with loss from operations of
$13,948 in 1995 after depreciation and amortization expense of $4,062 in
1996 and $22,199 in 1995.
The Company is continuing to reduce its administrative and operating
expenses to a level to provide profitable operations.
5
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash position at December 31, 1997 was $5,741, compared
with $9,103 at December 31, 1996; the cash position varies day-to-day,
depending on collections and the timing of payroll obligations. At
December 31, 1997 the Company had a $31,000 balance on its $50,000 bank
line of credit. The Company also has a $100,000 loan from the President of
Company, of which $71,000 remained outstanding as of December 31, 1997.
This loan is collateralized by the Company's accounts receivable.
The Company has a $7,500 non interest-bearing note receivable due from
the President, which was paid in full February 24, 1998. The aforementioned
loan by the President to the Company was for working capital purposes.
The Company's core business of providing security guard services in the
St. Louis metropolitan area was down approximately 35% in 1997 due to the loss
of several large customers. The Company hopes to reestablish revenue growth
through the recruitment of additional new clients during 1998. If new clients
are not added, management anticipates the Company's 1998 revenues based on
existing customers will be approximately $600,000.
The Company is attempting to find a buyer or merger candidate for the
public company vehicle in order to further reduce required legal, accounting
and printing and other expenses, so that the security guard business can
continue on going operations under private ownership.
The labor market for security guard applicants has been significantly
reduced where replacements or new personnel are very difficult to obtain.
This restricts the Company in its marketing efforts, and to maintain its
customer base.
In addition to guard services, the Company continues to provide
monitoring services for alarm systems already in service. Approximately
60 alarm systems are currently being monitored. This activity accounts
for less than 1% of the Company's revenues.
ITEM 7 - FINANCIAL STATEMENTS
- -----------------------------
The Company's Consolidated Financial Statements and the Independent
Auditors' Report are presented in a separate section of this report -- see
page 8, Index to Financial Statements.
ITEM 8 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
6
<PAGE> 7
PART III
--------
ITEMS 9, 10, 11 AND 12 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
- ----------------------------------------------------------------------------
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
-----------------------------------------------------------------
OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS AND RELATED
--------------------------------------------------------
TRANSACTIONS
------------
In accordance with the instructions for Part III, the information called
for by these items is incorporated by reference from the Company's definitive
proxy statement which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year.
PART IV
-------
ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1) Financial Statements - see index on page 8.
2) Exhibits - see Index to Exhibits on page 8.
(b) No current reports on Form 8-K were filed by the Company during
the period from September 30, 1997 to December 31, 1997.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL INDUSTRIAL SECURITY
CORPORATION
Date: March 31, 1998 By:
--------------------------------
Max T. Jackson, President,
Treasurer, Director and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
- --------------------------------- Director, Treasurer, March 31, 1998
Max T. Jackson Chairman of the
Board of Directors
and President
(Principal Executive,
Financial and Accounting
Officer)
- --------------------------------- Director and Secretary March 31, 1998
Warren W. Davis
7
<PAGE> 8
<TABLE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of stockholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6
</TABLE>
All other schedules are not submitted because they are not applicable
or not required, or because the required information is included in the
financial statements or the notes thereto.
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit and Number
(Ref. to Item 601(a)
Exhibit Table of
Regulation S-B) Description of Document
-----------------------
<S> <C>
Exhibit 3 Articles of Incorporation and By-Laws
-------------------------------------
Incorporated herein by reference pursuant to Rule 12(b)-23
from Exhibit A and Exhibit C to Annual Report on Form
10-KSB for the year ended December 31, 1983, File No.
2-31080.
Exhibit 22 Subsidiaries of the Company
---------------------------
Located at page F-13 herein.
</TABLE>
8
<PAGE> 9
[LETTERHEAD OF KERBER, ECK & BRAECKEL LLP]
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders of
National Industrial Security Corporation
We have audited the consolidated balance sheets of National Industrial
Security Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity
(deficiency in assets), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Industrial Security Corporation and subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has a net deficiency in working capital and
has experienced a significant reduction in its sales volume that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Kerber, Eck & Braeckel LLP
St. Louis, Missouri
January 30, 1998
F-1
<PAGE> 10
National Industrial Security Corporation
and Subsidiaries
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31,
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 5,741 $ 9,103
Accounts receivable
Trade 64,147 79,431
Other 336 891
-------- --------
64,483 80,322
Prepaid expenses 16,996 19,820
-------- --------
Total current assets 87,220 109,245
PROPERTY AND EQUIPMENT - at cost
Furniture and equipment 85,034 85,034
Less accumulated depreciation
and amortization (85,034) (83,715)
-------- --------
-- 1,319
DEFERRED CHARGES - net of
accumulated amortization 9,908 11,720
DUE FROM OFFICER 16,236 16,236
-------- --------
Total assets $113,364 $138,520
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Line of credit with bank $ 31,000 $ 15,000
Accounts payable and accrued expenses 28,288 15,759
Accrued salaries and related taxes 27,892 25,587
Accrued legal fees 40,722 40,722
Deferred revenue 1,811 2,406
----------- -----------
Total current liabilities 129,713 99,474
NOTE PAYABLE TO OFFICER 71,000 100,000
STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Common stock - authorized 12,000,000
shares; par value $.1667 per share;
6,994,100 shares issued and outstanding
in 1997 and 6,983,000 in 1996 1,165,680 1,163,830
Additional paid-in capital 38,785 38,785
Deficit (1,291,814) (1,263,569)
----------- -----------
Total stockholders' equity
(deficiency in assets) (87,349) (60,954)
----------- -----------
Total liabilities and stockholders' equity $ 113,364 $ 138,520
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE> 11
National Industrial Security Corporation
and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<CAPTION>
1997 1996 1995
-------- ---------- ----------
<S> <C> <C> <C>
Service revenues $709,400 $1,081,639 $1,363,107
Costs and expenses
Labor and related costs 545,586 789,606 1,021,083
General and administrative 176,570 271,678 333,773
Depreciation and amortization 3,130 4,062 22,199
-------- ---------- ----------
725,286 1,065,346 1,377,055
-------- ---------- ----------
Earnings (loss) from operations (15,886) 16,293 (13,948)
Other income (expense)
Interest expense (12,359) (15,290) (14,881)
Other -- -- 1,800
-------- ---------- ----------
NET EARNINGS (LOSS) $(28,245) $ 1,003 $ (27,029)
======== ========== ==========
NET EARNINGS (LOSS) PER
COMMON SHARE $ -- $ -- $ --
======== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE> 12
National Industrial Security Corporation
and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Total
Stockholders'
Common Stock Additional Equity
------------------------- Paid-in (Deficiency in
Shares Amount Capital Deficit Assets)
--------- ---------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 6,983,000 $1,163,830 $38,785 $(1,264,572) $(61,957)
Net earnings -- -- -- 1,003 1,003
--------- ---------- ------- ----------- --------
BALANCES, DECEMBER 31, 1996 6,983,000 1,163,830 38,785 (1,263,569) (60,954)
Issuance of common stock 11,100 1,850 -- -- 1,850
Net loss -- -- -- (28,245) (28,245)
--------- ---------- ------- ----------- --------
BALANCES, DECEMBER 31, 1997 6,994,100 $1,165,680 $38,785 $(1,291,814) $(87,349)
========= ========== ======= =========== ========
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE> 13
National Industrial Security Corporation
and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities $(28,245) $ 1,003 $ (27,029)
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 3,130 4,062 22,199
Gain on sale of assets -- -- (1,800)
Changes in assets and liabilities
Accounts receivable 15,839 23,862 24,974
Prepaid expenses 2,824 (9,897) 4,943
Due from officer -- (1,447) 5,921
Accounts payable and accrued expenses 12,529 (3,606) 8,268
Accrued salaries and related taxes 2,305 (47,396) 1,505
Accrued legal fees -- (4,884) (20,329)
Deferred revenue and other 1,256 493 117
-------- -------- ---------
Net cash provided by (used in)
operating activities 9,638 (37,810) 18,769
-------- -------- ---------
Cash flows from investing activities
Proceeds from sale of property -- -- 1,800
-------- -------- ---------
Net cash provided by investing
activities -- -- 1,800
-------- -------- ---------
Cash flows from financing activities
Borrowings under line of credit with bank 31,000 15,000 574,500
Payments under line of credit with bank (15,000) -- (612,241)
Borrowings on note payable to officer -- -- 40,000
Payments under note payable to officer (29,000) -- --
Payments of capital lease obligations -- (569) (10,736)
-------- -------- ---------
Net cash provided by (used in)
financing activities (13,000) 14,431 (8,477)
-------- -------- ---------
NET INCREASE (DECREASE)
IN CASH (3,362) (23,379) 12,092
Cash at beginning of year 9,103 32,482 20,390
-------- -------- ---------
Cash at end of year $ 5,741 $ 9,103 $ 32,482
======== ======== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 12,359 $ 16,071 $ 14,881
======== ======== =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE> 14
National Industrial Security Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Entity
----------------
National Industrial Security Corporation primarily provides security
guard services to industrial, commercial, governmental and other
institutional clients in the St. Louis, Missouri metropolitan area.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of National
Industrial Security Corporation (the "Company") and its wholly owned
subsidiaries, none of which operated in the three years ended December 31,
1997. All material intercompany balances have been eliminated.
3. Revenue Recognition
-------------------
In general, the Company's contracts with its clients have terms of one year
with an automatic renewal. The contracts can be canceled, however, at any
time upon 30 days notice. The contracts contain hourly rates for guard
services provided. The Company recognizes revenue as services are performed
in accordance with the contract terms.
4. Depreciation and Amortization
-----------------------------
Property and equipment is stated at cost and is depreciated on straight-line
and accelerated methods over the estimated useful lives of the related assets,
which approximates five years. Leasehold improvements and equipment under
capital lease are amortized over the shorter of the useful life of the asset
or the lease term.
Deferred charges consist principally of goodwill and patent costs which are
being amortized on the straight-line basis over the expected period of
recoverability of such costs based upon expected future operating results,
which is 15 to 20 years. Recoverability is reviewed on an annual basis.
Accumulated amortization of deferred charges was $20,724 and $18,912 at
December 31, 1997 and 1996, respectively.
5. Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes".
F-6
<PAGE> 15
National Industrial Security Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Income Taxes - Continued
------------------------
Under the asset and liability approach specified under SFAS No. 109,
deferred taxes are established for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled.
6. Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of
cash, trade receivables and trade payables are representative of their
fair values due to the short-term maturity of these instruments. The
book value of the Company's debt instruments is considered to approximate
their fair value at December 31, 1997, based on market rates and
conditions and the fact that all such instruments' rates are variable
depending on the current quoted prime rate.
7. Income (loss) Per Share
-----------------------
Income (loss) per share computations are based on the weighted average
number of common shares outstanding each year.
8. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. However, the Company has sustained
substantial losses from operations in recent years. In addition, the
Company has a net deficiency in working capital and stockholders' equity.
F-7
<PAGE> 16
National Industrial Security Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended December 31, 1997, 1996 and 1995
NOTE B - REALIZATION OF ASSETS - continued
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing, and to
succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to reestablish revenue growth through the recruitment of new
clients during 1998. The Company continues to try to reduce its administrative
and operating expenses to a level to provide profitable operations. Management
believes these actions are sufficient to provide the Company with the ability
to continue in existence.
NOTE C - DEBT
The Company has a $50,000 bank line of credit, of which $31,000 and $15,000,
was outstanding at December 31, 1997 and 1996, respectively. Advances under
the line of credit are collateralized by eligible accounts receivable and
by a personal guarantee of the Company's President and require monthly
interest payments at prime (8.50% at December 31, 1997) plus 2.0%. The
line of credit expires in June 1998.
The Company has a loan from the President of the Company to meet its working
capital requirements. The loan balance was $71,000 and $100,000 at
December 31, 1997 and 1996, respectively. The note is collateralized by
accounts receivable and property and equipment of the Company and is
subordinated to the bank line of credit. The note requires monthly interest
payments at prime (8.50% at December 31, 1997) plus 5.25% and is due May 31,
1999. Included in interest expense on the consolidated statement of operations
for the years ended December 31, 1997, 1996 and 1995 is $10,931, $14,243 and
$12,677, respectively, of interest related to notes payable to the President
of the Company.
NOTE D - INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards
aggregating approximately $819,000 expiring through 2012 (the majority
of such net operating loss carryforwards expire in 1999 and 2001). The
Company also has general business credit carryforwards of $8,450 expiring
principally in 1998.
F-8
<PAGE> 17
National Industrial Security Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended December 31, 1997, 1996 and 1995
NOTE D - INCOME TAXES - Continued
Temporary differences and the aforementioned net operating loss
carryforwards and tax credit carryforwards gave rise to deferred tax
assets at December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 327,600 $ 316,800
Tax credit carryforwards 8,450 8,450
--------- ---------
Total deferred tax assets 336,050 325,250
Deferred tax liabilities (2,600) (2,600)
Valuation allowance (333,450) (322,650)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
Management has determined, based on the Company's history of prior
operating earnings and its expectations for the future, that it is
not likely that future operating income of the Company will be
sufficient to fully recognize the net deferred tax asset. Therefore,
a valuation allowance for the entire amount of the net deferred tax
asset has been recorded.
The valuation allowance increased (decreased) by approximately $11,000,
$(11,000) and $7,000 for the years ending December 31, 1997, 1996 and
1995, respectively.
NOTE E - COMMITMENTS
The Company leases its office space under an operaing lease expiring in
August 1998. Future minimum lease commitments under the operating lease
at December 31, 1997 are $8,000.
Rent expense was $13,891, $20,200 and $22,200 and 1997, 1996 and 1995,
respectively.
NOTE F - DUE FROM OFFICER
At December 31, 1997 and 1996, the Company has a note receivable of $7,500
due from the President of the Company. The note is non-interest bearing
and payable on or before December 21, 1998. Also, the Company has non-
interest bearing receivables due from the President in the amount of
$8,736 at December 31, 1997 and 1996, respectively. The amounts due are
primarily for a portion of the monthly lease payments and repairs on the
Company's leased automobiles prior to 1996.
F-9
<PAGE> 18
National Industrial Security Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended December 31, 1997, 1996 and 1995
NOTE G - STOCKHOLDERS' EQUITY
In 1994, the Company granted to the President and two other stockholders,
options to purchase 500,000, 250,000 and 250,000 shares of common stock,
respectively. The options were exercisable at a price of $.10 per share
and expired on March 18, 1997. No options were exercised during the
option period.
On February 10, 1995, the Company granted options to purchase 4,000,000
shares of common stock. The options are contingent on certain performance
levels achieved in a currently inactive subsidiary. The options were
exercisable at a price of $.10 per share and expired on February 10, 1998.
No options were exercised during the option period.
NOTE H - SIGNIFICANT CUSTOMERS
The Company generated service revenues (as a percentage of total service
revenues) with major customers during the three years ending December 31, 1997
as detailed below:
<TABLE>
<CAPTION>
Customer 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C>
A -% 12% 21%
B 10% -% -%
C 25% 16% 12%
D 27% 18% 12%
</TABLE>
Accounts receivable (as a percent of total trade accounts receivable) as of
December 31, 1997 and 1996 from the aforementioned customers are as follows:
<TABLE>
<CAPTION>
Customer 1997 1996
-------- ---- ----
<S> <C> <C>
A -% -%
B 6% -%
C 19% 15%
D 25% 21%
</TABLE>
F-10
<PAGE> 1
EXHIBIT 22
----------
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Percentage
of Capital
Name of State of Stock Owned
Subsidiary Incorporation by Registrant
---------- ------------- -------------
<S> <C> <C>
National Industrial Security New York 100%
Corporation of New York
Centrix Entertainment and
Communications, Inc. Missouri 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,741
<SECURITIES> 0
<RECEIVABLES> 64,483
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 87,220
<PP&E> 85,034
<DEPRECIATION> (85,034)
<TOTAL-ASSETS> 113,364
<CURRENT-LIABILITIES> 129,713
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 113,364
<SALES> 0
<TOTAL-REVENUES> 709,400
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,359
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
