<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Paid).
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required).
For Fiscal Year Ended December 31, 1995
Commission File Number: 1-11900
INTEGRATED SECURITY SYSTEMS, INC.
---------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2422983
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(State of Incorporation) (I.R.S. Employer Identification No.)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TEXAS 75063 (214) 444-8280
(Address including zip code, area code and telephone number
of Registrant's executive offices.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common stock, $.01 par value Boston Stock Exchange
Warrants for common stock Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant 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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant'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. [ ]
Issuer's revenues for its most recent fiscal year: $7,622,219
As of February 23, 1996, 3,829,693 shares of the Registrant's common stock were
outstanding and 2,300,235 warrants were outstanding.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of February 23, 1996 - $3,071,000. This amount was computed by
reference to the average of the bid and asked prices of registrant's common
stock.
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TABLE OF CONTENTS
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Item No. Page
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Part I
1. Description of Business 3-5
2. Description of Properties 5-6
Part II
5. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
6. Financial Statements 12-29
Part IV
12. Exhibits, Lists and Reports on Form 8-K 30-34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Integrated Security Systems, Inc. ("ISSI") designs, develops,
manufactures, sells and services commercial and industrial security and traffic
control products including warning gates, crash barriers, lane changers,
navigational and airport lighting, and electronically-controlled security
gates. Through its predecessors, the Company has sold these products since 1925
and has installed them in thousands of locations across the country. The
Company also develops and markets "intelligent" or programmable security
systems that integrate multiple security devices and subsystems for
governmental, commercial and industrial facilities. Applications for these
systems include perimeter security for airports, access control for commercial
office buildings, and video surveillance for warehouses. By integrating
different commercially available security products such as automatic gates,
access control panels, video cameras, switchers, recorders, and badge
identification systems, the Company provides turnkey security solutions that
perform automated user-defined security functions.
At present, a customer with multiple security needs such as perimeter
security, access control or video surveillance typically must design, develop
and integrate each security function internally or utilize several outside
vendors. By combining multiple security functions into an integrated system or
network, the Company allows customers to reduce costs and human error while
increasing the level of security for asset protection and personnel safety.
ISSI also has exclusive licenses for certain video and electronic funds
transfer ("EFT") technologies. The licensed video technology can be used in
CCTV security applications and the licensed EFT software can be used in systems
which integrate, for example, parking garages and retail operations. By
integrating EFT (credit cards, debit cards, check verification, etc.) into
security systems, Innovative Security Technologies, Inc. ("IST") can provide
users, such as universities, with a single card solution to students and
faculty for identification, dormitory and parking access, cafeteria purchases
and automatic teller machine withdrawals.
Because of increasing crime rates, increased emphasis on corporate
security, and end user demands for more automated security products, the
Company believes that the industry trend will continue toward more
sophisticated, outsourced systems that offer the ability to automate several
security functions simultaneously. As a result, the Company has developed a
PC-based facility management system called Intelli-Site that integrates all
security functions across an entire enterprise including remote sites.
The Company distributes its products and services through direct sales,
dealer/distributor factory-direct purchasing networks, consultants and other
system integrators.
CORE BUSINESS PRODUCTS AND PRODUCT STRATEGY
Road and Bridge: B&B Electromatic, Inc. ("B&B")
B&B, the Company's manufacturing subsidiary in operation since 1925,
designs, manufactures, and markets warning gates, crash barriers
(anti-terrorist or traffic control), lane changers, navigational lighting,
airport lighting and perimeter security gates and operators. Road and bridge
products are usually custom-designed and are sold through B&B's direct sales
channel. Custom contracts have a wide range of value from $5,000 to over
$500,000 with contract fulfillment ranging from several months to one or more
years.
B&B plans to continue to focus on the rebuilding of the federal and state
road and bridge infrastructures by continuing its long established
relationships with the network of architectural firms that focus on these
projects. These firms tend to specify B&B products for their projects due to
the reputation of high quality designs of B&B products. In addition, ISSI will
continue to incorporate B&B's road and bridge reputation into its more recently
established perimeter security core business.
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Until August 1995, Automatic Access Controls, Inc. ("AAC"), an affiliate,
was the only authorized distributor of B&B perimeter security. AAC operations
were discontinued in 1995. Since then, perimeter security sales have increased
both in volume and effective price.
Perimeter Security: B&B Electromatic, Inc. ("B&B")
B&B manufactures gate operators and aluminum gate panels which it sells to
dealers and distributors. Gate panels are movable portions of an enclosure
used for pedestrian and vehicular site access and egress. Gate operators are
automated mechanisms designed to open and close gate panels under electronic
control. B&B perimeter security products average between $1,000 and $8,000 per
order with delivery times from less than a week to several weeks depending upon
whether the item is custom-built or a standard product. Perimeter security
products are also integrated into IST's Intelli-Site systems and resold as a
subsystem by IST to its clients.
Electronic Security Systems: Tri-Coastal Systems, Inc. ("TCSI")
TCSI designs, sells, installs and services electronic security systems
primarily for commercial and industrial buildings using standard
"off-the-shelf" subsystems from various manufacturers. TCSI will often provide
the subsystem components for an IST integrated system sale. In addition, TCSI
provides maintenance services and monitoring services for both its own and
IST's end users.
Integrated Systems: Innovative Security Technologies, Inc. ("IST")
IST designs, develops and markets fully integrated turnkey facility
management systems. Since its inception in 1993, IST has been developing and
testing a proprietary hardware and software product called Intelli-Site, a
user-defined, PC-based systems integration platform. IST is developing a
direct sales channel to provide total security and other facility management
functions (i.e., HVAC, EFT payment systems, parking systems, etc.) to customers
not serviced by dealers or, for various reasons including the unavailability of
turnkey products and services, choose not to use dealers. IST's strategy is to
exploit industry outsourcing trends by directly marketing and servicing its
proprietary Intelli-Site integrated turnkey system to end users and to other
system integrators.
The two industry-unique features of Intelli-Site are its ability to
integrate any vendor's security devices or sub-system (vendor independency) and
its ability to have the system's automated functionality be defined by the end
user at any time, within minutes, without programming (dynamic functionality).
The Company knows of no other product with these features.
Intelli-Site is a standard product that competes against custom-designed
systems. Since Intelli-Site is a standard product, it offers a significant
price advantage over custom-developed systems by eliminating software
development costs and reducing the time to delivery. Custom-designed systems
may cost $500,000 and can run as high as $10 million or more. Intelli-Site
systems cost much less than a custom-designed system with approximately the
same level of integration. However, custom system functions cannot be changed
by the user without paying for, and waiting for, another custom development
cycle. Intelli-Site systems, depending on the configuration and number of
integrated devices, can be sold for as little as $50,000 to over $1 million and
are user definable. The Company believes that 137,000 U.S. companies have
budgeted between $50,000 and $600,000 for security purposes. Intelli-Site,
because of the price discontinuity between standard products and custom
products, can penetrate these companies with little or no competition from
custom-design system integrators.
Having completed its customer on-site testing, IST received its first
commercial sales orders in 1995 to a major Texas semiconductor facility and an
Arizona copper mining facility.
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WARRANTY
The Company has two-year or five-year warranties on products it
manufactures. The Company provides for replacement of components and products
that contain manufacturing defects. When the Company uses other manufacturer's
components, the warranties of the other manufacturers are passed to the dealers
and end users. To date, the servicing and replacement of defective components
and products have not been material.
BACKLOG
The Company's backlog, calculated as the aggregate sales prices of firm
orders received from customers less revenue recognized, was approximately $2.9
million at December 31, 1994 compared to $3.5 million at December 31, 1995.
The Company expects that the majority of this backlog will be filled during
1996 with the balance to be filled in 1997.
INTELLECTUAL PROPERTY
On March 16, 1993, the Company entered into an agreement with COMTRAC
Corporation ("CTC") that grants to the Company a worldwide, irrevocable,
paid-up license to use CTC's proprietary transaction processing systems,
applications and communications software and related hardware for use in
security-related systems and systems integrating security and electronic funds
transfer functions, all of which are components of the Intelli-Site integration
platform. The license is exclusive until March 16, 1996. The Company paid
$250,000 for this license.
Also on March 16, 1993, the Company entered into an agreement with
DesignTech, Inc. ("DTI") that grants the Company a worldwide license to use
DTI's proprietary interactive Digital Video Interface system technology for
security-related functions, which may constitute a part of the Intelli-Site
system platform. This license is exclusive for two years and is nonexclusive
thereafter. Under the agreement, for a period of five years, the Company pays
DTI a royalty of 1% of the Company's total gross revenues derived from products
using the licensed technology. The royalty declines to 0.25% for cumulative
gross revenues exceeding $20,000,000.
EMPLOYEES
As of December 31, 1995, the Company employed 95 people, all in full-time
positions. None of the Company's employees is subject to collective bargaining
agreements. The Company believes that relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
B&B owns its manufacturing and office facility in Norwood, Louisiana.
This facility consists of approximately 26,000 square feet of manufacturing and
office space on five acres of land. The office portion of this facility is
subject to mortgages that as of December 31, 1995 had principal balances of
approximately $384,000, carry a variable interest rate of 0.5% above the prime
or base lending rate of the lender, require monthly payments of $3,720, and
mature in 1996 and 2002, at which time the principal balances are due in full.
The mortgages are guaranteed by the principal stockholder.
The Company occupies 13,038 square feet of office and warehouse space in
Irving, Texas, under a lease expiring on October 6, 1997, with monthly rent of
$6,790, plus the costs of utilities, property taxes, insurance,
repair/maintenance expenses and common area utilities. The Company also
occupies 1,200 square feet of office and warehouse space in Baltimore,
Maryland, under a lease expiring on May 31, 1997, with a monthly rent of $660
plus all utilities and property taxes. The Company sublets a portion of the
Baltimore facility to a distributor of perimeter security products.
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During the fourth quarter of the year, the Company's historically busiest
quarter, the manufacturing facility is operating close to capacity. However,
during the first three quarters of the fiscal year, the Company is able to
manage production so that the plant operates within capacity. When the Company
is able to obtain permanent financing, the Company plans to further expand its
manufacturing facility in Norwood by constructing a 33,000-square foot building
behind the existing administration and engineering building. Until such time,
the Company expects that the plant can continue to meet current and anticipated
levels for the next few years.
The Company believes that the properties, equipment, fixtures and other
assets of the Company located within the Company's facilities are adequately
insured against loss, that suitable alternative facilities are readily
available if the lease agreements described above are not renewed, and that
its existing facilities are adequate to meet current requirements.
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PART II
ITEM 5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company designs, develops, manufactures, sells and services commercial
security and traffic control products including gates, crash barriers, lane
changers, and navigational and airport lighting. In addition, the Company
develops and sells integrated security systems that control and monitor access
to governmental, commercial and industrial sites such as airports, prisons,
offices, warehouses and parking facilities. The Company is a holding company
that conducts its operations principally through three wholly owned
subsidiaries: B&B Electromatic, Inc. ("B&B"), Innovative Security
Technologies, Inc. ("IST") and Tri-Coastal Systems, Inc. ("TCSI").
The Company was incorporated on December 19, 1991. Effective as of
January 1, 1992, the Company acquired B&B from an affiliate in a transaction
which was accounted for similar to a pooling of interests. B&B designs,
manufactures, and distributes commercial and industrial security products, and
traffic control gates, barriers and lighting for the road and bridge industry.
B&B has been in operation since 1925.
Effective January 1, 1992, the Company purchased all of the outstanding
stock of AAC, an independent distributor of commercial and industrial security
products. ISSI discontinued the operations of AAC during 1995. Accordingly,
AAC is presented as discontinued operations for all periods.
On March 16, 1993, the Company organized IST, which is a retail seller of
security products and microprocessor-based systems to large customers. On
August 23, 1993, the Company announced the development of its PC-based security
network, the Intelli-Site, that integrates multiple security functions into a
centralized management system for single and/or multiple site locations. IST
will be responsible for the sales and marketing of this product. The first
beta site installations for this product were completed during the fourth
quarter of 1994 and early first quarter 1995.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
SALES. The Company experienced a $247,000 (3%) increase in sales from
1994 to 1995 from $7.4 million to $7.6 million, respectively. This increase is
primarily attributable to increased sales at B&B, net of the discontinuance of
the AAC operations. During the fourth quarter of 1995 sales increased to $3.5
million compared to $1.9 million for the comparable 1994 quarter. Record sales
at B&B accounted for this 84% increase over prior year.
For the period ended December 31, 1995, approximately 94% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 82% for 1994.
COST OF SALES AND GROSS PROFIT. Gross profit as a percent of sales
decreased to 45% in 1995 from 53% in 1994. This decrease was due to a less
favorable product mix from the prior year. During 1994, the Company
experienced higher sales of road and bridge products compared to perimeter
security products which have higher gross margins. Also during 1995 obsolete
inventory totaling $125,000 was written off.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.8 million for the 1994 12-month period to $4.6
million for the comparable 1995 period. The majority of this increase is due
to one-time expenses of approximately $1 million for severance obligations to a
former officer and for the write-off of acquisition fees. The remaining
increase is caused by non-recurring expenses associated with employee
terminations, legal fees associated with litigation dating from 1994 and
amortization expense of origination fees for 1994 loans.
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During 1995, the Company received notice from the target company that was
the subject of recent acquisition efforts that the target company no longer
wished to continue discussions. Although the Company continues to pursue an
acquisition strategy with other candidates in similar or complementary
industries, $511,000 of costs and fees previously incurred in connection with
this acquisition target and deferred at the time of being incurred, were
charged to operations in the quarter ended September 30, 1995.
INTEREST EXPENSE. Interest expense increased $192,000 for the 12-month
period from $151,000 in 1994 to $343,000 in 1995. This increase is primarily
attributable to interest on bridge financing that was entered into during the
third and fourth quarters of 1994, amortization of debt discount pertaining to
the aforementioned bridge financing and higher interest costs for the accounts
receivable financing facility.
DISCONTINUED OPERATIONS. The operations of the AAC subsidiary are
reflected as discontinued operations for all periods. During the second
quarter of 1995, the decision was made to discontinue the operations of this
subsidiary. The Company recorded a reserve of $425,000 during the second
quarter of 1995 for inventory and asset disposition, as well as office closings
and staff reductions. During the third and fourth quarters of 1995, the
Company reversed $65,000 of this accrual as actual costs became more
determinable.
INCOME TAXES. In assessing the likelihood of realization of the deferred
tax asset, the Company primarily considered the trend of the Company's
operating results toward profitability. The 1995 operating results, net of
non-recurring expenses, were in line with 1994. The Company anticipates a
positive trend to develop in 1996 since all non-recurring amounts have been
recognized in 1995, except for an anticipated seasonal loss in the first
quarter of 1996. This positive trend will be boosted by the sales roll-out of
Intelli-Site. These factors, coupled with the current growth of the security
industry, were considered positive factors in this assessment. Since the net
operating loss carryforward does not begin to expire until 2007, the Company
anticipates that all recognized carryforward benefits will be fully utilized
before this expiration date arrives. As there are no significant temporary
differences in the Company's tax calculation, realization will be primarily
achieved by increased profitability. The Company anticipates that its move to
profitability in 1996 and beyond will be dependent on its success in three
areas: (i) sales - continued increases in sales at all subsidiaries plus a
positive response to the Intelli-Site product; (ii) profit margins - continued
focus on increasing margins at IST, while maintaining the current margins at
B&B; and (iii) cost control - continued cost control at all subsidiaries.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 82% of the deferred
tax asset as of December 31, 1995. Further recognition of the asset will be
dependent on the Company attaining profitability targets that have been
established. The realizability of the net deferred tax asset will be reviewed
on a quarterly basis. The provision for income taxes for 1995 consists of
state income taxes for the Company's subsidiary, B&B.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
SALES. The Company experienced a $3.6 million (96%) increase in sales
from 1993 to 1994 from $3.7 million to $7.3 million, respectively. This
increase is attributable to increased business at B&B. Sales in the Company's
road and bridge business increased approximately 87% in 1994 compared to 1993.
Contributing to this increase were shipments to the State of Florida, the City
of Houston and a $1.7 million contract for roadway products with the Illinois
Department of Transportation.
For the year ended December 31, 1994, approximately 95% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 100% for 1993.
COST OF SALES AND GROSS PROFIT. Gross profit as a percent of sales
increased from 51% in 1993 to 53% in 1994. This increase was primarily due to
increased sales in the Company's road and bridge business, which generally has
a higher gross margin than individual perimeter security products.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 43% from $1.9 million in 1993 to $2.8 million in 1994.
This increase is primarily due to increased selling, general and administrative
expenses at B&B as a result of the significantly higher sales activity, and to
increased costs incurred in 1994 relating to the marketing of Intelli-Site (the
Company's PC-based site security system). As a percent of sales, selling
general and administrative expenses decreased to 38% in 1994 from 52% in 1993.
RESEARCH AND DEVELOPMENT. Expenses for research and development decreased
84% to approximately $79,000 in 1994 from approximately $509,000 during 1993 as
the Company began to capitalize software development costs in 1994 associated
with the development of the Intelli-Site project. The technological feasibility
of Intelli-Site was established in 1994 in accordance with FAS 86. Capitalized
software development costs were approximately $391,000 for 1994.
PROVISION FOR INCOME TAXES. As of December 31, 1993, the Company had a
net operating loss carryforward of $3.1 million from losses incurred in prior
years. Through the second quarter of 1994, the Company had not recognized any
deferred tax assets in accordance with FAS 109, "Accounting for Income Taxes."
During the third and fourth quarters of 1994, a portion of this deferred tax
asset was recognized (approximately $180,000). The resulting credit to
Provision for Income Taxes was partially offset by approximately $140,000 of
state income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not presently have sufficient cash on hand or available
from its factoring facility to meet all obligations that are due or will come
due in 1996. The factors which led to the independent auditors' report that
substantial doubt existed about the Company's ability to continue as a going
concern still exist. By June of 1996, $951,000 of the Company's notes payable
are due. The Company is currently exploring various sources of financing
including the sale of convertible preferred stock and a new bank financing
agreement.
On March 1, 1996, the Company entered into a private placement non-binding
letter of intent with an investment banking firm for the sale of up to 62,500
units comprised of one share of convertible preferred stock and 15 common stock
purchase warrants for $20.00 per unit. Each share of convertible preferred
stock is convertible into 30 shares of common stock at the option of the
Company if (i) the closing bid price of the common stock is at least $2.00 for
20 of 30 consecutive trading days and (ii) the shares of common stock to be
received upon conversion are registered or otherwise qualified for sale. Each
warrant is entitled to purchase one share of common stock at an exercise price
of $1.00 during the five-year period from the close of the offering. The
Company expects such convertible preferred stock offering will be completed
during 1996 and 1997 for a total of $2.5 million if the offering is fully
subscribed. There can be no guarantee of this based upon the fact that this is
a best efforts offering.
The Company is currently negotiating with bank lenders to obtain a new
long-term financing agreement for approximately $900,000. The Company intends
to use such bank financing to repay existing mortgages which amount to
approximately $400,000 at December 31, 1995, and to repay a portion of the
outstanding bridge loans.
Should the convertible preferred stock offering or the bank financing not
be successful, the Company will likely be required to take additional steps
including negotiating extended payment agreements with major creditors,
factoring additional amounts, and implementing additional cost reductions which
may delay revenue growth.
The Company's cash position increased by $2,000 during 1995. The Company
generated $879,000 from operations during this period as compared with $775,000
used by operations during 1994. This was primarily accomplished with increased
collections of accounts receivable, either directly or through a factoring
agreement, and extending payment terms for accounts payable and accrued
liabilities. These sources of cash were partially offset by increased
inventory. Discontinued operations provided $1,018,000 of cash during the 12
months ended December 31, 1995, $1,275,000 through collections of accounts
receivable and sales of assets, net of $257,000 paid out for accounts payable
and liabilities, compared to providing $493,000 in the same 1994 period. The
Company
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used approximately $246,000 during the 12 months ended December 31, 1995 to
fund development of the Intelli-Site project and to purchase approximately
$52,000 of fixed assets. During 1995, the Company used $578,000 for financing
activities. A line of credit of $847,000 was repaid in its entirety, along with
payments of $151,000 on notes and long-term debt. Conversely, the Company
received $144,000 from warrantholders exercising warrants, borrowed $98,000
from an officer of the Company, and borrowed $150,000 from a lending
institution.
On April 11, 1995, the Company repaid a bank line of credit in its
entirety with funds drawn against a credit facility with the same financial
institution entered into on that date to factor accounts receivable with
recourse. Such repayment released a $350,000 certificate of deposit and
accumulated interest. This factoring facility expires April 15, 1996, has a
factoring fee of 3.13% and a maximum borrowing amount of $1,400,000. As of
December 31, 1995, the Company had factored receivables of approximately
$1,103,000.
During June and July 1995, the Company borrowed $150,000 from a financial
institution. This loan due December 24, 1995, at an interest rate of 11%, and
is secured by a second mortgage on real estate. This loan has been extended
until June 27, 1996.
During the first quarter of 1995, a principal stockholder contributed
common stock and equipment to the Company and agreed to cancel the related
equipment lease with the Company in exchange for cancellation of the balance of
a note payable to the Company and related interest. This transaction resulted
in an increase in stockholders' equity of $87,000.
During December 1995, the Company obtained an extension of the due dates
of certain outstanding bridge loans. These loans are in the principal amount
of $789,000 and are secured by certain of the Company's accounts receivable,
equipment and inventory. The loan agreements were due between September and
November 1995. All loans have been extended to April 29, 1996 in exchange for
warrants and an increased interest rate from 14% to 16%.
On January 5, 1996, the Company issued $683,353 of convertible preferred
stock at $20 per share. The Company had received subscription agreements in
December 1995 for this amount, but issuance was contingent upon the release of
a conditional listing by Nasdaq. This release was granted on January 12, 1996
and the preferred shares were issued. This stock is redeemable by the Company
upon 30 days' written notice at $22 per share, is convertible to common stock
equal to the number of Preferred Shares times $20 divided by the conversion
price ($.67) and pays dividends semi-annually at 10%.
CAPITAL EXPENDITURES
The Company acquired approximately $52,000 and $129,000 of machinery and
equipment in 1995 and 1994, respectively, principally for its manufacturing
facility.
The Company currently plans to further expand its manufacturing facility
in Norwood, Louisiana, which is expected to cost approximately $1.4 million.
This expansion is expected to be funded through a combination of earnings and
bank financing in 1997. At December, 31 1995, the Company had incurred
approximately $153,000 of these costs.
In 1994, the Company began capitalizing software development costs in
accordance with FAS 86 "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed." In 1995, the amount capitalized was
approximately $246,000, for a total amount capitalized of approximately
$637,000. The Company completed its first sale of the Intelli-Site system in
March 1996, and will begin amortizing these costs in 1996 over the expected
life of the product.
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EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's sales or
operating results.
SEASONALITY
Historically the Company has experienced seasonality in its business due
to fluctuations in the weather. The Company typically experiences a decline in
sales and operating results and expects to incur a loss during the first
quarter of the year due to winter weather conditions.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance with all applicable
environmental regulations. Compliance with these regulations has not had, and
is not anticipated to have, any material impact upon the Company's capital
expenditures, earnings or competitive position.
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INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
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ITEM 6. FINANCIAL STATEMENTS
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Report of Independent Accountants 13
Consolidated Balance Sheets as of December 31, 1995 and 1994 14
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 15
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 17
Notes to Consolidated Financial Statements 18-29
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All financial statement schedules are omitted since they are not required, are
not applicable, or the information required is included in the Consolidated
Financial Statements or the Notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Integrated Security Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Integrated Security Systems, Inc. and its subsidiaries (the Company) at
December 31, 1995 and 1994 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 3 to
the consolidated financial statements, $951,000 of the Company's notes payable
are due by June 1996. The Company's current cash flow from operations is not
sufficient to permit the Company to repay such debt on the due date. The
Company has not been able to secure permanent refinancing of such debt and the
holders of the debt have not extended the terms of the debt. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to this matter are also described in
Note 3. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Dallas, Texas
March 14, 1996
Page 13 of 36
<PAGE> 14
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 209,655 $ 10,523
Accounts receivable, net of allowance for doubtful accounts
of $54,558 and $34,865, respectively 1,761,701 1,849,665
Inventories 854,888 721,306
Restricted cash 157,851 354,982
Other current assets 38,221 42,688
Net assets of discontinued operations 76,807 1,458,534
------------ ------------
Total current assets 3,099,123 4,437,698
Property and equipment, net 1,068,123 1,032,524
Capitalized software development costs 923,932 599,444
Deferred income taxes 205,384 205,384
Other assets 10,943 292,560
============ ============
Total assets $ 5,307,505 $ 6,567,610
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,484,152 $ 435,318
Accrued liabilities 1,044,450 450,308
Notes payable 950,947 1,778,905
Notes payable to related parties 4,000 56,713
Current portion of long-term debt 96,451 144,306
Net liabilities of discontinued operations 332,866 589,794
------------ ------------
Total current liabilities 3,912,866 3,455,344
------------ ------------
Long-term debt 213,899 238,768
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 750,000 shares
authorized, 34,165 issued and outstanding 6,833 --
Common stock, $0.01 par value, 11,000,000 shares authorized,
3,730,738, and 3,519,290, respectively, shares issued
and outstanding 37,307 35,192
Additional paid-in-capital 7,185,084 6,047,883
Accumulated deficit (5,929,734) (3,065,515)
Treasury stock (118,750) --
Stockholder receivable, net -- (144,062)
------------ ------------
Total stockholders' equity 1,180,740 2,873,498
------------ ------------
Total liabilities and stockholders' equity $ 5,307,505 $ 6,567,610
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 14 of 36
<PAGE> 15
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Sales $ 7,622,219 $ 7,374,637
Cost of sales 4,200,723 3,481,131
------------ ------------
Gross margin 3,421,496 3,893,506
------------ ------------
Operating expenses:
Selling, general and administrative 4,634,963 2,807,372
Research and product development 46,199 79,267
------------ ------------
4,681,162 2,886,639
------------ ------------
Loss from operations (1,259,666) 1,006,867
Other income (expense):
Interest income 14,957 42,207
Interest expense (343,012) (150,525)
Other 209 913
------------ ------------
Income (loss) from continuing operations before income taxes (1,587,512) 899,462
(Provision) benefit for income taxes (62,102) 64,354
------------ ------------
Income (loss) from continuing operations (1,649,614) 963,816
Discontinued operations:
Loss from discontinued operations (720,043) (1,336,384)
Loss on disposal of discontinued operations (494,562) --
------------ ------------
Loss from discontinued operations (1,214,605) (1,336,384)
------------ ------------
Net loss $ (2,864,219) $ (372,568)
============ ============
Weighted average common and common equivalent shares outstanding 4,014,108 3,919,705
Net loss per share:
Continuing operations $ (.41) $ .24
Discontinued operations (.30) $ (.34)
------------ ------------
Total $ (.71) (.10)
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 15 of 36
<PAGE> 16
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER
PREFERRED COMMON PAID IN ACCUMULATED RECEIVABLE, TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT NET STOCK
------ ------ --------- ------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- 3,519,290 $35,192 $5,858,251 $(2,692,947) $ (129,317) $ --
Contributed capital 99,632 (14,745)
Warrant issuance 90,000
Net loss (372,568)
------ ------ --------- ------- ---------- ----------- ----------- ---------
Balance at December 31, 1994 $ -- 3,519,290 $35,192 $6,047,883 $(3,065,515) $ (144,062) $ --
Shares issued to officer 2,448 25 4,259
Warrant issuance 102,557
Warrant exercise 138,000 1,380 112,808
Stock issuance 71,000 710 179,165
Preferred stock issuance 34,165 6,833 676,520
Stockholder settlement 61,892 144,062 (118,750)
Net loss (2,864,219)
====== ====== ========= ======= ========== ============ =========== =========
Balance at December 31, 1995 34,165 $6,833 3,730,738 $37,307 $7,185,084 $(5,929,734) $ -- $(118,750)
====== ====== ========= ======= ========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 16 of 36
<PAGE> 17
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Twelve Months Ended
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,864,219) $ (372,568)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation 175,428 155,369
Amortization 345,533 88,242
Bad debt expense 17,096 23,800
Non-cash related party expenses 24,521 (47,426)
Deferred income taxes -- (205,384)
Provision for inventory reserve 17,909 --
Net change in assets and liabilities from discontinued operations 1,018,324 492,857
Changes in operating assets and liabilities:
Accounts receivable 459,212 (910,414)
Inventories (112,328) (4,127)
Other assets 227,939 (139,866)
Accounts payable 806,872 (184,256)
Accrued liabilities 762,410 328,414
------------ ------------
Net cash provided (used) by operating activities 878,697 (775,359)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (52,416) (308,683)
Capitalized software costs (245,799) (391,107)
------------ ------------
Net cash used by investing activities (298,215) (699,790)
------------ ------------
Cash flows from financing activities:
Payments received on stockholder receivable -- 132,314
Payments on capital lease obligations -- (8,412)
Issuance of common stock 143,738 --
Net borrowings (payments) on line of credit (847,317) 285,207
Payments on notes payable and long-term debt (151,373) (59,566)
Proceeds from notes payable and long-term debt 278,417 1,038,497
Loan origination fees (1,946) (218,580)
------------ ------------
Net cash provided (used) by financing activities (578,481) 1,169,460
------------ ------------
Increase (decrease) in cash: 2,001 (305,689)
Cash at beginning of year 365,505 671,194
------------ ------------
Cash at end of period $ 367,506 $ 365,505
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 17 of 36
<PAGE> 18
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed in
December 1991 to leverage highway traffic control and security core
businesses into turnkey security solutions for "middle market" commercial
and industrial businesses. The middle market is defined as commercial,
industrial and institutional companies or government agencies which budget
$50,000 to $600,000 annually to meet their security needs. The two types of
security targeted by ISSI are asset protection and personal safety.
In order to provide turnkey security solutions to the middle market, several
key operating components and technologies have been vertically integrated
into the Company. To date, ISSI created internally, or acquired, a gate and
barrier engineering and manufacturing facility, B&B Electromatic, Inc.
("B&B"), a PC-based control system which integrates discrete security
devices, Innovative Security Technologies, Inc. ("IST"), and an installation
and service company, Tri-Coastal Systems, Inc. ("TCSI"). ISSI also has a
subsidiary that was a distributor of commercial and industrial perimeter
security products, Automatic Access Controls, Inc. ("AAC"). The operations
of this subsidiary were discontinued during 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, B&B, IST, TCSI and AAC. All significant
intercompany transactions and balances have been eliminated.
CASH
Cash is comprised of highly liquid instruments with maturities of three
months or less. In 1994, a certificate of deposit of $354,982, securing a
note payable, is reflected as Restricted Cash. No such certificate of
deposit exists in 1995. At December 31, 1995 restricted cash of $157,851 was
recorded related to a factoring arrangement (see Note 6). For the purposes
of the consolidated statement of cash flows, cash includes restricted cash.
INVENTORIES
Inventories are primarily carried at the lower of cost or market using the
first-in, first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line and
accelerated methods. Estimated useful lives range from 3 to 31 years.
Depreciation expense includes amortization of assets recorded as capital
leases.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulted from the acquisitions and is amortized using the
straight-line method over a period of ten years.
Amortization expense for goodwill for the years ended December 31, 1995 and
1994, respectively, was $1,144 and none.
Page 18 of 36
<PAGE> 19
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
It is the Company's policy to periodically review the net realizable value
of its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. Each business unit to
which these intangible assets relate is reviewed to determine whether future
cash flows over the remaining estimated useful life of the asset provide for
recovery of the carrying value of the assets. If assets are being carried at
amounts in excess of estimated gross future cash flows, then the assets are
adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Under the liability method,
deferred taxes are provided for tax effects of differences in the basis of
assets and liabilities arising from differing treatments for financial
reporting and income tax purposes using currently enacted tax rates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of customers
in the traffic and security products market. During 1994, the Illinois
Department of Transportation was the only customer to account for 10% or
more of the Company's consolidated revenues ($1.7 million). No single
customer accounted for 10% or more of revenues in the year ended December
31, 1995.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("FAS 86"). During the
years ended December 31, 1995 and 1994, respectively, $245,799 and $391,107
in software development costs qualified for capitalization pursuant to FAS
86 for a total of $636,906 of capitalized software development costs.
Beginning in 1996, the Company expects to amortize its capitalized software
costs using the straight-line method over a period of five years.
During 1993, the Company entered into a license and distribution agreement
for certain proprietary technology. In connection with this agreement (see
Note 9), the Company paid $250,000 to an affiliate controlled by the
Company's former parent for the right to use the technology, which is being
amortized using the straight-line method over a period of five years from
the acquisition date.
The Company expenses all other research and product development costs as
they are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes receivable,
accounts payable, note payable and other debt instruments approximate the
fair values of such financial instruments.
NET LOSS PER SHARE
Net loss per common share is computed using the weighted average number of
common and common equivalent shares outstanding during the year. Fully
diluted and primary loss per share data are the same for each period
presented.
Page 19 of 36
<PAGE> 20
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash paid for interest expense $295,469 $140,306
Cash paid for income taxes $63,615 $78,173
</TABLE>
During 1995, accounts payable to unrelated parties of $139,141 and notes and
accrued liabilities to related parties of $469,212 were converted by the
Company's creditors into convertible preferred stock. As described more
fully in Note 9, the Company had non-cash transactions with its principal
stockholder.
RECLASSIFICATION
Certain reclassifications of prior year amounts have been made to conform to
the fiscal 1995 presentation.
3. LIQUIDITY
During 1995, the Company financed operating activities through working
capital, bridge loans and negotiating extended payment terms with vendors.
The Company currently does not have adequate cash on hand or available to
meet its debt obligations which will become due in 1996. By June 24, 1996,
$951,000 of notes payable are due.
On March 1, 1996, the Company entered into a best efforts private placement
agreement with an investment banking firm for the sale of up to 62,500 units
comprised of one share of convertible preferred stock and 15 common stock
purchase warrants for $20.00 per unit. Each share of convertible preferred
stock is convertible into 30 shares of common stock at the option of the
Company if (i) the closing bid price of the common stock is at least $2.00
for 20 of the preceding 30 trading days and (ii) the shares of common stock
to be received upon conversion are registered or otherwise qualified for
sale. Each warrant is entitled to purchase one share of common stock at an
exercise price of $1.00 during the five-year period from the close of the
offering. The Company has received additional bridge loan financing of
$150,000 from affiliates of the investment banking firm during March 1996 to
provide working capital until a private placement agreement can be sold. The
Company expects that the convertible preferred stock offering will be sold
during 1996 for a total of $1,250,000. Additionally, the Company is
negotiating with a commercial bank to refinance the mortgage on the B&B
facility and provide up to $500,000 in additional working capital.
Should the convertible preferred stock offering or bank financing
negotiations not be successful, the Company will likely be required to take
additional steps including negotiating extended payment agreements with
major creditors, factoring or borrowing additional amounts, and implementing
additional cost reductions which may delay revenue growth. If the Company is
unable to extend payment terms, the Company will be forced to sell operating
assets.
Page 20 of 36
<PAGE> 21
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. ACQUISITION
In September 1995, the Company acquired assets of Tri-Coastal Systems, Inc.
("TCSI"), an unrelated company in exchange for the Company's common stock
valued at $55,125. The excess of the purchase price over the fair value of
the assets acquired of $137,260 was recorded as goodwill. If the acquisition
of TCSI had been effective as of January 1, 1995, pro forma net sales would
have amounted to approximately $8.6 million and pro forma net loss from
continuing operations would have been approximately $1.6 million.
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at December
31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Inventories:
Raw materials $ 586,237 $ 527,276
Work-in-process 223,052 185,030
Finished goods 45,599 9,000
------------ ------------
$ 854,888 $ 721,306
============ ============
Property and Equipment:
Land $ 5,264 $ 5,264
Building 577,168 577,168
Leasehold improvements 48,769 48,769
Office furniture and equipment 575,257 403,881
Manufacturing equipment 533,167 419,476
Vehicles 68,304 34,443
Construction 153,425 152,495
------------ ------------
1,961,354 1,641,496
Less: accumulated depreciation (893,231) (608,972)
------------ ------------
$ 1,068,123 $ 1,032,524
============ ============
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT
During 1994, B&B maintained a $1,000,000 line of credit with a bank under
which B&B paid a commitment fee equal to .5% of the line. Borrowings were
limited to 80% of qualified accounts receivable. The terms of this line of
credit were: interest at the lender's prime rate; borrowings limited to 80%
of qualified accounts receivable; certificate of deposit of $350,000
required; and expiration date of April 15, 1995. On April 11, 1995, the
Company repaid the line of credit in its entirety with funds drawn against a
Business Manager factoring facility with the same financial institution
entered into on that date to factor accounts receivable with recourse. Such
repayment released the $350,000 certificate of deposit and accumulated
interest. This factoring facility expires April 15, 1996, has a factoring
fee of 3.13%, and a maximum borrowing amount of $1,400,000. As of December
31, 1995, $1,103,275 was utilized, $157,851 of restricted cash was held, and
$1,103,275 of factored accounts receivable were subject to recourse. During
the year ended December 31, 1995, the Company sold $3,967,000 of its trade
accounts receivable under the terms of its factoring facility agreement.
Page 21 of 36
<PAGE> 22
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Bridge loans payable to unrelated individual investors;
interest at 16%; due April 30, 1996, net of debt discount
of $52,766 and $67,500, respectively; secured by certain
accounts receivable, equipment and inventory $ 736,285 $ 832,500
Borrowings under bank line of credit; interest at the
lender's prime (9.75% December 31, 1994); repaid on April
11, 1995 -- 847,317
Note payable due in monthly principal installments of
various amounts until paid in full by June 1996, net of
debt discount of $6,000; no interest; personally
guaranteed by an officer 57,646 --
Note payable, interest at 3.3%, due on April 1, 1996 7,016 --
Note payable to a bank due on June 24, 1996; interest at
11%; secured by second mortgage on real estate 150,000 --
---------- ----------
$ 950,947 $1,679,817
========== ==========
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Term note payable to a bank; due in monthly principal
and interest installments of $3,720 through August 2002;
interest at the lender's prime plus .5% (10.75% at
December 31, 1995 and 10.25% at December 31, 1994);
guaranteed by principal stockholder $ 234,365 $ 252,523
Note payable to a bank due in monthly principal and
interest installments of $4,060 through March 1997 when
the balance is due; interest at 9.75% secured by
equipment and accounts receivable 53,265 95,286
Note payable due in monthly principal and interest
installments of $576 through May 1997 when the balance
is due; interest at 8.75%; secured by equipment 9,188 14,999
Note payable due in monthly principal and interest
installments of $366 through August 1997 when the
balance is due; interest at 11%; secured by equipment 6,243 10,050
Note payable due in monthly principal and interest
installments of $477 through May 1997 when the balance
is due; interest at 11%; secured by equipment 7,289 10,216
--------- ---------
310,350 383,074
Less current portion (96,451) (144,306)
--------- ---------
Long-term portion $ 213,899 $ 238,768
========= =========
</TABLE>
Page 22 of 36
<PAGE> 23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES PAYABLE TO RELATED PARTIES
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note payable to former officer and stockholder; interest
at 6%; due January 31, 1995; repaid in 1995 $ -- $ 56,713
Notes payable to executive officers and members of Board of
Directors; non-interest bearing; due on demand 4,000 99,088
---------- ----------
4,000 155,801
Less: current portion (4,000) (155,801)
---------- ----------
Long-term portion $ -- $ --
========== ==========
</TABLE>
Payments required under all notes payable and long-term debt outstanding at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $1,066,039
1997 54,175
1998 44,640
1999 44,640
2000 44,640
Thereafter 11,163
----------
$1,265,297
==========
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current:
Federal $ -- $ --
State 62,102 141,030
--------- ---------
$ 62,102 $ 141,030
--------- ---------
Deferred:
Federal $ -- $(205,384)
State -- --
--------- ---------
-- (205,384)
--------- ---------
Tax expense (benefit) $ 62,102 $ (64,354)
========= =========
</TABLE>
Page 23 of 36
<PAGE> 24
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory benefit rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Federal statutory benefit rate (34%) (34%)
State income tax provision, net of federal tax benefit 4% 26%
Installment sale gain 2% 8%
Additional tax benefit recognized for net operating
loss carryforward -- (8%)
Net operating loss not benefited 31% --
Non-deductible expenses and other 1% 1%
------ ------
4% (7%)
====== ======
</TABLE>
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities) are
comprised of the following at December 31, 1995 and 1994:
<TABLE>
1995 1994
------------ ------------
<S> <C> <C>
Gross deferred tax liability - Amortization $ (39,915) $ (20,535)
------------ ------------
Litigation reserve 57,120 --
Depreciation 3,343 623
Warranty reserve 24,733 17,253
Bad debt reserve 49,970 111,850
Net operating loss carryforward 1,895,091 999,871
------------ ------------
Gross deferred tax asset 2,030,257 1,129,597
Valuation allowance (1,784,958) (903,678)
------------ ------------
Net deferred tax asset $ 205,384 $ 205,384
============ ============
</TABLE>
Should a cumulative change in ownership of more than 50% occur within a
three year period, there could be an annual limitation on the use of the net
operating loss carryforward. The Company has unused net operating loss
carryforwards of $5.6 million and $2.9 million at December 31, 1995 and
1994, respectively, that begin to expire in the year 2007. The Company
increased the valuation allowance because it does not expect to realize the
benefit of net operating losses, except to the extent of the $205,384
deferred tax asset, in the foreseeable future.
Page 24 of 36
<PAGE> 25
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under leases accounted for as
operating leases. The Company currently does not have any capital leases.
Future minimum payments for years subsequent to December 31, 1995 under
capital and non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------
<S> <C>
1996 $119,230
1997 88,790
1998 4,862
1999 4,862
2000 0
--------
Total minimum payments $217,744
========
</TABLE>
Rent expense for operating leases was $85,836 and $80,700 for the years
ended December 31, 1995 and 1994, respectively.
CONTINGENCIES
The Company is currently a defendant in a lawsuit alleging a design and
manufacturing defect which resulted in personal injuries. The Company is
being defended by its insurance carrier and has denied all claims. As the
case is currently in discovery, legal counsel is unable to assess the
ultimate outcome of this case; however, management believes that the
resolution of the case will not materially affect the Company's financial
position or results of operations.
The Company and a principal stockholder were defendants in a lawsuit that
sought to recover repayment of a certain promissory note together with
advances in the aggregate amount of $250,000 allegedly due and owing
pursuant to a Stock Purchase Agreement. The plaintiff also alleges wrongful
termination and fraud due to the termination of his employment with the
Company, sought exemplary damages in an unspecified amount, together with
attorney's fees and costs. The plaintiff, who formerly served as President
of Automatic Access Controls, Inc., was terminated by the Company on August
16, 1993. The Company and the principal stockholder settled this case on
February 8, 1996 for $175,000 cash to be paid by the Company over the next
year, the issuance of 99,000 shares of common stock by the Company and the
issuance of 85,000 shares of common stock by the principal stockholder. The
Company recorded its proportionate share of the settlement in 1995.
9. RELATED PARTY TRANSACTIONS
In addition to borrowings from related parties as described in Note 6, the
Company has participated in the following additional related party
transactions.
AFFILIATED COMPANY
The Company was charged $120,000 during 1994 and $30,000 during 1995 by
Thomas Group Holding Company ("TGHC"), a principal stockholder, for
consulting and other services.
Page 25 of 36
<PAGE> 26
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCKHOLDERS
In 1984, the principal stockholder of the Company who was then sole owner
of B&B Electromatic, Inc. ("B&B"), purchased the land, building, and
equipment of B&B for a $1,500,000 note payable (bearing interest at 10%) to
B&B. In December 1991, the portion of the above transaction related to the
land and building was rescinded, which decreased the note balance to
$795,000. This note became an asset of the Company upon its acquisition of
B&B in 1992. The note was being paid over a five-year period beginning in
1992. The gain on the sale has been deferred and offset against the note
receivable, which has been classified in stockholders' equity. The net note
receivable balance at December 31, 1994 was $144,062. As a result of these
transactions, B&B leased from Mr. Thomas substantially all of the
manufacturing equipment used at B&B's facility in Norwood, Louisiana at the
current rate of $6,725 per month during 1993 and 1994. On March 31, 1995,
this transaction was closed with the principal stockholder contributing
common stock and equipment and canceling the related equipment lease with
the Company in exchange for forgiveness of a note payable to the Company
and related interest. This resulted in an increase to stockholders' equity
of $87,000.
The net note receivable at December 31, 1994 was calculated as follows:
<TABLE>
<S> <C>
Outstanding principal $ 300,262
Less: deferred gain (156,200)
---------
Note receivable $ 144,062
=========
</TABLE>
During 1994, the Company received interest income on the note receivable
from the principal stockholder of $25,365. No interest was received in
1995.
SOFTWARE LICENSE
During 1993, the Company entered into a license and distribution agreement
for certain proprietary technology to be utilized as the basis for the
Intelli-Site products. This license was purchased for $250,000 from
COMTRAC, a company controlled at that time by ISSI's largest stockholder.
This license is being amortized over five years from the acquisition date.
10. DISCONTINUED OPERATIONS
During the second quarter of 1995, the Company adopted a plan to
discontinue the operations of the wholesale distribution subsidiary,
Automatic Access Controls, Inc. ("AAC"). The operations of this subsidiary
were discontinued during July 1995. Provisions totaling $560,000 were
recorded for estimated losses during the phase-out period, and for
writedown of assets to net realizable value. During the fourth quarter of
1995, this provision was decreased by $65,000 due to better receipts than
anticipated on certain assets. The December 31, 1995, assets and
liabilities related to this action, totaling $76,807 and $332,866,
respectively, are reported on the balance sheet as other current assets and
other current liabilities. These assets and liabilities consist primarily
of notes receivable, accounts receivable and other long-term liabilities.
Page 26 of 36
<PAGE> 27
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Where appropriate, the financial statements reflect the operating results
and balance sheet items of the discontinued operations separately from
continuing operations. Prior years have been restated. Operating results
for the discontinued operations were:
<TABLE>
<CAPTION>
For the Period Ended
December 31,
--------------------
1995 1994
-------- --------
($ in thousands)
<S> <C> <C>
Operating Revenue $ 1,389 $ 3,031
Loss from Operations $ (720) $ (1,336)
Loss Per Share $ (.30) $ (.34)
</TABLE>
11. BENEFIT PLANS
The Company has established a 401(k) savings and profit sharing plan.
Participants include all employees who have completed six months of service
and are at least 21 years of age. Employees can contribute up to 15% of
compensation. Vesting on the Company's contribution occurs over a five-year
period. The Company made no contributions in 1995 and 1994.
12. STOCK OPTIONS AND WARRANTS
CONVERTIBLE PREFERRED STOCK
The Company's outstanding convertible preferred stock consists of 750,000
authorized shares of $.01 par value convertible preferred stock. The
preferred stock has a face value of $20.00 share. The shares are entitled
to 10% dividends paid semi-annually and may be redeemed for $22 per share
by the Company at its option if the Company's common stock closing bid
price exceeds the conversion price for ten consecutive days with 30 days'
written notice.
Each share of convertible preferred stock has a liquidating value of $20.00
per share and is convertible into common stock at the rate of the number of
preferred shares times $20.00 divided by the conversion price. The
conversion price is 100% of ISSI common stock average closing bid price for
the previous ten business days, on the date of investor's closing. The
preferred stock was issued with four warrants granted for each share of
preferred stock. These warrants to purchase the Company's common stock
expire in five years and have an exercise price of $.67.
The convertible preferred stock has liquidation preference at $20.00 per
convertible share over all common shares, is secured by the stock of B&B
Electromatic, Inc., and has a one-time demand registration right that must
be exercised by June 30, 1996.
The convertible preferred shares that are expected to be issued in 1996, as
discussed in Note 3, may have different conversion and/or dividend rights
than the convertible preferred shares presently outstanding.
Page 27 of 36
<PAGE> 28
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTIONS
In February 1993, the Company established a stock option plan whereby
options to purchase up to 250,000 shares of common stock may be granted
(the "1993 Stock Option Plan"). In December 1994, the shareholders' of the
Company increased the number of shares of common stock which may be granted
under this plan to 500,000. The plan is administered by the Company's
Board of Directors which has the authority to establish the terms of each
option grant. Under the plan, incentive stock options must be granted with
an exercise price not less than the fair market value on the date of grant.
During 1995, the Company granted incentive stock options under the 1993
Stock Option Plan to acquire 127,138 shares of common stock to certain
officers and employees of the Company at exercise prices ranging from
$1.563 to $2.719, which were equal to the fair market value of the
underlying stock on the dates of the grants. During 1994, the Company
granted incentive stock options under the 1993 Stock Option Plan to acquire
195,400 shares of common stock to certain officers and employees of the
Company at exercise prices ranging from $1.406 to $2.219, which were equal
to the fair market value of the underlying stock on the dates of the
grants. At December 31, 1995, 92,771 of these options have been canceled
and 367,333 are still outstanding.
Also during 1994, non-qualified stock options to purchase 33,000 shares of
common stock were granted to various officers and related parties. No such
options were granted in 1995. The options were granted at exercise prices
of $1.375, $1.50 and $1.875 in 1994, which were equal to the fair market
value of the common stock on the dates of grants. The options cannot be
exercised for a two year period subsequent to their issuance and can then
be exercised for a period of up to ten years. During 1994, 10,000 shares
of the total 33,000 shares issued were rescinded.
Stock option transactions for the years ended December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
Number of Shares Per Share Option Price
---------------- ----------------------------
<S> <C> <C>
Outstanding at December 31, 1993 485,276 $2.125 - $2.50
Granted 218,400 $1.375 - $2.219
Cancelled (28,604) $1.375 - $2.125
---------------
Outstanding at December 31, 1994 675,072 $1.375 - $2.50
Granted 127,138 $1.563 - $2.719
Cancelled (63,972) $1.406 - $2.375
Outstanding at December 31, 1995 738,238 $1.375 - $2.719
===============
</TABLE>
Options exercisable and shares available for future grant at December 31,
1995 are as follows:
<TABLE>
<S> <C>
Options exercisable 653,007
Shares available for grant 132,667
</TABLE>
Page 28 of 36
<PAGE> 29
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
WARRANTS
On April 20, 1993, in connection with the Company's initial public
offering, the Company issued 1,450,000 Redeemable Common Stock Purchase
Warrants. Each warrant entitles the holder to purchase one share of common
stock at a price of $5.40 per share during the first 30 months, and $6.75
per share during the second 30 months. The warrants are subject to
redemption by the Company at $0.25 per warrant upon 30 days prior written
notice with the consent of the underwriters, Thomas James Associates, Inc.
("Underwriters"). As of December 31, 1995, all warrants issued remain
outstanding. The warrants expire on April 20, 1998. Management believes
that the exercise price of the warrants at the date of grant approximated
market value.
Also, in connection with the initial public offering, the Company issued a
warrant to the Underwriters for the purchase of up to 145,000 units at a
price of $6.30 per unit. A unit consists of a share of common stock and a
warrant to purchase an additional share of common stock. This warrant is
exercisable over a period of four years commencing April 20, 1994.
Management believes that the exercise price of the warrant at the date of
grant approximated market value.
In connection with bridge financing obtained in 1993, the Company issued
warrants to purchase 246,000 shares of common stock at an exercise price of
$1.00 per share. As of December 31, 1995, 123,000 warrants issued remain
outstanding. The warrants expire in 1998. No value has been assigned to
warrants as management believes such value to be insignificant at the time
of issuance.
The Company issued warrants to purchase 211,800 shares of common stock at
exercise prices of $1.06, in connection with the bridge financing obtained
in 1994. As of December 31, 1995, 196,800 warrants remain outstanding and
have expiration dates in 1999. Value was assigned to these warrants
totaling $90,000 at December 31, 1994. Such value was amortized over the
one year term of the bridge loans. The Company issued an additional 58,457
warrants in connection with this bridge financing in exchange for an
extension of the bridge loans' due date to April 30, 1996. Value was
assigned to these warrants totaling $58,457 at December 31, 1995. Such
value is being amortized over the five-month extension term of the bridge
loans.
The Company issued 136,671 warrants in connection with the convertible
preferred stock sale completed in December 1995. These warrants are
exercisable at $.67 per share and expire in 2000. The value of the
warrants was recorded as part of the convertible preferred stock offering.
In connection with a note payable to a former director, the Company issued
warrants to purchase 10,000 shares of common stock at an exercise price of
$.75 per share. Value has been assigned to these warrants totaling $7,500
at December 31, 1995. Such value is being amortized over the five-month
term of the note.
Page 29 of 36
<PAGE> 30
PART IV
ITEM 12. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits.
Unless otherwise indicated, all exhibits are incorporated by
reference to comparable exhibits to Amendment No. 2 to the Company's
registration statement on Form SB-2 No. 33-59870-FW filed April 16,
1993.
1.1 Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.11 Amendment to Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen certificate for common stock of the Company.
4.2 Specimen certificate for Redeemable Common Stock Purchase Warrant.
4.3 Warrant Agreement among the Company, American Stock Transfer & Trust
Company, and Thomas James Associates, Inc.
4.4 Representative's Warrant.
9.1 Exhibit 10.28 hereof contains a voting agreement in Section 2.2
thereof.
10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan.
10.2 Form of Integrated Security Systems, Inc. 1993 Incentive Stock Option
Agreement.
10.3 Form of Integrated Security Systems, Inc. 1993 Non-Qualified Stock
Option Agreement.
10.4 Integrated Security Systems, Inc. Non-Qualified Stock Option
Agreements with each of Robert C. Pearson, William S. Leftwich,
Ferdinand A. Hauslein, Jr., Gerald K. Beckman and Daniel Hampton.
10.5 Agreement dated January 26, 1993, by and between the Illinois
Department of Central Management Services and B&B.
10.6 Promissory Note dated August 3, 1992 in the principal amount of
$90,000 by and between AAC and Ferdinand A. Hauslein, Jr.
10.7 Promissory Note dated December 31, 1992 in the principal amount of
$696,669 by and between B&B and TGHC.
10.8 Promissory Note dated December 31, 1992 in the principal amount of
$170,545 by and between B&B and Lynn R. Causey.
10.9 Letter Agreements converting certain promissory notes into common
stock with each of Ferdinand A. Hauslein, Jr., TGHC and Lynn R.
Causey.
Page 30 of 36
<PAGE> 31
10.10 Letter Agreements extending payment date of certain promissory notes
with Lynn R. Causey and Ferdinand A. Hauslein, Jr.
10.11 Financial Consulting Contract by and between the Company and Thomas
James Associates, Inc. for financial consulting services.
10.12 Letter Agreement by and between the Company and Thomas James
Associates, Inc. for Thomas James Associates, Inc. to act as a
finder.
10.13 Form of Indemnification Agreement by and between the Company and the
Company's officers and directors.
10.14 Commercial Lease dated August 6, 1984, by and among Philip R. Thomas,
Wayne L. Thomas and Thomas Group Service Company, predecessor to B&B,
for land, building and equipment.
10.16 Loan Documents and Continuing Guaranty relating to a revolving line
of credit in the aggregate principal amount of $750,000 to B&B from
Sunburst Bank including a Loan Agreement dated August 3, 1992, by and
between B&B and Sunburst Bank, a Master Note dated August 4, 1992, by
and between B&B and Sunburst Bank, a Security Agreement dated August
4, 1992, by and between B&B and Sunburst Bank, a Compensating Balance
Agreement dated August 7, 1992, by and between B&B and Sunburst Bank,
and a Continuing Guaranty dated August 4, 1992, by and between Philip
R. Thomas and Sunburst Bank guaranteeing the principal amount of
$750,000.
10.17 Promissory Note dated August 24, 1992, by and between B&B and
Sunburst Bank in the principal amount of $300,000 and Continuing
Guaranty dated August 21, 1992, by and between Philip R. Thomas and
Sunburst Bank guaranteeing the principal amount of $300,000.
10.18 Waiver of Default to Note referenced in Exhibit 10.16 hereto dated
March 9, 1993 from Sunburst Bank.
10.19 Employment Agreement dated June 1, 1991 by and between James Edwin
Ray and COMTRAC Corporation.
10.20 Lease Agreement dated March 25, 1992 and April 6, 1992, by and among
the Company, Trammell Crow Company No. 90 and Petula Associates
Limited for property located in Dallas, Texas.
10.21 Lease Agreement dated November 18, 1992 by and among Joseph T.
Johnson, Adaz B. Johnson and AAC for property located in Bossier
City, Louisiana.
10.22 Lease Agreement commencing April 15, 1992, by and between Crescent
Realty Corporation and AAC for property located in Denver, Colorado.
10.23 Lease Agreement commencing June 1, 1992 by and between Kelso Joint
Venture and AAC, for property located in Baltimore, Maryland.
10.24 Letter dated March 15, 1993, from Mr. Philip R. Thomas to Mr. Lynn R.
Causey, President of B&B, terminating Mr. Thomas' $14,000 per month
salary from B&B.
10.25 Promissory Note dated November 28, 1990, in the principal amount of
$50,000 from Thomas Group Service Company, the predecessor of B&B, to
Wayne L. Thomas.
10.26 Promissory Noted dated December 10, 1990, in the principal amount of
$250,000 from Thomas Group Service Company, the predecessor of B&B,
to Wayne L. Thomas.
Page 31 of 36
<PAGE> 32
10.27 Letter dated January 1, 1993, from the Company to Ferdinand A.
Hauslein, Jr., granting Mr. Hauslein 16,794 shares of common stock in
exchange for personal guaranties.
10.28 Stock Purchase Agreement dated December 20, 1991 by and among the
Company, Philip R. Thomas and Charles W. Martin relating to the
Acquisition of AAC and amendments to the Stock Purchase Agreement
dated December 20, 1991, and March 16, 1993, contained in Exhibits
10.31 and 10.44, hereto.
10.29 Promissory Noted dated December 20, 1991 in the principal amount of
$225,000 by and between the Company and Charles W. Martin and
amendment to the Promissory Note dated December 20, 1991, contained
in Exhibit 10.31, hereto.
10.30 Employment Agreement dated December 20, 1991, by and between Charles
W. Martin and the Company and amendments to the Employment Agreement
dated December 20, 1991 and March 16, 1993, contained in Exhibits
10.31 and 10.45, hereto.
10.31 Amendment to Stock Purchase Agreement, Employment Agreement and
Promissory Note dated December 20, 1991, by and among the Company,
Philip R. Thomas and Charles W. Martin.
10.32 Purchase Agreement and Form of Promissory Note in connection with the
Acquisition of the Assets of Bossier Caddo Electronics dated November
18, 1992 between Fluid-Tronics, Inc., Robert Worn and AAC.
10.33 Management Agreement by and between AAC and TGHC dated April 1, 1992.
10.34 Management Agreement by and between B&B and TGHC dated April 1, 1988
and amendment to Management Agreement dated April 20, 1992.
10.35 Termination Agreement by and between AAC and TGHC, dated January 1,
1993 to terminate Management Agreement.
10.36 Termination Agreement by and between B&B and TGHC dated January 1,
1993 to terminate Management Agreement.
10.37 License and Distribution Agreement dated March 16, 1993, by and among
COMTRAC Corporation, Thomas Group Holding Company and the Company
relating to analog technology for transaction processing systems.
10.38 License and Distribution Agreement dated March 16, 1993, by and
between DesignTech Incorporated and the Company relating to
interactive digital video interface system technology.
10.39 Employment Agreements between the Company and its Executive Officers.
10.40 Non-Disclosure Agreement between the Company and its employees.
10.41 Note relating to the $1,230,000 Bridge Financing.
10.42 Redeemable Common Stock Purchase Warrants (2 forms) that were issued
in connection with Bridge Financing.
10.43 Agreement dated January 4, 1992 by and between the Company and
Managerial Resources, Inc. for consulting services.
10.44 Amendment to Stock Purchase Agreement dated March 16, 1993, by and
between the Company and Charles W. Martin.
Page 32 of 36
<PAGE> 33
10.45 Amendment to Employment Agreement dated March 16, 1993, by and
between the Company and Charles W. Martin.
10.46 Financial Consulting Agreement dated March 16, 1993, by and between
the Company and Thomas James Associates, Inc.
10.47 Merger and Acquisition Agreement by and between the Company and
Thomas James Associates, Inc.
10.48 Employment Agreement dated October 19, 1994, by and between the
Company and Ferdinand A. Hauslein.
10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option Plan.
10.50 Confidential Agreement dated February 16, 1994, by and between the
Company and Thomas Group Holding Company.
10.51 Note relating to the $900,000 Bridge Financing.
10.52 Redeemable Common Stock Purchase Warrants that were issued in
connection with the $900,000 Bridge Financing.
10.53 Subscription Agreement dated December 28, 1995.
10.54 Factoring Agreement from Sunburst Bank for B&B receivables.
11.1 Statement related to computation of per common share earnings.
21.1 Subsidiaries of the Company.
*23.1 Consent of Price Waterhouse LLP.
* Filed herewith.
Page 33 of 36
<PAGE> 34
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
INTEGRATED SECURITY SYSTEMS, INC.
------------------------------------------
(Registrant)
Date: August 13, 1996 /s/ GERALD K. BECKMANN
------------------- ------------------------------------------
Gerald K. Beckmann
Director, Chairman of the Board, President
and Chief Executive Officer
Page 34 of 36
<PAGE> 35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*23.1 Consent of Price Waterhouse LLP.
* Filed herewith.
Page 35 of 36
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on form S-3 (No. 33-89218) and
in the Registration Statement on Form S-8 (No. 33-59780-S) of Integrated
Security Systems, Inc. of our report dated March 14, 1996 appearing on page 13
of this Form 10-KSB/A.
PRICE WATERHOUSE LLP
Dallas, Texas
August 9, 1996
Page 36 of 36
