<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1996
REGISTRATION NO. 333-5023
REGISTRATION NO. 33-59870-FW
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTEGRATED SECURITY SYSTEMS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 3499
(State of (Primary Standard Industrial 75-2422983
incorporation or organization) Classification Code Number) (I.R.S. Employer Identification No.)
</TABLE>
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<TABLE>
<S> <C>
Gerald K. Beckmann
President & CEO
8200 Springwood Drive, Suite 230 8200 Springwood Drive, Suite 230
Irving, Texas 75063 Irving, Texas 75063
(214) 444-8280 (214) 444-8280
(Address and telephone number (Name, address and telephone number
of principal executive offices and principal place of business) of agent for service)
</TABLE>
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Copies to:
DAVID H. ODEN
Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, TX 75202
(214) 651-5000
Approximate date of commencement of proposed sale to public: From time to time
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [x]
Pursuant to Rule 416, there are hereby registered such additional indeterminate
number of shares of the Registrant's Common Stock as may become issuable to
prevent dilution by reason of stock splits, stock dividends, or similar
transactions.
PURSUANT TO THE PROVISIONS OF RULE 429 PROMULGATED PURSUANT TO THE SECURITIES
ACT OF 1933, THE PROSPECTUS CONTAINED IN THIS REGISTRATION STATEMENT RELATES TO
THE REGISTRANT'S REGISTRATION STATEMENT NO. 33-59870-FW AND REGISTRATION
STATEMENT NO. 333-5023.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Dollar amount Proposed maximum Proposed maximum Amount of
Title of each class of securities to be to be registered (1) offering price aggregate registration
registered per unit (1) offering price (1) fee (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 5,072,670 shares (3) $2.00 $10,145,340 $3,499
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of IPO 2,320,000 shares (4) $2.00 $4,640,000 $1,600
Warrants
- ------------------------------------------------------------------------------------------------------------------------
Common Stock and Common Stock Purchase Warrants 232,000 shares (5) $3.51 $814,320 $281
issuable upon exercise of Underwriter's Warrant
- ------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants issuable upon 232,000 shares (5) $3.51 $814,320 $281
exercise of Underwriter's Warrant
========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) A filing fee of $8,028 was previously paid in connection with
Registration Statement No. 333-5023.
(3) Securities registered pursuant to Registration Statement No. 333-5023.
(4) 1,667,500 of these shares were previously registered pursuant to
Registration Statement No. 33-59870-FW. The additional 652,500 shares
are deemed previously registered pursuant to Rule 416.
(5) 145,000 of these securities were previously registered pursuant to
Registration Statement No. 33-59870-FW. The additional 87,000 shares
are deemed previously registered pursuant to Rule 416.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 2
INTEGRATED SECURITY SYSTEMS, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2
AND PROSPECTUS
<TABLE>
<CAPTION>
Registration Statement Items and Headings Prospectus Captions
- ----------------------------------------------------------------- ----------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover Cover Page of Registration Statement and
Page of Prospectus . . . . . . . . . . . . . . . . . . . Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page of Prospectus
3. Summary Information and Risk Factors . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . Not Applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . . . Principal and Selling Stockholders
8. Plan of Distribution . . . . . . . . . . . . . . . . . . Plan of Distribution
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . Business - Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management - Directors, Executive Officers and
Persons . . . . . . . . . . . . . . . . . . . . . . . . Key Employees
11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities . . . . . . . . . . . . . . . Description of Securities; Part II
15. Organization Within Last Five Years . . . . . . . . . . The Company
16. Description of Business . . . . . . . . . . . . . . . . The Company; Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation . . . . . . . . . . . . . . . . . . . . . . . Condition and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . . Business - Property
19. Certain Relationships and Related Transactions . . . . . Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Market for Company's Common Stock
21. Executive Compensation . . . . . . . . . . . . . . . . . Management - Executive Compensation
Index to Financial Statements; Financial
22. Financial Statements . . . . . . . . . . . . . . . . . . Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
7,856,670 SHARES
INTEGRATED SECURITY
===================
ISSI
===================
SYSTEMS, INC.
COMMON STOCK
This Prospectus relates to the sale of 7,856,670 shares of Common Stock, $.01
par value (the "Common Stock"), of Integrated Security Systems, Inc. ("ISSI").
Of this amount, 2,320,000 shares of Common Stock may be issued by the Company
upon the exercise of certain publicly traded warrants (the "IPO Warrants") to
purchase Common Stock. The IPO Warrants were issued by the Company in
connection with the Company's initial public offering in April 1993 (the
"IPO"). The Common Stock will be issued upon exercise of the IPO Warrants
directly to the registered holders of the IPO Warrants. The Company does not
intend to compensate any underwriter or dealer in connection with such exercise
and issuance.
Each IPO Warrant currently entitles the registered holder to purchase 1.6
shares of Common Stock at an exercise price of $4.15 per share. The IPO
Warrants expire on April 20, 1998. See "Plan of Distribution" and "Description
of Securities."
The IPO Warrants are subject to redemption by the Company at $.25 per warrant
on 30 days' prior written notice, with the prior written consent of H.J.
Meyers, Inc. The exercise price for the IPO Warrants is subject to adjustment
under certain circumstances. See "Description of Securities."
This Prospectus also relates to the sale of 232,000 units, with each unit
consisting of one share of Common Stock and one warrant to purchase one share
of Common Stock which may be issued by the Company upon the exercise of a
warrant (the "Underwriter's Warrant") issued to H.J. Meyers, Inc. in connection
with the IPO. See "Selling Stockholders," "Plan of Distribution," and
"Description of Securities."
This Prospectus also relates to the sale of 5,072,670 shares of Common Stock by
certain selling stockholders (each a "Selling Stockholder"), who currently own
such Common Stock or who may acquire shares of Common Stock upon the exercise
or conversion of currently outstanding warrants, options, and convertible
preferred stock. See "Selling Stockholders," "Plan of Distribution," and
"Description of Securities."
The Common Stock may be sold directly by each Selling Stockholder or indirectly
through agents, dealers or underwriters from time to time in one or more
transactions on the Nasdaq Small Cap Market, the Boston Stock Exchange or such
exchanges on which the Common Stock is then listed, or in privately negotiated
transactions at prices related to such market prices, at negotiated prices or
at fixed prices. The Selling Stockholders will bear all discounts and
commissions paid to broker-dealers in connection with the sale of their Common
Stock. Other offering expenses will be borne by the Company. The Company will
receive proceeds from the exercise price of warrants which may be exercised by
certain Selling Stockholders. The Company will not receive any proceeds from
the sales of Common Stock by the Selling Stockholders. See "Use of Proceeds"
and "Plan of Distribution."
The Common Stock and the IPO Warrants are quoted on the Nasdaq Small Cap Market
under the symbol "IZZI" and "IZZW," respectively, and on the Boston Stock
Exchange under the symbol "ISI" and "ISIW," respectively. On August 13, 1996,
the last reported sale prices for the Common Stock and IPO Warrants as reported
on the Nasdaq Small Cap Market were $1 7/8 and $ 3/4, respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY
PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
ON PAGE 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
Underwriting Proceeds to
Discounts Proceeds to Selling
Price to Public and Commissions Company (1) Stockholders
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share . . . . . . $ $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total . . . . . . . . $ $ $ $
===============================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company of approximately
$43,828.
THE DATE OF THIS PROSPECTUS IS __________, 1996.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The IPO and Subsequent Securities Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Market for Company's Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Principal and Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 13
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
SUMMARY OF THE OFFERING
<TABLE>
<S> <C>
Securities Offered: . . . . . . . . . . . . . 7,856,670 shares of Common Stock.
Common Stock Outstanding:
Prior to this Offering . . . . . . . 4,932,905 shares (1)(2)
After this Offering . . . . . . . . 11,904,575 shares (1)(2)(3)
Net Proceeds of this Offering . . . . . . . . $13,570,082 (3)(4)
Use of Proceeds To be used for working capital and general corporate purposes, and possible
future acquisitions. The Company will not receive any proceeds from the sales
of Common Stock by the Selling Stockholders. See "Use of Proceeds."
</TABLE>
<TABLE>
<CAPTION>
Boston
Symbols Nasdaq Symbols Exchange Symbols
- ------- -------------- ----------------
<S> <C> <C>
Common Stock IZZI ISI
IPO Warrants IZZIW ISIW
- --------------------
</TABLE>
(1) Does not include 500,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan.
(2) Of the shares of Common Stock being offered, 885,000 shares are currently
outstanding.
(3) Assumes the exercise of all IPO Warrants, the Underwriter's Warrants, all
other options and warrants outstanding (except for the options referred to
in note (1) above, and the conversion of all outstanding shares of the
Company's convertible preferred stock).
(4) Because of the current market price of the Common Stock, the Company
believes it is not presently likely that a substantial number of the IPO
Warrants or the Underwriter's Warrant will be exercised in the near future.
2
<PAGE> 5
RISK FACTORS
An investment in the Common Stock involves a high degree of risk and
should not be made by persons who cannot afford the loss of their entire
investment. Accordingly, prospective investors should carefully consider the
following factors, in addition to the other information concerning the Company
and its business contained in this Prospectus before purchasing the securities
offered hereby.
UNCERTAIN FINANCIAL CONDITION AND CONTINUING LOSSES -- ABILITY TO CONTINUE AS A
GOING CONCERN AND FUTURE CAPITAL NEEDS
As of December 31, 1995, the Company's independent accountants issued
a "going concern" opinion about its ability to continue without obtaining
additional funding. Although the Company has realized income from operations
and generated cash flow from operations in certain quarters in 1991 and 1994,
it has reported a net loss and had negative cash flow for the years ended
December 31, 1992, 1993 and 1995, and during 1996. The Company believes that
its ability to continue as a going concern is dependent upon obtaining adequate
financing, reducing operating expenses or operating profitably. There can be
no assurance that the Company will be successful in achieving these goals. If
the Company is unable to achieve these goals, the Company may be forced to sell
assets or close subsidiaries in an effort to be profitable.
Although the Company raised approximately $2,700,000 through equity
placements and new or refinanced debt during the first half of 1996, the
Company will be required to raise additional funds in order to fund future
operations, service existing debt, or acquire other businesses during the next
12 months. The Company's future cash requirements will depend on many factors,
including cash flow from operations and the ability to market its products
successfully. There can be no assurance that the Company will be able to raise
additional funds or that financing will be available on acceptable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OPERATING HISTORY
The Company commenced operations in 1992. Its operating subsidiaries
have been in business for the following periods: B&B Electromatic, Inc. since
1925; Innovative Security Technologies, Inc. since 1993; and Tri-Coastal
Systems, Inc. since 1994. B&B Electromatic, Inc. is the Company's primary
operating subsidiary, producing 89% of the Company's total revenues in 1995 and
78% in the first half of 1996.
EXPIRATION OF FACTORING FACILITY
The Company's accounts receivable factoring facility with Sunburst
Bank is subject to renewal on April 15, 1997. The Company intends to seek
renewal of such facility. In addition, the Company may seek alternative
short-term financing. There can be no assurance that this line of credit will
be renewed or extended, or that alternative financing will be obtained on
favorable terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RISK OF NASDAQ DELISTING
Under applicable criteria for continued listing of securities on the
Nasdaq System, a company must maintain at least $2,000,000 in total assets, at
least $1,000,000 in net worth and a minimum bid price of $1.00 per share.
During the third and fourth quarter of 1995, the Company fell below these
requirements. The Company was in compliance with such requirements as of
December 31, 1995 and thereafter. Although the Company was not delisted, if
the Company continues to experience losses from operations, it may be unable to
maintain the standards for continued listing and the listed securities could be
subject to delisting from the Nasdaq System. Trading, if any, in the listed
securities would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the
Nasdaq System listing requirements or in what is commonly referred to as the
"pink sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were delisted, they would
be subject
3
<PAGE> 6
to a rule that imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors (generally defined as an investor with a net worth in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with a spouse). For transactions covered by this rule, the broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to sale.
Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers
in this Offering to sell their securities in the secondary market.
The Securities and Exchange Commission has adopted regulations that
define a "penny stock" to be any equity security that has a market price (as
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the Commission relating to
the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker- dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stocks.
While many Nasdaq-listed securities are covered by the definition of
penny stock, transactions in a Nasdaq- listed security are exempt from all but
the sole market-maker provision for (i) issuers who have $2,000,000 in tangible
assets, (ii) transactions in which the customer is an institutional accredited
investor and (iii) transactions that are not recommended by the broker-dealer.
In addition, transactions in a Nasdaq security directly with a Nasdaq market-
maker for such securities would be subject only to the sole market-maker
disclosure, and the disclosure with respect to commissions to be paid to the
broker-dealer and the registered representative.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends, to a significant extent, upon the
efforts and abilities of a number of key employees. The loss of services of
one or more of these employees, especially the Company's Chairman of the Board,
President and Chief Executive Officer, Gerald K. Beckmann, or the Company's
Chief Financial Officer, James W. Casey, could have a material adverse effect
on the business of the Company. The Company believes that its future success
will also depend in part upon its ability to attract, retain, and motivate
qualified personnel. Competition for such personnel is intense. There can be
no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."
DEPENDENCE UPON COMPLETION OF PRODUCT DEVELOPMENT
The Company's ability to compete successfully in the integrated
security systems market is dependent upon its ability to develop and produce
products that are technologically comparable to those of its competitors.
Development by others of new or improved products or technologies may make the
Company's products or proposed products obsolete or less competitive. In order
to fulfill its marketing strategy, the Company will be required to devote
substantial effort and financial resources to enhance its existing products and
to develop new products which meet a wide range of evolving user needs and
achieve market acceptance. There can be no assurance that the Company will
succeed in developing and marketing such products or that the Company will be
able to respond effectively to technological changes, emerging industry
standards, or new product introductions by others. Based upon the Company's
current financial condition, the amount of funding that may be available to
continue research and development at historical levels could be materially
reduced if additional funding is not raised by the Company. The amount of
money that the Company expends on research and development in the future may
vary significantly from the amount expended in prior years in order to respond
to technological changes, emerging industry standards, or new product
introductions by others. During fiscal 1995 and 1994, the Company spent
approximately $292,000 and $470,000 on research and development, has spent
approximately $50,000 during the first quarter of 1996, and anticipates
spending approximately $350,000 during fiscal 1996.
4
<PAGE> 7
ACQUISITION AND DEVELOPMENT RISKS
The Company's strategy includes increasing its market penetration by
starting new, or acquiring existing, businesses to develop, manufacture or sell
products which enhance the safety and security of people and assets. In
addition, the Company's ability to execute this strategy will depend on a
number of factors, including its ability to hire, train and retain an adequate
number of experienced management and sales employees, and to secure adequate
financing. There can be no assurance that such new businesses can be acquired
or operated profitably. The Company does not currently have the financial
resources to meet this objective. In addition, the Company may expand into new
geographic markets in which it has no operating experience. The Company's
marketing strategy includes the sale of sophisticated security integration
systems, such as the Company's Intelli-Site(R), which the Company believes will
result in higher sales and gross margins. To date, sales of these systems have
been limited and there can be no assurance that the Company will be successful
in implementing this marketing strategy.
CAPACITY OF MANUFACTURING FACILITY
The Company's manufacturing facility in Norwood, Louisiana typically
operates at full capacity during the fourth quarter of each fiscal year. The
Company intends to expand this facility if the Company is able to obtain
permanent financing for that purpose. The Company currently does not have the
financial resources to fund such expansion, and there can be no assurance that
the Company will be able to obtain appropriate financing for this purpose. If
the expansion is delayed or does not occur, then the Company's ability to
expand its output from this facility will be limited and may not be possible.
COMPETITION
The markets for the Company's products are extremely competitive.
Many of the Company's competitors have greater market recognition and greater
financial, technical, marketing and human resources than the Company. There
can be no assurance that the Company will be able to compete successfully
against existing companies or new entrants to the marketplace. Furthermore,
the development by competitors of new or improved products or technologies may
render the Company's products or proposed products obsolete or less
competitive. See "Business-Competition."
CERTAIN TRANSACTIONS
The Company has engaged in certain transactions with its officers,
directors and principal stockholders that have resulted in the creation of
certain obligations to these affiliates. From time to time, in order to fund
Company operations, these affiliates have advanced funds to the Company,
deferred salaries or guaranteed Company indebtedness. See "Certain
Transactions."
SEASONALITY -- IMPACT ON QUARTERLY RESULTS
Because the Company sells some products which are used primarily in
outdoor construction, which is affected by weather, the Company's revenues
during the third and fourth quarters have historically represented
approximately 61% of the annual revenues of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality."
RECENT DEVELOPMENTS
The Company is negotiating an arrangement with an unaffiliated third
party whereby the third party would undertake to fund most of the sales,
engineering and order fulfillment expenses of the Company's subsidiary
Innovative Security Technologies, Inc. ("IST"), which provides the
Intelli-Site(R) product. In exchange, the third party would receive, as
compensation from IST, most of the revenue arising from any Intelli-Site sales
that take place after the agreement commences. The Company retains full
ownership of the product during the agreement period and retains responsibility
for managing IST's business activities, including customer relationships.
5
<PAGE> 8
The period of time during which this arrangement would continue
(during which there would be very little profit or loss impact to the Company
from Intelli-Site product activities) is dependent upon the total amount of
funding available and when, or if, the maximum funding commitment of the third
party is reached. The Company believes that the period of time is likely to be
at least six months but not likely to be more than 24 months -- although no
firm determination can be made at this time. This arrangement would continue
until a pre-agreed rate of return had been earned by the third party. After
the end of the agreement, all revenue and expenses arising from Intelli-Site
activities would revert to IST.
Although the Company considers it likely that such an arrangement will
be entered into before the end of the third quarter of 1996, there is no
assurance that it will occur or at what level it will occur, in which case the
Company would be responsible to fund Intelli-Site activities. As of August 12,
1996, no funding has been received by the Company pursuant to this proposed
arrangement.
The Company has entered into a non-binding letter of intent to acquire
a company which develops, manufactures and markets products to the banking and
hospital industries. The consummation of such acquisition is contingent upon
completion of due diligence, funding, and the negotiation of a definitive
contract, none of which can be assured. If the acquisition occurs, it will
require the issuance of additional debt and securities totaling approximately
$6.5 million the terms of which may cause dilution of existing shareholders.
The Company is unable to determine at this time whether, or to what extent,
dilution may occur.
THE COMPANY
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. 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.
The Company was incorporated in Delaware on December 19, 1991.
Effective as of January 1, 1992, the Company acquired B&B Electromatic, Inc.
("B&B"). B&B designs, manufactures and distributes commercial and industrial
security products, and traffic control barriers and lighting for the road and
bridge industry. B&B has been in operation since 1925.
On March 16, 1993, the Company organized Innovative Security
Technologies, Inc. ("IST"), which is a retail seller of security products and
microprocessor-based systems to large customers. This company markets a
PC-based security network, the Intelli-Site(R), that integrates multiple
security functions into a centralized management system for single and/or
multiple site locations. IST is responsible for the sales and marketing of
this product.
During the second quarter of 1995, the Company discontinued the
operations of Automatic Access Controls, Inc. ("AAC"), a distributor of
commercial and industrial security products, and merged certain functions of
AAC with two other existing subsidiaries (B&B and IST). This merger was
implemented during the second and third quarters of 1995.
On September 18, 1995, the Company purchased substantially all of the
assets and liabilities of Tri-Coastal Systems, Inc. ("TCSI"). TCSI sells and
installs security and safety systems to end users.
The Company's executive offices are located at 8200 Springwood Drive,
Suite 230, Irving, Texas 75063. The Company's telephone number is (214)
444-8280.
Unless the context otherwise requires, the term "ISSI" or "Company" as
used in this Prospectus means Integrated Security Systems, Inc. and its
subsidiaries.
6
<PAGE> 9
THE IPO AND SUBSEQUENT SECURITIES ISSUANCES
The Company completed its initial public offering (the "IPO") in April
1993. In connection with the IPO, the Company issued to the public units (the
"Units") with each Unit consisting of one share of Common Stock and one IPO
Warrant. At the time of the IPO, each IPO Warrant was exercisable for one
share of Common Stock. In connection with the IPO, the Company issued the
Underwriter's Warrant to Thomas James Associates, Inc. (which firm was
subsequently acquired by H.J. Meyers, Inc.), the lead underwriter of the IPO.
The Underwriter's Warrant was initially exercisable for an aggregate of 145,000
Units, at an exercise price of $6.30 per Unit.
The IPO Warrants and the Underwriter's Warrant provide that the
exercise price and number of shares of Common Stock purchasable upon exercise
are subject to adjustment upon the occurrence of certain events, including
stock dividends, stock splits, consolidations or reclassifications of the
Common Stock, or the sale by the Company of shares of Common Stock (or
securities exercisable for, or convertible into, shares of Common Stock) at a
price below the then-applicable exercise price of the IPO Warrants or the
Underwriter's Warrant, respectively. As a result of the subsequent issuance of
the warrants, options, and convertible preferred stock described below, the
exercise price for the IPO Warrants and the Underwriter's Warrant were
adjusted, effective June 17, 1996. After giving effect to the adjustment, the
IPO Warrants may now be exercised for 1.6 shares of Common Stock (an aggregate
of 2,320,000 shares) at an exercise price of $4.15 per share, and the
Underwriter's Warrant may now be exercised for an aggregate of 232,000 Units
(relating to 464,000 shares of Common Stock) at an exercise price of $3.51 per
Unit.
From August 1994 through March 1996, the Company granted non-qualified
compensatory stock options for an aggregate of 71,000 shares of Common Stock to
current and former employees.
On September 18, 1995, the Company purchased substantially all of the
assets and liabilities of TCSI by issuing 21,000 shares of Common Stock to the
former owners of TCSI. On March 31, 1996, the Company issued 45,000 additional
shares of Common Stock and paid $66,178 in cash to the former owners of TCSI in
exchange for the surrender by the former owners of a right granted to them at
the time of the purchase of TCSI to rescind the original purchase transaction.
The Company entered into several extensions of bridge loans from
October 1995 through March 1996. Warrants to purchase an aggregate of 105,677
shares of Common Stock were issued to creditors in connection with these
extensions.
During the quarter ended December 31, 1995, the Company secured an
extension of the due dates of certain outstanding loans in the principal amount
of $789,000. These loans were extended until April 29, 1996 in exchange for
warrants to purchase Common Stock and an increase in the interest rate on such
loans from 14% to 16% per annum. On April 29, 1996, $680,000 of these loans
was paid, together with accrued interest. The remaining principal balance of
$109,000 was converted by the lender into 5,668 shares of the Company's $20
Series A Convertible Preferred Stock and warrants to purchase an aggregate of
45,344 shares of the Company's Common Stock at a price of $1 per share through
March 31, 2001. Each share of the $20 Series A Convertible Preferred Stock is
convertible into 20 shares of Common Stock.
In December 1995, the Company sold to a group of investors consisting
primarily of the Company's officers and directors 34,168 shares of the
Company's $20 Series B Convertible Preferred Stock and warrants to purchase an
aggregate of 136,665 shares of Common Stock. The investors forgave
indebtedness of the Company of $683,000 in connection with the issuance. Each
share of the $20 Series B Convertible Preferred Stock is convertible into 29.85
shares of Common Stock.
During the quarter ended December 31, 1995, the Company extended
credit terms with several creditors. In consideration for such extensions, the
Company issued the creditors an aggregate of 45,000 shares of Common Stock and
warrants to purchase an aggregate of 108,000 shares of Common Stock.
7
<PAGE> 10
In connection with the settlement of litigation with a former
executive officer of the Company, in January 1996 Philip R. Thomas (a
co-defendant in the litigation) transferred 85,000 shares of Common Stock to
such former executive officer. The Company agreed to register an amount of
these shares having a market value of at least $170,000, and has registered all
85,000 shares. If the market value of such 85,000 shares exceeds $170,000, the
former executive will remit to the Company the excess shares of Common Stock.
During the first quarter of 1996, the Company issued 13,200 shares of
Common Stock to a shareholder in return for certain consulting services.
In March 1996, the Company sold to unaffiliated investors 800,000
shares of Common Stock, 10,000 shares of the Company's $20 Series A Convertible
Preferred Stock, and warrants to purchase an aggregate of 320,000 shares of
Common Stock at $1.00 per share. The Company received net proceeds of $950,000
in connection with the sale.
In March, 1996, the Company entered into a consulting agreement with
Bathgate McColley Capital Group LLC ("BMCG") to provide investment banking
services to the Company for a period of two years. Under this agreement,
warrants to purchase an aggregate of 200,000 shares of Common Stock were issued
to BMCG.
During April 1996, the Company issued warrants to purchase an
aggregate of 100,000 shares of Common Stock to ComVest Partners Inc. as a
placement agent fee. These warrants are exercisable at $1.00 per share.
In May 1996, the Company sold to a group of unaffiliated investors
47,968 shares of the Company's $20 Series A Convertible Preferred Stock and
warrants to purchase an aggregate of 381,344 shares of Common Stock at $1.00
per share. Net proceeds realized by the Company from this offering were
approximately $530,000. The placement agent for the offering was BMCG. In
connection with the placement, the Company issued to BMCG a warrant to purchase
126,000 shares of Common Stock at an exercise price of $1.00 per share.
In June 1996, the Company sold 12,500 shares of the Company's $20
Series C Convertible Preferred Stock and issued warrants to purchase an
aggregate of 187,500 shares of Common Stock at $1.00 per share to a group of
investors including one of the Company's officers and directors in exchange for
the cancellation of $250,000 in short-term debt of the Company. Each share of
the $20 Series C Convertible Preferred Stock is convertible into 30 shares of
Common Stock.
8
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company on June
30, 1996 as if all IPO Warrants and all other options and warrants outstanding
(except those issued under the Company's Stock Option Plan) were exercised, and
all outstanding shares of the Company's convertible preferred stock were
converted.
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------
Pro Forma
Actual As Adjusted
----------- -----------
<S> <C> <C>
Notes Payable $ 10,131 $ 10,131
Notes Payable - Related Party 20,783 20,783
Short-Term Debt 56,540 56,540
Long-Term Debt 833,555 833,555
----------- -----------
Total Debt 921,009 921,009
Stockholders' Equity
Preferred Stock, $.01 par value, 750,000 shares authorized;
94,334 shares issued and outstanding at March 31, 1996; 0 as
adjusted 943 --
Common Stock, $.01 par value, 18,000,000 shares authorized;
4,932,905 shares issued and outstanding at March 31, 1996;
11,904,575 shares as adjusted 49,329 119,046
Additional Paid In Capital 9,390,552 22,891,860
Treasury Stock (118,750) (118,750)
Accumulated Deficit (6,365,239) (6,365,239)
----------- -----------
Total Stockholders' Equity 2,956,835 16,526,917
----------- -----------
Total Capitalization $ 3,877,844 $17,447,926
----------- -----------
</TABLE>
USE OF PROCEEDS
All proceeds from the exercise of the IPO Warrants and other warrants
and options outstanding will be used for working capital and general corporate
purposes, and possible future acquisitions. The Company will not receive any
proceeds from the sales of Common Stock by the Selling Stockholders. Because
of the current market price of the Common Stock, the Company believes it is not
presently likely that a substantial number of the IPO Warrants or the
Underwriter's Warrant will be exercised in the near future. The principal
reasons for the offering are to ensure that the issuance of Common Stock upon
exercise of the IPO Warrants complies with applicable laws regarding the
registration of securities, and to comply with contractual obligations to
register certain shares of Common Stock.
MARKET FOR COMPANY'S COMMON STOCK
The Company's Common Stock is traded on the Automated Quotation System
of the National Association of Securities Dealers, Inc. ("Nasdaq") under the
symbol "IZZI" and on the Boston Stock Exchange under the symbol "ISI." The IPO
Warrants are traded on the Nasdaq Small Cap Market under the symbol "IZZIW" and
on the Boston Stock Exchange under the symbol "ISIW." As of July 22, 1996,
there were 4,932,905 shares of Common Stock and 1,485,140 Warrants outstanding.
The shares of Common Stock are held of record by approximately 75 holders and
the Warrants are held of record by approximately 54 holders. The following
table sets forth, for the periods indicated, the high and low bid quotations
for the IPO Warrants and the Common Stock on the Nasdaq Small Cap Market.
Trading prices for the Common Stock and the IPO Warrants on the Boston Stock
Exchange are substantially similar to the prices set forth below for the Nasdaq
Small Cap Market. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual
9
<PAGE> 12
transactions. The trading market in the Company's securities may at times be
relatively illiquid due to low volume.
<TABLE>
<CAPTION>
Common Stock Warrants
------------------------------ ------------------------------
High Low High Low
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1996
First Quarter 2 13/16 5/8 7/8 1/16
Second Quarter 5 7/8 2 1/16 1 3/8 5/16
Third Quarter (1) 3 1/2 1 13/16 1 11/16
Fiscal 1995
First Quarter 2 1/2 1 5/8 11/16 3/8
Second Quarter 2 5/8 1 5/8 5/16
Third Quarter 3 1 7/8 7/8 9/16
Fourth Quarter 2 3/8 3/8 9/16 1/16
Fiscal 1994
First Quarter 2 5/16 1 3/8 3/4 3/8
Second Quarter 1 15/16 1 1/8 7/16 1/8
Third Quarter 1 15/16 1 1/8 11/16 1/8
Fourth Quarter 2 5/16 1 3/4 5/8 7/16
</TABLE>
- --------------------------
(1) Through July 31, 1996
DIVIDEND POLICY
Dividends have not been declared on the Common Stock and it is not
anticipated that dividends will be paid in the near future as any funds
available will most likely be reinvested in the Company's business used to
repay outstanding debt.
PRINCIPAL AND SELLING STOCKHOLDERS TABLE
The following tables set forth the number and percentage of outstanding
shares of Common Stock beneficially owned as of December 31, 1995, by (i) each
director and named executive officer of the Company, (ii) all officers and
directors of the Company as a group,(iii) all persons who are known by the
Company to be beneficial owners of 5% or more of the Company's outstanding
Common Stock, and (iv) each Selling Stockholder. Unless otherwise noted, each
of the persons listed below has sole voting and investment power with respect
to the shares indicated as beneficially owned by such person. This table
assumes that the persons set forth below have fully converted all their shares
of convertible preferred stock into shares of Common Stock and fully exercised
all their warrants to purchase Common Stock. For a description of the
Company's convertible preferred stock, see "Description of Securities."
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
PRIOR TO OFFERING (1) AFTER OFFERING
------------------------- -------------------------
Number of Number of
Shares of Shares of Common Shares of
Name of Beneficial Owner Common Stock % of Class Stock To Be Sold Common Stock % of Class
- ----------------------------------- ------------ ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Advisors Marketing Group, Inc. 2,779 * 2,779 -- *
Andrew F. Nicoletta 14,000 * 14,000 -- *
Bathgate McColley Capital Group (2) 126,000 3% 126,000 -- *
Capital Acquisition Corp., Inc. (3) 60,000 * 60,000 -- *
Caribou Bridge Fund, LLC 283,321 3% 283,321 -- *
Charles W. Martin (3) 85,000 * 85,000 -- *
Cherokee Trading Corp. 2,222 * 2,222 -- *
ComVest Partners, Inc. 100,000 1% 100,000 -- *
Craig A. Nichols 28,000 * 28,000 -- *
D&B Partners 28,000 * 28,000 -- *
Don Crosbie 185,953 2% 166,953 19,000 *
Donald A. Dole 14,000 * 14,000 -- *
Doris Tinsley-Nadel 1,668 * 1,668 -- *
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
PRIOR TO OFFERING (1) AFTER OFFERING
------------------------- -------------------------
Number of Number of
Shares of Shares of Common Shares of
Name of Beneficial Owner Common Stock % of Class Stock To Be Sold Common Stock % of Class
- ----------------------------------- ------------ ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Doug Urquhart 56,000 * 56,000 -- *
Dudley L. Bailey 28,000 * 28,000 -- *
Edward Krupa 1,668 * 1,668 -- *
Elizabeth R. McChesney 14,000 * 14,000 -- *
The Equity Group Inc. (4) 80,000 * 80,000 -- *
Eugene C. McColley (2) 142,000 * 142,000 -- *
Ferdinand A. Hauslein, Jr. (5) 204,211 2% 20,000 184,211 2%
Frank R. Marlow (6)(7)(8) 46,919 * 8,463 38,456 *
George I. Gasior 1,668 * 1,668 -- *
Gerald K. Beckmann (6)(7)(9) 843,692 9% 673,692 170,000 2%
H. Dennison Parker 42,000 * 42,000 -- *
Hanifen Imhoff Trustee FBO K.S.
Bernstein 14,000 * 14,000 -- *
Harry J. Schmidt 56,000 * 56,000 -- *
Henry E. McGuffee 15,000 * 15,000 -- *
Holly J. Burlage (6)(7)(10) 12,595 * 10,494 2,101 *
James Edgar McDonald, Trustee 98,250 * 98,250 -- *
James W. Casey (6)(7)(11) 157,957 2% 107,092 50,865 *
Jeffrey Markowitz 28,000 * 28,000 -- *
John P. Manry and Hedy White Manry 14,000 * 14,000 -- *
Joseph A. Lavigne 7,000 * 7,000 -- *
Kiawah Capital Partners 112,500 * 112,500 -- *
Larry D. Brooks 14,000 * 14,000 -- *
Lawrence E. Bathgate FBO Del.
Charter SEP (2) 14,000 * 14,000 -- *
Lester W. Erb Living Trust 14,000 * 14,000 -- *
Louis A. Davis 15,000 * 15,000 -- *
Managerial Resources, Inc. (13) 58,000 * 58,000 -- *
McChesney Family LLC 21,000 * 21,000 -- *
McKee Securities, Inc. (14) 18,000 * 18,000 -- *
Michael A. Richmond 15,000 * 15,000 -- *
Michael A. Lang 5,555 * 5,555 -- *
Nora Sherwood Parker 14,000 * 14,000 -- *
PAMB Investments 35,000 * 35,000 -- *
Philip J. Hempleman 224,000 * 224,000 -- *
Philip R. Thomas (6)(15) 1,696,327 17% 240,009 1,456,318 15%
Quad Capital Partners 28,000 * 28,000 -- *
Richard F. Cooper, Jr. 28,000 * 28,000 -- *
Richard Friedman 28,000 * 28,000 -- *
Richard M.H. Thompson 14,000 * 14,000 -- *
Richard P. Shortz (6)(7)(16) 38,921 * 31,481 7,440 *
Robert D. Goldstein 173,485 2% 173,485 -- *
Robert M. Nieder 28,000 * 28,000 -- *
Seabeach & Co. 1,120,000 11% 1,120,000 -- *
Shanly B. Stach 14,000 * 14,000 -- *
Steffany Lea Martin 5,000 * 5,000 -- *
Stephen L. Martin (7) 10,000 * 10,000 -- *
Steven Bathgate (2) 156,000 * 156,000 -- *
Summit Fund, LP 28,000 * 28,000 -- *
Teresa L. Luse (17) 1,000 * 1,000 -- *
Tony C. Lisotta (6)(7)(12) 46,755 * 11,117 35,638 *
Tracy H. Parker 7,000 * 7,000 -- *
Victor Kashner 28,000 * 28,000 -- *
Virginia Stevens McDonald, Trustee 98,250 * 98,250 -- *
Wayne Hamersly 28,000 * 28,000 -- *
William J. Macy 14,000 * 14,000 -- *
William S. Leftwich (17) 22,003 * 22,003 -- *
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
PRIOR TO OFFERING (1) AFTER OFFERING
------------------------- -------------------------
Number of Number of
Shares of Shares of Common Shares of
Name of Beneficial Owner Common Stock % of Class Stock To Be Sold Common Stock % of Class
- ----------------------------------- ------------ ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Winter Haven Homes, Inc. 70,000 * 70,000 -- *
Underwriter Warrants 464,000 * 464,000 -- *
IPO Warrants 2,320,000 * 2,320,000 -- *
TOTAL 9,820,699 7,856,670 --
</TABLE>
- ---------------
* less than 1%
(1) Pursuant to the rules of the Securities and Exchange Commission,
shares of Common Stock which an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to
be outstanding for the purpose of computing the percentage ownership of
any other person shown in the table.
(2) Since March, 1996, Bathgate McColley Capital Group ("BMCG") has acted
as the Company's investment banker. Lawrence E. Bathgate, Steven
Bathgate, and Eugene C. McColley are principals in BMCG.
(3) From 1991 to August 1993, Mr. Martin was an executive officer of the
Company.
(4) The Equity Group, Inc. acts as the Company's public relations firm.
(5) Includes 184,211 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days. Mr. Hauslein was a
Director, the President and CEO of the Company until May 1, 1995.
(6) The address for this person is 8200 Springwood Drive, Suite 230,
Irving, Texas 75063.
(7) Mr. Beckmann is a Director, the Chairman of the Board of Directors, the
President and the Chief Executive Officer of the Company. Mr. Casey is
a Director, Vice President, Secretary and Chief Financial Officer
Treasurer of the Company. Mr. Marlow is a Director of the Company.
Mr. Martin was a Director of the Company until December 15, 1995.
Mr. Lisotta and Mr. Shortz are officers of the Company. Ms.
Burlage is Controller and Assistant Secretary of the Company.
(8) Includes 38,456 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 7,463 shares of Common
Stock issuable upon the conversion of preferred stock; and 1,000 shares
of Common Stock issuable upon the exercise of warrants within 60 days.
(9) Includes 170,000 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 395,682 shares of
Common Stock issuable upon the conversion of preferred stock; and
53,021 shares of Common Stock issuable upon the exercise of warrants
within 60 days.
(10) Includes 2,101 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 9,254 shares of Common
Stock issuable upon the conversion of preferred stock; and 1,240
shares of Common Stock issuable upon the exercise of warrants within
60 days.
(11) Includes 48,865 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 50,346 shares of
Common Stock issuable upon the conversion of preferred stock; and
6,746 shares of Common Stock issuable upon the exercise of warrants
within 60 days.
(12) Includes 35,640 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 9,803 shares of Common
Stock issuable upon the conversion of preferred stock; and 1,314
shares of Common Stock issuable upon the exercise of warrants within
60 days.
(13) Managerial Resources, Inc. performed financial consulting services for
the Company from 1993 to 1995.
(14) McKee Securities, Inc. performed investment banking services for the
Company in 1995.
(15) Includes 146,850 shares of Common Stock owned by Thomas Group Holding
Company, a company owned by Mr. Thomas; 200,007 shares of Common Stock
issuable upon the conversion of preferred stock; and 26,801 shares of
Common Stock issuable upon the exercise of warrants within 60 days.
(16) Includes 7,440 shares of Common Stock issuable upon the exercise of
outstanding options exercisable within 60 days; 27,761 shares of
Common Stock issuable upon the conversion of preferred stock; and
3,720 shares of Common Stock issuable upon the exercise of warrants
within 60 days.
(17) An employee or former employee of the Company.
12
<PAGE> 15
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 Automatic Access Controls, Inc. ("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. The
Company's PC-based security network, the Intelli-Site, that integrates multiple
security functions into a centralized management system for single and/or
multiple site locations, is the primary product of IST. 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.
On September 18, 1995, the Company purchased substantially all of the
assets and liabilities of TSCI. TSCI sells and installs security and safety
systems.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
SALES. The Company's sales increased by 84.8% from $2,286,767 in the
first six months of 1995 to $4,225,419 in the first six months of 1996. A
majority of this increase is attributable to increased sales at B&B and the
inclusion of TCSI revenue during the first six months of 1996, with no
equivalent revenue last year. B&B's road and bridge sales increased primarily
as a result of a factory-direct perimeter security sales program instituted
when AAC's operations were discontinued last year.
COST OF SALES AND GROSS PROFIT. Gross profit as a percent of sales
decreased to 38.1% from 43.6% for the first half of 1996 and 1995,
respectively. This decrease was primarily attributable to inclusion of TCSI
results in the first six months of 1996 which generally has lower gross margins
than B&B, the other material operating subsidiary. Historically, gross margins
have averaged 47% and 25% for B&B and TCSI, respectively. Also during 1996 the
Company began amortizing software development costs related to the Intelli-Site
software. During the first six months of 1996, the Company amortized $63,690 of
these costs.
13
<PAGE> 16
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs decreased during the first six months of 1996 compared to
the same period in 1995 by approximately $421,000. The majority of this
decrease was attributable to one-time expenses incurred during the second
quarter of 1995 of approximately $575,000 for severance obligations to a former
officer and employees.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $35,697 for the second quarter of 1995 to $108,911 for the comparable 1996
period. This increase is primarily attributable to the inclusion of expenses at
IST related to the development of Intelli-Site, offset by a decrease in expenses
at B&B. Prior to 1996, the Company capitalized software development costs
related to Intelli-Site.
INTEREST INCOME. Interest income for the first six months of 1996
decreased to $5,805 from $13,192 in the comparable 1995 period. During the
first quarter of 1995, the Company earned interest on a $350,000 certificate of
deposit placed with a bank as collateral to secure a line of credit. The
certificate of deposit and accumulated interest were released on April 11,
1995.
INTEREST EXPENSE. The decrease of $22,456 in interest expense during
the first six months of 1996, compared to the same period in 1995, is primarily
due to the payment of certain short-term notes.
INCOME TAXES. The Company recorded a net income tax benefit of
$14,326 during the first six months of 1996, due primarily to the adjustment of
state income tax liabilities.
DISCONTINUED OPERATIONS. The discontinued operations reflect the
operations of AAC. AAC's operations were discontinued in the second quarter of
1995. During the first six months of 1996, the Company has recorded a gain on
disposal of discontinued operations in the amount of $22,789 related to the
settlement of certain liabilities.
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 89% 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 percentage 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 1994 to $4.6 million
for 1995. The majority of this increase was 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 was 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.
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 proposed acquisition and deferred at the time of being incurred, were
charged to operations in the quarter ended September 30, 1995.
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<PAGE> 17
INTEREST EXPENSE. Interest expense increased $192,000 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 AAC 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 half
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 and growth of net income through
acquisition. 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 sales 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 82% 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 percentage 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.
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. As a percentage of sales, selling general and
administrative expenses decreased to 38% in 1994 from 52% in 1993.
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<PAGE> 18
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.
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.
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 B&B's manufacturing
facility in Norwood, Louisiana, which is expected to cost approximately $1.4
million. This expansion is expected to commence in 1997 and be funded through
a combination of earnings and bank financing. At December 31, 1995, the
Company had incurred approximately $153,000 of these costs for land preparation
and design 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 began amortizing these costs in 1996 over the expected life of
the product.
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.
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 the remainder of 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. The Company will be
required to raise additional cash through debt and/or equity placements, or
other arrangements, in order to fund operations as presently structured and/or
to acquire other businesses during 1996. The exact amount, type and timing of
such funding activities, and their impact on current shareholder interests,
cannot be determined at this time.
For the fiscal year ended December 31, 1995 and the first half of
1996, the Company generated cash flow from operating activities of $879,000 and
($1,528,326), respectively. As a result of payment of certain 1995 accounts
payable, the Company's cash position decreased by $79,350 during the first half
of 1996. The Company used $1,528,326 for operations during this period as
compared with $1,004,575 generated from operations during the same period last
year. This was primarily attributable to the payment of certain 1995 accounts
payable and accrued liabilities, for which extended payment terms were
negotiated. These uses of cash were partially offset by increased collections
of accounts receivable, either directly or through a factoring agreement.
Discontinued operations used $159,897 of cash during the first six months of
1996 to pay liabilities compared to providing $855,272 in the same 1995 period.
During the first six months of 1996, the Company generated $1,585,955 from
financing activities, the major portions of which are described below.
Payments of $1,228,464 were made on notes payable and long-term debt. The
Company borrowed $985,045 from a principal stockholder and lending institution
and received short term advances totaling $250,000 from affiliated and
unaffiliated investors. The Company also received
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<PAGE> 19
$1,579,374 through the sale of common and preferred stock, warrants and
convertible debt, net of related expenses.
On March 11, 1996, the Company received short term advances totaling
$250,000 from affiliated and unaffiliated investors. These advances are
convertible into $20 Series C preferred stock convertible to 30 common shares
and a warrant to purchase 15 shares of the Company's Common Stock at a price of
$1 per share. These warrants expire five years from the date of issue.
During March and April 1996, the Company sold 47,968 Units, with each
Unit consisting of one share of $20 Series A convertible preferred stock and
warrants to purchase eight shares of the Company's Common Stock at a price of
$1 per share until March 31, 2001, to outside investors for $862,000 in cash,
net of offering expenses. On March 28, 1996, the Company sold 800,000 shares
of Common Stock and 320,000 warrants to purchase Common Stock to an
institutional investor for $760,000 in cash, net of offering expenses. The
warrants have an exercise price of $1 per share and expire on March 31, 2001.
The Company used the proceeds of these sales to make payments on short-term
notes payable and past due trade debt.
On April 25, 1996, the Company closed on a $900,000 term loan facility
with a lending institution. The loan is due in 23 monthly payments of $12,000
beginning June 1, 1996, and one payment sufficient to pay the balance due June
1998. Interest on the loan is floating at the lending institution's Base
Lending Rate plus 1%, which is currently 10% APR. The loan is secured by all
real estate and equipment at B&B and guaranteed by Gerald K. Beckmann, the
Company's Chief Executive Officer, with certain of his personal assets pledged
as collateral. Approximately $450,000 of the proceeds of this loan were used
to repay existing mortgages and notes payable at B&B, and the remaining
proceeds were used to repay a portion of the Company's notes payable due April
29, 1996. The Company anticipates that it will repay this loan from funds
generated from current operations.
On April 15, 1996, the Company renewed its factoring facility with
Sunburst Bank of Baton Rouge, Louisiana. This factoring facility expires April
15, 1997, has a factoring fee of 3.13% and a maximum borrowing amount of
$1,400,000. As of March 31, 1996, approximately $750,000 was utilized and
factored receivables of the same amount were subject to recourse.
SEASONALITY
Because the Company sells products which are used primarily in outdoor
construction, which is affected by weather, the Company's sales have
historically been greater during the third and fourth quarters of the year than
during the first two quarters. Consequently, the Company's sales during the
two quarters ending in March and June of each year are generally not expected
to reach the levels of the two quarters ending in September and December of
each year. The Company has historically performed 61% of its total sales
during the second half of this fiscal year and expects that this seasonal
fluctuation will continue.
BUSINESS
DESCRIPTION OF BUSINESS
General
The Company 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. 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.
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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.
The Company 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, the Company 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(R) 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
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 leverage its long term reputation of high
quality designs and its broad network of architectural firms that prefer and
specify B&B products on new projects into increased revenues during the
rebuilding of the federal and state road and bridge infrastructures. In
addition, ISSI will continue to incorporate B&B's road and bridge reputation
into its more recently established perimeter security core business.
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 ranging 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 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.
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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.
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
$4.1 million at June 30, 1996. The Company expects that the majority of this
backlog will be filled during 1996 with the balance to be filled in 1997.
INTELLECTUAL PROPERTY
The Company has applied for U.S. registration of "ISSI" as a trademark
and a service mark. The Company has also applied for U.S. registration of the
trademark "Intelli-Gate."
On March 16, 1993, the Company entered into an agreement with COMTRAC
Corporation ("CTC") that grants to the Company a non-exclusive, 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 was exclusive until March 16, 1996. The
Company paid $250,000 for this license.
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Also on March 16, 1993, the Company entered into an agreement with
DesignTech, Inc. ("DTI") that grants the Company a non-exclusive, 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. 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. To date, no
royalties have been paid.
PRODUCT DESIGN AND DEVELOPMENT
Six employees of the Company are dedicated to research, development
and product engineering. During fiscal 1995 and 1994, the Company spent
approximately $292,000 and $470,000 on research and development, has spent
approximately $50,000 during the first quarter of 1996, and anticipates
spending approximately $350,000 during fiscal 1996.
COMPETITION
Many large system integration consultants and engineering firms
compete directly with the Company for large security contracts. Large, complex
projects usually receive bids for the design of a custom system, or multiple
side- by-side systems, to meet their requirements. System integrators bid
these design contracts not only for the design effort but also to place
themselves in a most favored position to become the prime contractor during the
implementation phase. During the design phase, system integrators survey the
market for components of the specified system and define how they can be
integrated together. Finally, if awarded the implementation phase, the system
integrator acts as a prime contractor and subcontracts the component suppliers,
and supervises the integration.
Depending on the contract, the Company will either become a
subcontractor for the majority of the systems or bid the project as a
vertically integrated system integrator and prime contractor. By combining
both the first and second phase into a proposal from a single vendor, the
Company eliminates several third party profit tiers and can reduce the time and
overall costs to the customer.
The Company faces intense competition in the security industry.
Certain of the Company's competitors are large, well-financed and established
companies that have greater name recognition and resources for research and
development, manufacturing and marketing than the Company has and, therefore,
may be better able than the Company to compete for a share of the market.
EMPLOYEES
As of June 30, 1996, the Company employed 92 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.
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. All facilities and equipment of B&B are
pledged as collateral to a loan entered into in April 1996.
The Company's manufacturing facility in Norwood, Louisiana typically
operates at full capacity during the fourth quarter of each fiscal year. The
Company intends to expand this facility if the Company is able to obtain
permanent financing for that purpose. The Company currently does not have the
financial resources to fund such expansion, and there can be no assurance that
the Company will be able to obtain appropriate financing for this purpose. If
the expansion is delayed or does not occur, then the Company's ability to
expand its output from this facility will be extremely limited and may not be
possible.
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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.
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.
LEGAL PROCEEDINGS
The Company is the defendant in a lawsuit filed in the Superior Court
of New Jersey, Law Division: Monmouth County, entitled Frank G. Tufarelli and
Fedora D. Tufarelli v. County of Monmouth, et al., filed on July 17, 1992.
This is a civil suit for damages in an unspecified amount due to personal
injuries and damages sustained by the plaintiffs in 1990 as a result of an
automobile accident. Plaintiffs claim that, as a result of an inherent design
or manufacturing flaw in a B&B bridge barrier gate, warning lights attached to
a bridge barrier arm did not function at the time of the accident, thereby
causing plaintiffs' automobile to collide with the barrier gate. The case is
being defended by the Company's insurance carrier. Other defendants in the
case include the County of Monmouth, New Jersey, and the designer of the bridge
security system. The Company believes there are substantial issues of
negligence on the part of the bridge operators who were on duty at the time of
the accident. The Company also believes that the barrier gate was not properly
maintained by Monmouth County. The Company believes that the plaintiffs'
claims against the Company are without merit, and the Company intends to
vigorously defend itself. Although the outcome of this litigation cannot be
predicted, the Company believes that the plaintiffs will not recover damages
from the Company or, even if such damages are recovered, damages will not
exceed the Company's insurance coverage.
MANAGEMENT
Directors, Officers and Key Employees
The directors, officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Gerald K. Beckmann . . . . . . . . . . . . . Director, Chairman of the Board, President and Chief Executive
Officer
James W. Casey (1) . . . . . . . . . . . . . Director, Vice President, Chief Financial Officer, Secretary and
Treasurer
Richard P. Shortz . . . . . . . . . . . . . . Corporate Officer, and Vice President of IST
Tony C. Lisotta . . . . . . . . . . . . . . . Corporate Officer, and Vice President of IST
Holly J. Burlage . . . . . . . . . . . . . . Controller and Assistant Secretary
Robert M. Galecke (1)(2) . . . . . . . . . . Director
John P. Jenkins (1)(2) . . . . . . . . . . . Director
Frank R. Marlow . . . . . . . . . . . . . . . Director
- ---------------
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
Each director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and
serve at the discretion of the Board of Directors.
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Directors who have served as directors for at least six months prior
to the calculation of an award are eligible to receive grants of options under
the Stock Option Plan. Awards are made pursuant to a formula that is based on
the Company's net income per share. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with their attendance at Board
meetings.
Set forth below are descriptions of the backgrounds of the directors,
officers and key employees of the Company.
GERALD K. BECKMANN, 53, Director, Chairman of the Board, President and
Chief Executive Officer, has served as a director of the Company since its
inception in 1991 and Chairman of the Board of Directors since February 1993.
On May 1, 1995, Mr. Beckmann became President and Chief Executive Officer of
the Company. From 1991 to 1994 Mr. Beckmann was President and Chief Operating
Officer of Thomas Group Holding Company, a private investment company. In
1985, Mr. Beckmann joined Thomas Group, Inc., a publicly-held management
consulting firm, and currently serves as a director. Mr. Beckmann also serves
as a director on the board of CTC Holdings, an electronic funds transfer
systems supplier. Mr. Beckmann is also a manager in Celerity Partners, L.L.C.,
the general partner of Celerity Partners I, L.P., an acquisition limited
partnership. From 1989 to 1992, Mr. Beckmann was director of PROTECH, Inc., a
publicly-held automatic test equipment supplier and a director of DesignTech,
Inc., a digital video system designer. Mr. Beckmann has also served as past
President of COMTRAC Corporation and BehaviorTech, Inc., a computer-based
training company as well as past Chairman of Integrated Multimedia Solutions,
Inc., BehaviorTech's parent company. From 1991 to 1994, Mr. Beckmann was the
CEO of Threshold Technology, Inc., a developer and manufacturer of voice
recognition systems. Mr. Beckmann also held various other management
positions in sales, marketing, engineering and general management at Exxon,
RCA, IBM and Honeywell. Mr. Beckmann holds a B.S.E.E. from Virginia
Polytechnic Institute and University.
HOLLY J. BURLAGE, 32, Controller and Assistant Secretary, joined the
Company in February 1994 and became Controller and Assistant Secretary in May
1995. Prior to joining the Company, Ms. Burlage was Controller of Signature
Home Care Group, Inc., a home health care company, from 1993 to 1994, and
Controller and Chief Accounting Officer of National Heritage, Inc., a
publicly-traded long-term care company, from 1989 to 1993. Ms. Burlage holds a
B.B.A. from Baylor University.
JAMES W. CASEY, 54, Director, Vice President, Chief Financial Officer,
Secretary and Treasurer, has served as General Manager of B&B Electromatic,
Inc., the Company's manufacturing subsidiary, since April 1994, and became
Director, Vice President and Chief Financial Officer of the Company on May 1,
1995. Prior to joining the Company, Mr. Casey was President and Chief
Executive Officer of PROTECH, Inc., a publicly-held automatic test equipment
manufacturer from 1990 to 1993 and President and Chief Operating Officer of CJC
Holdings, Inc., a custom jewelry manufacturer from 1989 to 1990. Mr. Casey
holds a B.B.A. from Iona College and an M.S. from the State University of New
York. He is a Certified Public Accountant.
ROBERT M. GALECKE, 54, Director, is Vice President for Finance and
Administration for the University of Dallas, since June, 1996, and became a
director of the Company on May 7, 1996. From 1993 to May, 1996, he was a
principal in the corporate consulting firm of Pate, Winters & Stone, Inc. From
1989 to 1992, Mr. Galecke served as Chairman of the Board, President and Chief
Executive Officer of National Heritage, Inc., a large multi-state nursing home
management company, and a director until 1995. Mr. Galecke was also Chairman of
the Board, President and Chief Executive Officer of USTrails, Inc., a private
camping and resort company, from 1989 to 1992 and director and chairman of the
Audit Committee until 1995. He also served as Chief Operating Officer Executive
Vice President, and Chief Financial Officer of Southmark Corporation, a
financial services, insurance, and real estate holding company, from 1986 to
1992. Mr. Galecke received a graduate degree from the School of Banking at the
University of Wisconsin, Madison, Wisconsin, and a BS in Economics from the
University of Wisconsin, Stevens Point.
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JOHN P. JENKINS, 46, Director, is President, Chief Executive Officer
and a director of Topro, Inc. since January 1995 and became a director of the
Company on May 7, 1996. From 1993 to 1995, Mr. Jenkins obtained broad domestic
and international operating experience in technology intensive businesses as
President of Morgan Technical Ceramics, Inc. From 1991 to 1993, he obtained
divisional profit and loss responsibility in Coors Ceramic Co. as Vice
President and General Manager of its structural ceramics division. Mr. Jenkins
holds a Bachelor of Science degree in Mechanical Engineering from the
University of Washington, and a Juris Doctor degree from the University of
Denver.
TONY C. LISOTTA, 54, Vice President and General Manager of Innovative
Security Technologies, Inc. ("IST"), a subsidiary of the Company, joined the
Company in October 1993. Mr. Lisotta has over 14 years of sales and management
experience with IBM. Mr. Lisotta previously served as Senior Vice President
for Fults Associates, Inc., a commercial real estate firm from 1988 to 1992,
and Executive Vice President for The Consolidated Companies, a surety bond
company from 1992 to 1993. Mr. Lisotta holds a B.B.A. from Lamar University.
FRANK R. MARLOW, 56, Director, has been a director of the Company
since May 1995. Mr. Marlow served as Vice President, Sales and Marketing for
the Company from October 1993 to February 1995. Mr. Marlow has been a vice
president of CSC, Inc., a publicly-traded company, since March of 1995.
Previously, Mr. Marlow was with IBM, Docutel Corporation, UCCEL Corporation and
Syntelligence Corporation in executive sales and training positions.
RICHARD P. SHORTZ, 41, Vice President, Engineering, IST, joined the
Company in May 1994 and is responsible for Intelli-Site software development.
Prior to IST, Mr. Shortz was a Software Developer for Thomas Group, Inc. from
1988 to 1994. Mr. Shortz holds a B.S.C.S. from the University of Maryland.
Executive Compensation
Summary Compensation Table
The following table sets forth the total compensation paid or accrued
by the Company for services rendered during the fiscal years ended December 31,
1995, 1994, and 1993 to the Company's Chief Executive Officer and the four
other most highly compensated executive officers whose total cash compensation
for the fiscal year ended December 31, 1995 exceed $100,000 (the "named
executive officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
----------------------------------- ----------------------------------
Option/Year Other Annual Restricted Stock
Name and Principal Position SARS Salary Bonus Compensation Awards
- -------------------------------------- ------------ -------- ------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Gerald K. Beckmann
Chairman, CEO & President 1995 $114,583 -- $68,750 (5) 14,473
1994 -- -- -- --
1993 -- -- -- 170,000
James W. Casey
Vice President & CFO 1995 $115,145 $ 7,750 $33,333 (5) 23,395
1994 $ 94,125 $17,125 -- 34,333
1933 -- -- -- --
Ferdinand A. Hauslein, Jr. (2)
former CEO & President 1995 $233,333 -- $32,845 (4) 20,000
1994 $154,167 $56,250 $ 4,284 (3) 16,271
1993 $118,250 -- $ 2,129 (1) 147,941
Tony C. Lisotta
Vice President & General
Manager, IST 1995 $116,000 $ 2,850 $ 3,550 (5) 10,150
1994 $111,500 $16,900 -- 8,627
1993 $ 27,500 -- -- 35,000
</TABLE>
23
<PAGE> 26
(1) Employer matching contribution on 401(k) Plan.
(2) No longer employed by the Company.
(3) Mr. Hauslein holds 2,448 shares of restricted Common Stock valued at $1,874
at December 31, 1995.
(4) Outplacement services.
(5) Convertible preferred stock issued for forgiveness of deferred salary
amounts.
No other executive officer's salary and bonus exceed $100,000 during
any of the indicated periods.
No other executive had any form of long-term incentive plan
compensation arrangement with the Company during any of the indicated periods.
Stock Option Grants
The following table provides information concerning the grant of stock
options during the year ended December 31, 1995 to the named executive
officers:
<TABLE>
<CAPTION>
Number of Securities % of Total Options
Underlying Options Granted to Employees in Exercise Expiration
Granted (1) Fiscal Year Price Date
-------------------- ----------------------- -------- ----------
<S> <C> <C> <C> <C>
Gerald K. Beckmann 14,473 11.4% $2.38 9/30/05
James W. Casey 10,062 7.9% 2.00 3/1/05
James W. Casey 13,333 10.5% 1.56 6/1/00
Ferdinand A. Hauslein, Jr. 20,000 15.7% 2.00 5/2/03
Tony C. Lisotta 10,150 8.0% $2.00 3/1/05
</TABLE>
(1) The options for all listed except Mr. Hauslein vest with respect to 25% of
the shares issuable thereunder six months after the date of grant and with
respect to cumulative increments of 25% of the shares issuable thereunder
on each anniversary of the date of grant. Mr. Hauslein's options vested at
his resignation on May 1, 1995.
Option Exercises and Holdings
The following table provides information related to the number of
shares received upon exercise of options, the aggregate dollar value realized
upon exercise, and the number and value of options held by the named executive
officers of the Company at December 31, 1995.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options/SARS at In-The-Money Options/SARS
Fiscal Year End at Fiscal Year End
------------------------------------- -----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann 170,000 14,473 -- --
James W. Casey 46,349 11,379 -- --
Ferdinand A. Hauslein, Jr. 184,212 -- -- --
Tony C. Lisotta 33,102 20,675 -- --
</TABLE>
Stock Option Plan
The Company's 1993 Stock Option Plan (the "Plan") was adopted by the
Board of Directors on February 26, 1993 and approved by the stockholders on
February 26, 1993.
Options granted under the Plan may be either (i) options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), or (ii) non-qualified
stock options. Incentive stock options may be granted under the Plan to
employees, including officers and directors who are employees. Non-qualified
options may be granted to non-employee directors of the Company.
24
<PAGE> 27
The Plan is administered by the Stock Option Committee of the Board of
Directors. Under the Plan, the Stock Option Committee has the authority to
determine the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be
incentive stock options, the duration and rate of exercise of each option, the
option price per share of incentive stock option, the manner of exercise, and
the time, manner and form of payment upon exercise of an option. The Company
has 500,000 shares of Common Stock reserved for issuance to its employees and
non-employee directors under the Plan. Members of the Stock Option Committee
are not eligible to receive stock options under the Plan, except as discussed
below.
Incentive stock options granted under the Plan may not be granted at a
price less than the fair market value of the Common Stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of the voting stock of the Company). Non-qualified stock options may be
granted at an exercise price established by the Stock Option Committee which
may be less than, equal to, or greater than the fair market value of the Common
Stock on the date of grant. Incentive stock options granted under the Plan
must expire not more than ten years form the date of grant, and not more than
five years from the date of grant in the case of incentive stock options
granted to an employee holding 10% or more of the voting stock of the Company.
The Plan provides for the granting of options to purchase shares of
Common Stock to each member of the Board of Directors. Options to purchase
Common Stock may be granted to members of the Board of Directors annually in
accordance with a specified formula based upon increases in the Company's net
income per share over the previous fiscal year. All grants of options are made
automatically and without any discretion on the part of the Stock Option
Committee with respect to the grantee, the number of options granted and the
exercise price of the options. The exercise price for each option must be at
least equal to 100% of the fair market value of the Common Stock on the date of
the grant of the option. Each option will expire ten years from the date of
grant and no option is exercisable until six months from the date of grant.
Notwithstanding any other restriction in the Plan, options will become
immediately exercisable upon a reorganization, merger or consolidation of the
Company or a change in control of the Company.
At December 31, 1995, 367,333 options were outstanding under the Plan.
Other Stock Options
On January 1, 1993, various officers and key employees of the Company
were granted options to purchase Common Stock at the exercise price of $2.50,
which was equal to the fair market value of the Common Stock on the date of
grant. Mr. Ferdinand A. Hauslein, Jr. has been granted options to purchase up
to 90,000 shares of Common Stock, and Mr. Gerald K. Beckmann has been granted
options to purchase up to 120,000 shares of Common Stock. All such options are
currently exercisable.
On January 1, 1993, the Company granted to Mr. Robert C. Pearson and
Mr. Daniel J. Hampton options to purchase 19,200 shares of Common Stock and
2,500 shares of Common Stock, respectively, at an exercise price of $2.50,
which was equal to the fair market value of the Common Stock on the date of
grant. All such options are currently exercisable. Such options were granted
to Mr. Pearson and Mr. Hampton in exchange for consulting services provided to
the Company.
CERTAIN TRANSACTIONS
In 1984, Mr. Philip R. Thomas, the Company's principal stockholder,
who was then sole owner of 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 had been deferred and offset against the note receivable, which had 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
25
<PAGE> 28
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 Mr. Thomas contributing Common Stock and equipment and canceling
the related equipment lease with the Company in exchange for forgiveness of the
note payable to the Company and related interest. This resulted in an increase
to stockholders' equity of $87,000.
During the period from January 1990 to December 1992, the Company
incurred aggregate indebtedness of $786,373 to Thomas Group Holding Company
("TGHC"), Mr. Lynn R. Causey, and Mr. Ferdinand A. Hauslein, Jr., all in
separate transactions. From the total amount of this debt, $636,531 was
exchanged for 141,451 shares of Common Stock on April 20, 1993, $40,000 was
repaid out of the proceeds of the Company's initial public offering on April
20, 1993, and the maturity date of the remaining $109,842 in loans to the
Company was extended until January 1, 1995. This amount has been paid in full.
Effective as of February 16, 1994, the Company entered into a
five-year agreement for $120,000 annually with TGHC for TGHC to provide
services including but not limited to the services of Mr. Gerald K. Beckmann to
serve as Chairman of the Board and as a Director of the Company. Pursuant to
such agreement, the Company was obligated to nominate Mr. Beckmann as a
director during the term of the agreement. This agreement was terminated May
1, 1995, the date Mr. Beckmann became the Chief Executive Officer and
President.
On January 1, 1995, Mr. Thomas and Mr. Beckmann loaned the Company
$69,088 and $90,000, respectively. On December 29, 1995 Mr. Thomas and Mr.
Beckmann converted their loans along with additional amounts owed them for
interest and miscellaneous expenses into 14,539 shares of Series B $20
Convertible Preferred Stock. During 1995, Mr. Thomas loaned the Company
$40,000 which was secured by certain receivables. On December 29, 1995, Mr.
Thomas converted this loan into 2,000 Series B $20 Convertible Preferred Stock.
Also on December 29, 1995, Mr. Beckmann, Mr. Casey, Mr. Lisotta, Mr. Shortz,
Ms. Burlage and Mr. Marlow converted unpaid compensation totaling $138,451 into
6,922 Series B $20 Convertible Preferred Stock.
During 1995 and 1996, Mr. Beckmann loaned the Company approximately
$306,000. As of August 12, 1996, loans of $80,000 were outstanding. On March
11, 1996, Mr. Beckmann loaned the Company $100,000 as part of a $250,000 bridge
loan. These bridge loans were converted in June 1996 into $20 Series C
Preferred Stock convertible to 30 shares of Common Stock and Warrants to
purchase 15 shares of Common Stock at $1.00 per share. These warrants expire
five years from date of issue. In 1996, Mr. Beckmann guaranteed loans to the
Company in the aggregate amount of $1,050,000.
The Company believes that the terms of the foregoing transactions were
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, $.01 par value per share, 4,674,693 of which are
outstanding, and 750,000 shares of Preferred Stock, $.01 par value per share,
issuable in series. As of the date hereof, there are 47,968 shares of Series A
$20 Convertible Preferred Stock outstanding, 34,168 shares of Series B $20
Convertible Preferred Stock, and 12,500 shares of Series C $20 Convertible
Preferred Stock Outstanding. The following statements are brief summaries of
certain provisions relating to the Company's capital stock.
COMMON STOCK
The Company is authorized to issue 18,000,000 shares of Common Stock.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. There is no cumulative voting
with respect to the election of Directors, with the result that the holders of
more than 50% of the shares voted in the election of Directors can elect all of
the Directors. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors of the Company
out of funds legally available therefor. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company
26
<PAGE> 29
after payment of all debts and liabilities and liquidation preferences of
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
GENERAL. The Company's Board of Directors may, without further action
by the Company's stockholders, from time to time issue preferred stock in
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution, or winding-up of the Company before any payment is
made to the holders of Common Stock. In addition, under certain circumstances,
the issuance of Preferred Stock may render more difficult or tend to discourage
a merger, tender offer or proxy contest, or the removal of incumbent
management.
SERIES A $20 CONVERTIBLE PREFERRED STOCK. The Company currently has
outstanding 47,968 shares of its Series A $20 Convertible Preferred Stock (the
"Series A Preferred"). Holders of the Series A Preferred are not entitled to
receive any dividends, and have no voting rights, unless otherwise required
pursuant to Delaware law. Each share of the Series A Preferred may, at the
option of the Company, be converted into 20 shares of Common Stock at any time
after (i) the closing bid price of the Common Stock is at least $2.00 for at
least 20 trading days during any 30 trading day period, and (ii) the shares of
Common Stock to be received on conversion have been registered or otherwise
qualified for sale under applicable securities laws. In addition, the holders
of the Series A Preferred have the right to convert each share into 20 shares
of Common Stock at any time. The number of shares of Common Stock into which
the Series A Preferred is convertible will be proportionately adjusted in the
event of a stock dividend, stock split, or reverse stock split. Upon any
liquidation, dissolution, or winding up of the Company, the holders of the
Series A Preferred are entitled to receive $20 per share before the holders of
Common Stock are entitled to receive any distribution and the Series A
Preferred ranks pari passu with Series B and Series C Preferred except with
respect to the security interest granted to Series B Preferred (see Series B
description below).
SERIES B $20 CONVERTIBLE PREFERRED STOCK. The Company has issued
34,168 shares of its Series B $20 Convertible Preferred Stock (the "Series B
Preferred"). Holders of the Series B Preferred are entitled to receive
dividends equal to $2.00 per share per annum, payable in equal semi-annual
payments. Holders of the Series B Preferred have no voting rights, unless
otherwise required by Delaware law. Each share of the Series B Preferred may,
at the option of the Company or the holder, be converted into 29.85 shares of
Common Stock, together with accrued but unpaid dividends. The Company has the
right to redeem the Series B Preferred at any time at $22 per share, together
with accrued but unpaid dividends. The number of shares of Common Stock into
which the Series B Preferred is convertible will be proportionately adjusted in
the event of a stock dividend, stock split, or reverse stock split. Upon any
liquidation, dissolution, or winding up of the Company, the holders of the
Series B Preferred are entitled to receive $20 per share together with accrued
but unpaid dividends before the holders of any shares of Common Stock and on a
pari passu basis with Series A and C Preferreds. A security interest in 6.8%
of the Common Stock of B&B Electromatic, Inc. has been granted to secure
payment of any liquidation proceeds or dividends to which the Series B becomes
entitled. All Series B was converted to Common Stock in June 1996.
SERIES C $20 CONVERTIBLE PREFERRED STOCK. The Company has issued
12,500 shares of its Series C $20 Convertible Preferred Stock (the "Series C
Preferred"). Holders of the Series C Preferred have no voting rights, unless
otherwise required by Delaware law. Each share of the Series C Preferred may,
at the option of the Company or the holder, be converted into 30 shares of
Common Stock. The Company has no right to redeem the Series C Preferred. The
Series C Preferred is also subject to the conversion adjustments, and is
entitled to receive a liquidation preference, identical to the Series A
Preferred.
27
<PAGE> 30
WARRANTS AND OPTIONS
THE IPO WARRANTS. In connection with the Company's initial public
offering ("IPO"), the Company issued warrants which currently permit the
holders to purchase 2,320,000 shares of Common Stock (the "IPO Warrants").
Each IPO Warrant entitles the holder to purchase one share of Common Stock at
$4.15 per share. The IPO Warrants may be exercised at any time prior to April
20, 1998. The Warrants are subject to redemption at $.25 per Warrant on 30
days' written notice with the prior written consent of the underwriter for the
IPO. The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the company
of shares of its Common Stock at a price below the then-applicable exercise
price of the IPO Warrants.
UNDERWRITER'S WARRANT. In connection with the IPO, the Company issued
to H.J. Meyers, Inc. (successor to Thomas James Associates Inc.) the
Underwriter's Warrant to purchase 232,000 Units, each Unit consisting of one
share of Common Stock and one Warrant. The Underwriter's Warrant is
exercisable until April 20, 1998, at an exercise price of $3.51 per Unit. The
Underwriter's Warrant contains anti-dilution provisions providing for
appropriate adjustment upon certain events, including any combination,
recapitalization, reclassification, stock dividend, stock split or sale by the
Company or shares of its Common Stock at a price below the then applicable
exercise price of the Underwriter's Warrant.
OTHER WARRANTS. The Company has issued additional warrants to
purchase 1,864,730 shares of Common Stock in connection with certain other
financings and to certain other persons who provided services to the Company.
The exercise prices of these warrants range from $.01 to $2.00.
STOCK OPTIONS. The Company has issued options to employees and
consultants to purchase an aggregate of 833,238 shares of Common Stock under
the Company's 1993 Stock Option Plan and outside of such Plan.
DELAWARE LAW; CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the
removal of incumbent officers and directors. The Company's Certificate of
Incorporation contains a provision prohibiting stockholder action by less than
unanimous written consent, which would otherwise be permitted by Delaware law.
The Company's Bylaws contain a provision which requires that a stockholder may
nominate a person for election as a director only if written notice of such
stockholder's intent to make such nomination has been given to the Secretary of
the Company not later than 60 days prior to an annual meeting and not later
than ten days after the date on which notice of a special meeting was first
sent to stockholders. The notice must set forth, among other things, a
description of all arrangements or understandings between the nominating
stockholder and the nominee and such other information regarding the nominee as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee been
nominated by the Board of Directors of the Company. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to first negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
results in an improvement of their terms.
The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date
that the person became an interested stockholder unless (with certain
exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together
28
<PAGE> 31
with affiliates and associates, owns (or within three years prior, did own) 15%
or more of the corporation's voting stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide broadly
for indemnification of the officers and directors of the Company. In addition,
the Certificate of Incorporation provides that, to the fullest extent permitted
by Delaware law, no director shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such
director in his or her capacity as a director.
PLAN OF DISTRIBUTION
In connection with exercises of the IPO Warrants and the Underwriter's
Warrant, the Company will issue shares of Common Stock directly the registered
holders of such warrants. Upon such issuances, such shares of Common Stock
will be available for resale without restriction under the Securities Act,
except that shares owned by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the applicable provisions of Rule 144 or pursuant to an
effective registration statement under the Securities Act.
The Common Stock may be sold directly by each Selling Stockholder or
indirectly through agents, dealers or underwriters from time to time in one or
more transactions on the Nasdaq Small Cap Market, the Boston Stock Exchange or
such exchanges on which the Common Stock is then listed, or in privately
negotiated transactions at prices related to such market prices, at negotiated
prices or at fixed prices. The Selling Stockholders will bear all discounts
and commissions paid to broker-dealers in connection with the sale of their
Common Stock. Other offering expenses will be borne by the Company. The
Company will receive proceeds from the exercise price of warrants which may be
exercised by certain Selling Stockholders. The Company will not receive any
proceeds from the sales of Common Stock by the Selling Stockholders.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Haynes and Boone, L.L.P., Dallas, Texas.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for each
of the two years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 3 to the financial statements) of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"), Nasdaq and the
Boston Stock Exchange. The Registration Statement, the exhibits and schedules
forming a part thereof, and the reports, proxy statements, and other
information filed with the Commission in accordance with the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission at 7 World Trade
Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also may
29
<PAGE> 32
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The address for Nasdaq is 1735 K Street NW., Washington, D.C. 20006-1500, and
the address for the Boston Stock Exchange is One Boston Place, Boston,
Massachusetts 02108.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as
the Registration Statement) under the Securities Act with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is
made to the Registration Statement, each such statement being qualified in all
respects by such reference. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company will provide without charge to each recipient of this
Prospectus, upon written or oral notice to Director of Investor Relations, 8200
Springwood Drive, Suite 230, Irving, Texas 75083, phone (214) 444-8280, a copy
of any of the information that is incorporated by reference in this Prospectus
as of the date of filing, and subject in each case to information contained in
this Prospectus.
30
<PAGE> 33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
authorizes indemnification of certain officers, directors, employees and agents
of the Company; allows the advancement of costs of defending against
litigation; and permits companies incorporated in Delaware to purchase
insurance on behalf of directors, officers, employees and agents against
liabilities whether or not in the circumstances such companies would have the
power to indemnify against such liabilities under the provisions of the
statute.
The Company's Amended and Restated Certificate of Incorporation and
its By-Laws provide for indemnification of its officers and directors to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware.
The Company's Amended and Restated Certificate of Incorporation
eliminates, to the fullest extent permitted by Delaware law, liability of a
director to the Company or its stockholders for monetary damages for a breach
of such director's fiduciary duty of care except for liability where a director
(a) breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or a stock
repurchase or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be borne by
the Company in connection with the registration, issuance and distribution of
the securities being registered hereby. None of the estimated expenses will be
borne by the Selling Stockholders.
<TABLE>
<S> <C>
SEC Registration Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,028
Nasdaq Exchange Listing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,200
The Boston Stock Exchange Listing Fee . . . . . . . . . . . . . . . . . . . . . . . 2,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Printing and Engraving Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 100
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,828*
========
</TABLE>
__________
* Estimated
II-1
<PAGE> 34
Item 26. Recent Sales of Unregistered Securities
The following table specifies securities sold by the Registrant with
the past three years and not registered under the Securities Act of 1933. All
such sales were carried out in reliance on the exemptions from registration
contained in Section 4(2) of the Securities Act of 1933. In relying on such
exemption, the Registrant relied upon written representations of the persons
acquiring the Registrant's shares that they were acquiring the shares for
investment purposes only and not for resale, and that they had received
adequate opportunity to obtain information, and had reviewed such information,
regarding the Registrant. Certificates representing the shares issued to these
persons contained a legend restricting transfer thereof absent registration
under the Securities Act or the availability of an exemption therefrom.
<TABLE>
<CAPTION>
Underwriting
Title and Amount of Discounts or
Date Sold Securities Purchaser Consideration Received Commissions Paid
- --------------- -------------------------- ------------------------ ---------------------- ----------------
<S> <C> <C> <C> <C>
March-May 1996 47,968 Series A A group of 38 accredited $640,000 $78,000
Convertible Preferred investors
Stock and Warrants to
Purchase 381,344 Shares of
Common Stock
January 1996 34,168 Series B A group of 11 accredited Conversion of an
Convertible Preferred investors primarily aggregate of $683,000
Stock and Warrants to consisting of officers owed by the Company
Purchase 136,669 Shares of and directors
Common Stock
June 1996 12,500 Series C A group of 5 investors $250,000
Convertible Preferred including an officer and
Stock and Warrants to director
Purchase 187,500 Shares of
Common Stock
March 1996 800,000 Shares of Common Seabeach & Co. $800,000 $40,000
Stock and Warrants to
Purchase 320,000 Shares of
Common Stock
March 1996 15,000 Shares of Common Henry E. McGuffee Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 15,000 Shares of Common Lois A. Davis Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 15,000 Shares of Common Michael A. Richmond Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 Warrant to Purchase ComVest Partners Placement Agent fee
100,000 Shares of Common
Stock
October Warrants to Purchase A group of 9 investors Extension of loan
1995-March 1996 105,677 Shares of Common terms
Stock
October 1993 Warrants to Purchase The Equity Group, Inc. Investor relation
80,000 Shares of Common services
Stock
December 1995 45,000 Shares of Common Managerial Resources, Financial advisory
Stock and Warrants to Inc. and Steffany Lea services
Purchase 26,000 Shares of Martin
Common Stock
January 1996 Warrants to Purchase Philip R. Thomas Consulting services
13,200 Shares of Common
Stock
March 1996 Warrants to Purchase Bathgate McColley Capital Investment banking
326,000 Shares of Common Group LLC fees
Stock
September- An aggregate of 1,059,000 Accredited bridge An aggregate of
November 1994 Promissory Notes and financial investors $1,059,000
Warrants to Purchase
211,800 Shares of Common
Stock
</TABLE>
II-2
<PAGE> 35
Item 27. Exhibits
--------
(a) Exhibits.
Unless otherwise indicated, all exhibits are incorporated by
reference from comparable exhibits to Amendment No. 2 to the
Company's registration statement on Form SB-2 No. 33-59870-FW,
filed April 16, 1993.
<TABLE>
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.11 Amendment to Restated Certificate of Incorporation of the Company (incorporated by reference to exhibit
3.11 to the Company's Form 10-KSB for the year ended December 31, 1994).
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 Underwriter's Warrant.
*4.5 Certificate of Designation for Series A $20 Convertible Preferred Stock.
*4.6 Certificate of Designation for Series B $20 Convertible Preferred Stock.
*4.7 Certificate of Designation for Series C $20 Convertible Preferred Stock.
*5.1 Opinion of Haynes and Boone, L.L.P.
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 dated September 7, 1993, as amended on
December 30, 1994.
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.
10.13 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.
10.20 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.
10.23 Lease Agreement commencing June 1, 1992 by and between Kelso Joint Venture and AAC, for property
located in Baltimore, Maryland.
</TABLE>
II-3
<PAGE> 36
<TABLE>
<S> <C>
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.
10.49 Amendment to Integrated Security System, Inc. 1993 Stock Option Plan.
10.51 Note relating to the $900,000 Bridge Financing (incorporated by reference from similarly numbered
exhibits filed with the Company's Form 10-KSB for the year ended December 31, 1995).
10.52 Standard Form of Common Stock Purchase Warrant (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-KSB for the year ended December 31, 1995).
10.53 Subscription Agreement dated December 28, 1995 (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-KSB for the year ended December 31, 1995).
10.54 Factoring Agreement from Sunburst Bank for B&B receivables (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form 10-KSB for the year ended December 31, 1995).
10.55 Corporate Consulting Agreement, dated March 3, 1986, by and between the Company and Bathgate McColley
Capital Group LLC for consulting services (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
10.56 Form of Promissory Notes dated March 11, 1996 (incorporated by reference from the similarly numbered
exhibit filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
10.57 Engagement letter dated March 26, 1996, from Bathgate McColley Capital Group LLC to the Company
proposing private placement offering (incorporated by reference from the similarly numbered exhibit
filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
10.58 Form of Subscription Agreement for Series A Convertible Preferred Stock executed on March 27, 1996
(incorporated by reference from the similarly numbered exhibit filed with the Company's Form 10-QSB for
the quarter ended March 31, 1996).
10.59 Subscription Agreement for Common Stock executed March 28, 1996 (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
10.60 Form of Warrant Agreement for purchase of common stock executed March 29, 1996 (incorporated by
reference from the similarly numbered exhibit filed with the Company's Form 10-QSB for the quarter
ended March 31, 1996).
10.61 Placement Agent Agreement dated April 16, 1996, by and between the Company and Bathgate McColley
Capital Group LLC confirming private placement offering (incorporated by reference from the similarly
numbered exhibit filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
</TABLE>
II-4
<PAGE> 37
<TABLE>
<S> <C>
10.62 Form of Amendment to Promissory Notes dated April 22, 1996 (incorporated by reference from the
similarly numbered exhibit filed with the Company's Form 10-QSB for the quarter ended March 31, 1996).
21.1 Subsidiaries of the Company (incorporated by reference from the similarly numbered exhibit filed with
the Company's Form 10-KSB for the year ended December 31, 1995).
*23.1 Consent of Price Waterhouse LLP.
*23.2 Consent of Haynes and Boone, L.L.P. (included in their opinion filed as Exhibit 5.1).
*24.1 Power of Attorney (included on the signature page hereto).
</TABLE>
- -------------------
* Filed herewith.
(b) Reports filed on Form 8-K.
None.
Item 28. Undertakings
The Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE> 38
The Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act (Sections 230.424(b)(1), (4) or 230.497(h)) as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-6
<PAGE> 39
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irving, State of Texas, on August 15, 1996.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
------------------------------------
Gerald K. Beckmann
President and Chief Executive Officer
II-7
<PAGE> 40
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Officers
and Directors of Integrated Security Systems, Inc. (the "Company") hereby
constitutes and appoints Gerald K. Beckmann (with full power to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute, and file any and all documents relating to this
Registration Statement, including any and all amendments, exhibits and
supplements thereto, with any regulatory authority, granting unto said attorney
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he himself might or
could do if personally present, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 15, 1996.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
----------------------------------
Gerald K. Beckmann
Director, Chairman of the Board,
Chief Executive Officer and
President
By: /s/ JAMES W. CASEY
----------------------------------
James W. Casey
Director, Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
By: /s/ ROBERT M. GALECKE
----------------------------------
Robert M. Galecke
Director
By: /s/ JOHN P. JENKINS
----------------------------------
John P. Jenkins
Director
By: /s/ FRANK R. MARLOW
----------------------------------
Frank R. Marlow
Director
II-8
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Page
------- ------ ----
<S> <C>
4.5 Certificate of Designation for Series A $20 Convertible Preferred Stock.
4.6 Certificate of Designation for Series B $20 Convertible Preferred Stock.
4.7 Certificate of Designation for Series C $20 Convertible Preferred Stock.
5.1 Opinion of Haynes and Boone, L.L.P.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Haynes and Boone, L.L.P. (included in their opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included on the signature page hereto).
</TABLE>
<PAGE> 1
EXHIBIT 4.5
CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES A $20 CONVERTIBLE PREFERRED STOCK
OF
INTEGRATED SECURITY SYSTEMS, INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
The undersigned, President of Integrated Security Systems, Inc., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), in accordance with the provisions of
Section 103 thereof DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the Corporation, the said Board of
Directors on March 4, 1996, adopted the following resolutions creating a series
of shares of Preferred Stock, par value $.01 per share, designated as Series A
$20 Convertible Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation
be, and it hereby is, created, and that the designations and amounts thereof
and the voting powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A $20 Convertible Preferred Stock" and the
number of shares constituting such series shall be 75,000.
Section 2. Dividends. The Series A $20 Convertible Preferred
Stock shall not be entitled to any dividends.
Section 3. Voting. The holders of shares of Series A $20
Convertible Preferred Stock shall have no voting rights.
Section 4. Conversion.
(A) Each share of Series A $20 Convertible Preferred
Stock may be converted at the option of the Board of Directors of the
Corporation, as a whole or in part, at any time after the occurrence of both
events described in paragraph (B) of this Section 4 into twenty (20) times the
"Adjustment Number" of shares of Common Stock, par value $.01, of the
Corporation ("Common Stock"). The initial Adjustment Number shall be one (1),
and shall be subject to adjustment from time to time as provided in paragraph
(D) of
<PAGE> 2
this Section 4. Upon the action by the Board of Directors authorizing the
conversion of Series A $20 Convertible Preferred Stock, the Corporation shall
send notice of such conversion to each holder of Series A $20 Convertible
Preferred Stock whose shares are to be so converted.
(B) The Corporation shall not have the conversion right
described in paragraph (A) of this Section 4 until such time as (i) the closing
bid price of the Common Stock, as quoted on NASDAQ, is at least equal to $2.00
for at least twenty (20) consecutive or nonconsecutive trading days during any
thirty (30) consecutive trading day period preceding the date of the action by
the Board of Directors ordering conversion, and (ii) the shares of Common Stock
that will be received upon such conversion have been registered or otherwise
qualified for sale under applicable federal and state securities laws.
(C) Each share of Series A $20 Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, by written
notice to the Corporation, into twenty (20) times the Adjustment Number of
shares of Common Stock, subject to adjustment as provided in paragraph (D) of
this Section 4. Before any holder of Series A $20 Convertible Preferred Stock
shall be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation.
(D) In the event the Corporation shall at any time
after the date of issuance of the Series A $20 Convertible Preferred Stock (i)
declare any dividend on the Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the number
of shares of Common Stock into which holders of shares of Series A $20
Convertible Preferred Stock were entitled to convert their shares or into which
the Corporation could convert their shares pursuant to paragraph (C) or
paragraph (A), respectively, of this Section 4 immediately prior to such event
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event (such fraction, the
"Adjustment Number").
Section 5. Registration Rights. Within twelve (12) months of
issue, the Corporation will file, and use its best efforts to have declared
effective, one (1) registration statement pursuant to the Securities Act of
1933, as amended, registering resales of the shares of Common Stock into which
the Series A $20 Convertible Preferred Stock may be converted (the "Registrable
Stock"). This registration right is subject to any and all registration rights
granted and outstanding as of the date hereof. Such resales need not be
underwritten. No such registration shall be required if all of the Registrable
Stock may be sold pursuant to Rule 144 or any successor rule.
At least thirty (30) days prior to the filing of such registration
statement, the Corporation will notify all registered holders of the Series A
$20 Convertible Preferred
-2-
<PAGE> 3
Stock (or the Registrable Stock, if the Series A $20 Convertible Preferred
Stock has been converted under the provisions of Section 4) by first class mail
at their last known addresses as such shall appear on the stock transfer books
of the Corporation of the Corporation's intention to file, and each registered
holder shall have fifteen (15) days from the date the notice was mailed to the
holders to notify the Corporation in writing stating what portion of the
Registrable Stock such holder desires to have covered by such registration
statement. Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given when mailed whether or not the
holder receives the notice. If the registered holder fails to so notify the
Corporation, then the Corporation shall have no further obligation to register
such shares. Any registered holder of the Series A $20 Convertible Preferred
Stock (or the Registrable Stock, if the Series A $20 Convertible Preferred
Stock has been exercised) shall cooperate with the Corporation in the
registration of the shares, and shall deliver such agreements as are customary
or appropriate to facilitate the registration of such shares, including, but
not limited to, the execution of an underwriting agreement with the
underwriters, if any, selected by the Corporation.
If requested by the Corporation and an underwriter of Common Stock of
the Corporation, a holder shall not sell or otherwise transfer or dispose of
any Common Stock or Series A $20 Convertible Preferred Stock of the Corporation
held by such holder (other than those included in the registration statement)
during the 180-day period following the effective date of a registration
statement of the Corporation filed under the Securities Act of 1933, as
amended.
Section 6. Expenses. For purposes of this Section 6,
"Registration Expenses" shall mean any and all expenses, except Selling
Expenses as defined below, incurred by the Corporation in complying with
Section 5, including without limitation, (a) all Securities and Exchange
Commission and stock exchange or National Association of Securities Dealers
registration and filing fees, (b) all fees and expenses of complying with
securities or blue sky laws (including reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
registered securities), (c) all printing, messenger and delivery expenses, (d)
the fees and disbursements of counsel for the Corporation and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance and (e) any reasonable fees and expenses of any special experts
retained in connection with the registration, but excluding underwriting
discounts and commissions and transfer taxes, if any. "Selling Expenses" shall
mean all underwriting discounts selling commissions and stock transfer taxes
applicable to the Registrable Stock registered by the holders and, except as
set forth in the definition of Registration Expenses, all reasonable fees and
disbursements of one (1) counsel for the holders whose Registrable Stock is
included in such registration as chosen by a simple majority of such holders.
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Section 5 shall be borne
by the Corporation. All Selling Expenses relating to Registrable Stock
registered on behalf of the holders whose
-3-
<PAGE> 4
Registrable Stock is included in any registration, qualification or compliance
pursuant to Section 5 shall be borne by the holders pro rata based on the
number of shares of Registrable Stock to be registered.
Section 7. Reacquired Shares. Any shares of Series A $20
Convertible Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein.
Section 8. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A $20 Convertible
Preferred Stock unless, prior thereto, the holders of shares of Series A $20
Convertible Preferred Stock shall have received $20.00 per share (the
"Liquidation Preference"). Following the payment of the full amount of the
Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A $20 Convertible Preferred Stock.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A $20 Convertible Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences.
Section 9. Consolidation, Merger, etc. In the event the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or other securities, cash or any other property, then in any
such event the shares of Series A $20 Convertible Preferred Stock shall at the
same time be similarly exchanged or changed in an amount per share (subject to
the provision for adjustment hereinafter set forth) equal to twenty (20) times
the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at
any time after the issuance of the Series A $20 Convertible Preferred Stock (i)
declare any dividend on the Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A $20 Convertible Preferred Stock shall be adjusted by
multiplying such amount by the Adjustment Number. The consolidation, merger,
combination or other transaction of the Corporation with one or
-4-
<PAGE> 5
more other corporations shall not constitute a liquidation, dissolution or
winding up of the Corporation within the meaning of paragraph (A) of Section 8.
Section 10. Ranking. The Series A $20 Convertible Preferred
Stock shall rank junior to all other series of the Corporation's Preferred
Stock as to the distribution of assets, unless the terms of any such series
shall provide otherwise.
IN WITNESS WHEREOF, I have executed and subscribed this Certificate
and do affirm the foregoing as true as of the day of March 4, 1996.
----------------------------------------
Name: Gerald K. Beckmann
Title: President
-5-
<PAGE> 1
EXHIBIT 4.6
CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES B $20 CONVERTIBLE PREFERRED STOCK
OF
INTEGRATED SECURITY SYSTEMS, INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
The undersigned, President of Integrated Security Systems, Inc., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), in accordance with the provisions of
Section 103 thereof DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the Corporation, the said Board of
Directors on December 13, 1995, adopted the following resolutions creating a
series of shares of Preferred Stock, par value $.01 per share, designated as
Series B $20 Convertible Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation
be, and it hereby is, created, and that the designations and amounts thereof
and the voting powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series B $20 Convertible Preferred Stock" (herein
referred to as "Series B") and the number of shares constituting such series
shall be 40,000.
Section 2. Dividends. The holders of Series B shall be entitled
to receive, out of the funds of the Corporation legally available therefor (and
the Board of Directors shall declare such dividends to the extent funds are
legally available therefor), a cash dividend at the rate of $2.00 per annum per
share, and no more. Dividends on each share of Series B shall be cumulative
from the date of original issue of such share.
Such dividends shall be paid in two equal semi-annual installments on
each January 15 and July 15 (the "Dividend Payment Dates"), beginning with July
15, 1996. Dividends on account of arrears may be declared and paid at any
time, without reference to any Dividend Payment Date. Each dividend shall be
paid to the holders of record of shares of Series B as they appear on the stock
register of the Corporation on such record date, not exceeding 30 days
preceding the payment date thereof, as may be fixed by the Board of Directors
of the Corporation.
<PAGE> 2
So long as any share of Series B remains outstanding, no dividend
whatever shall be paid or declared and no distribution shall be made on any
junior stock, other than a dividend payable solely in junior stock, and no
shares of junior stock shall be purchased, redeemed or otherwise acquired for
consideration by the Corporation, directly or indirectly (other than as a
result of a reclassification of junior stock, or the exchange or conversion of
one share of junior stock, in each case, for or into another share of junior
stock, and other than through the use of the proceeds of a substantially
contemporaneous sale of other shares of junior stock), unless all accrued
dividends on all outstanding shares of Series B for all past semi-annual
dividend periods shall have been paid and the full dividend thereon for the
then current semi-annual dividend period shall have been paid or declared and
set apart for payment. Subject to the foregoing, and not otherwise, such
dividends (payable in cash, stock or otherwise) as may be determined by the
Board of Directors may be declared and paid on any junior stock from time to
time out of any funds legally available therefor, and the shares of Series B
shall not be entitled to participate therein.
Section 3. Voting. The holders of shares of Series B shall not,
by virtue of their ownership thereof, be entitled to vote upon any matter
except as required by the General Corporation Laws of the State of Delaware.
Section 4. Conversion.
(A) Each share of Series B may be converted at the option of the
Board of Directors of the Corporation, as a whole or in part, at any time after
the occurrence of both events described in paragraph (B) of this Section 4 into
the number of shares of Common Stock, par value $.01, of the Corporation (the
"Common Stock") equal to the product of 29.85 multiplied by the "Adjustment
Number", together with an amount of shares of Common Stock equal to all accrued
but unpaid dividends on such share of Series B (such amount of shares of Common
Stock being calculated by dividing (i) the accrued but unpaid dividends on such
share of Series B by (ii) the average closing bid price for the Common Stock,
as quoted on NASDAQ, for the 10 consecutive trading days immediately preceding
such conversion. The shares of Common Stock to be received upon such
conversion (which shall be rounded to the nearest whole share) are referred to
as the "Conversion Shares." The initial Adjustment Number shall be one (1),
and shall be subject to adjustment from time to time as provided in paragraph
(D) of this Section 4. Upon the action by the Board of Directors authorizing
the conversion of Series B, the Corporation shall send notice of such
conversion to each holder of Series B whose shares are to be so converted.
(B) The Corporation shall not have the conversion right described
in paragraph (A) of this Section 4 until such time as (i) the closing bid price
of the Common Stock, as quoted on NASDAQ, is at least equal to $0.67 for at
least ten (10) consecutive trading days at any time preceding the date of the
action by the Board of Directors ordering conversion, and (ii) the shares of
Common Stock that will be received upon such conversion have been registered or
otherwise qualified for sale under applicable federal and state securities
laws.
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<PAGE> 3
(C) Each share of Series B shall be convertible, at the option of
the holder thereof, by written notice to the Corporation, into the Conversion
Shares. Before any holder of Series B shall be entitled to convert the same
into shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation.
(D) In the event the Corporation shall at any time after the date
of issuance of the Series B (i) declare any dividend on the Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of shares of Common Stock into which holders
of shares of Series B were entitled to convert their shares or into which the
Corporation could convert their shares pursuant to paragraph (C) or paragraph
(A), respectively, of this Section 4 immediately prior to such event shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (such fraction, the "Adjustment
Number").
Section 5. Registration Rights. On or before June 30, 1996, the
Corporation will file, and use its best efforts to have declared effective, one
(1) registration statement pursuant to the Securities Act of 1933, as amended,
registering resales of the shares of Common Stock into which the Series B have
been or may be converted (the "Registrable Stock"). This registration right is
subject to any and all registration rights granted and outstanding as of the
date hereof. Such resales need not be underwritten. No such registration
shall be required if all of the Registrable Stock may be sold pursuant to Rule
144 or any successor rule.
At least thirty (30) days prior to the filing of such registration
statement, the Corporation will notify all registered holders of the Series B
(or the Registrable Stock, if the Series B has been converted under the
provisions of Section 4) by first class mail at their last known addresses as
such shall appear on the stock transfer books of the Corporation of the
Corporation's intention to file, and each registered holder shall have fifteen
(15) days from the date the notice was mailed to the holders to notify the
Corporation in writing stating what portion of the Registrable Stock such
holder desires to have covered by such registration statement. Any notice
which is mailed in the manner herein provided shall be conclusively presumed to
have been duly given when mailed whether or not the holder receives the notice.
If the registered holder fails to so notify the Corporation, then the
Corporation shall have no further obligation to register such shares. Any
registered holder of the Series B (or the Registrable Stock, if the Series B
has been exercised) shall cooperate with the Corporation in the registration of
the shares, and shall deliver such agreements as are customary or appropriate
to facilitate the registration of such shares, including, but not limited to,
the execution of an underwriting agreement with the underwriters, if any,
selected by the Corporation.
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<PAGE> 4
If requested by the Corporation and an underwriter of Common Stock of
the Corporation, a holder shall not sell or otherwise transfer or dispose of
any Common Stock or Series B of the Corporation held by such holder (other than
those included in the registration statement) during the 180-day period
following the effective date of a registration statement of the Corporation
filed under the Securities Act of 1933, as amended.
Section 6. Expenses. For purposes of this Section 6,
"Registration Expenses" shall mean any and all expenses, except Selling
Expenses as defined below, incurred by the Corporation in complying with
Section 5, including without limitation, (a) all Securities and Exchange
Commission and stock exchange or National Association of Securities Dealers
registration and filing fees, (b) all fees and expenses of complying with
securities or blue sky laws (including reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
registered securities), (c) all printing, messenger and delivery expenses, (d)
the fees and disbursements of counsel for the Corporation and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance and (e) any reasonable fees and expenses of any special experts
retained in connection with the registration, but excluding underwriting
discounts and commissions and transfer taxes, if any. "Selling Expenses" shall
mean all underwriting discounts selling commissions and stock transfer taxes
applicable to the Registrable Stock registered by the holders and, except as
set forth in the definition of Registration Expenses, all reasonable fees and
disbursements of one (1) counsel for the holders whose Registrable Stock is
included in such registration as chosen by a simple majority of such holders.
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Section 5 shall be borne
by the Corporation. All Selling Expenses relating to Registrable Stock
registered on behalf of the holders whose Registrable Stock is included in any
registration, qualification or compliance pursuant to Section 5 shall be borne
by the holders pro rata based on the number of shares of Registrable Stock to
be registered.
Section 7. Reacquired Shares. Any shares of Series B purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject
to the conditions and restrictions on issuance set forth herein.
Section 8. Redemption.
(A) Subject to the last paragraph of this Section 8(A), the
Corporation, at the option of the Board of Directors, may redeem in whole or in
part the shares of Series B, at any time and from time to time, upon notice
given as hereinafter specified, at the redemption price in effect at the
redemption date as provided in this Section 8. The redemption price for shares
of Series B shall be $22.00 per share, together with any accrued but unpaid
dividends as of the redemption date.
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<PAGE> 5
Notice of every redemption of shares of Series B shall be mailed by
first class mail, postage prepaid, addressed to the holders of record of the
shares to be redeemed at their respective last addresses as they shall appear
on the books of the Corporation. Such mailing shall be at least 30 days and no
more than 60 days prior to the date fixed for redemption. Any notice which is
mailed in the manner herein provided shall be conclusively presumed to have
been duly given, whether or not the stockholder receives such notice, and
failure duly to give such notice by mail, or any defect in such notice, to any
holder of shares of Series B designated for redemption shall not affect the
validity of the proceedings for the redemption of any other shares of Series B.
In case of redemption of only a part of the shares of Series B at the
time outstanding, the redemption may be either pro rata or by lot. The Board
of Directors shall have full power and authority, subject to the provisions
herein contained, to prescribe the terms and conditions upon which shares of
Series B shall be redeemed from time to time.
If notice of redemption shall have been duly given, and if on or
before the redemption date specified therein all funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the holders of the
shares called for redemption, so as to be and continue to be available
therefor, then, notwithstanding that any certificate for shares so called for
redemption shall not have been surrendered for cancellation, on and after such
redemption date, all shares so called for redemption shall no longer be deemed
outstanding and all rights with respect to such shares shall forthwith on such
redemption date cease and terminate, except only the right of the holders
thereof to receive the amount payable on redemption thereof, without interest.
Any funds so set aside or deposited by the Corporation which shall not
be required for such redemption because of the exercise of any right of
conversion by the holder thereof pursuant to paragraph (C) of Section 4
subsequent to the date of such deposit shall be released or repaid to the
Corporation forthwith. Any funds so set aside or deposited, as the case may
be, and unclaimed at the end of three years from such redemption date shall, to
the extent permitted by law, be released or repaid to the Corporation, after
which time the holders of the shares so called for redemption shall look only
to the Corporation for payment thereof.
The Corporation shall not have the redemption right described in this
Section 8 until such time as the closing bid price of the Common Stock, as
quoted by NASDAQ, is at least equal to $0.67 for at least ten (10) consecutive
days at any time preceding the date of the action by the Board of Directors
ordering redemption.
(B) If the Corporation issues debt or equity securities subsequent
to the issuance of the Series B (a "Securities Issuance"), then each holder of
Series B may, but is not obligated to, demand that the Corporation redeem any
or all shares of Series B held by such stockholder. The redemption price shall
be $22 per share, and shall not include any accrued but unpaid dividends.
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<PAGE> 6
Upon any such Securities Issuance, the Corporation shall provide the
holders of Series B with written notice of such Securities Issuance. Notice of
every such Securities Issuance shall be mailed by first class mail, postage
prepaid, addressed to the holders of record of the Series B at their respective
last addresses as they shall appear on the books of the Corporation. Such
mailing shall be made on or before 30 days after such Securities Issuance. Any
notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the stockholder receives such
notice.
Any demand for redemption must be made by written request received by
the Corporation on or before 30 days after the notice sent by the Corporation,
as described above. The redemption hereunder shall be consummated on or before
45 days from the date of the Corporation's notice, as described above.
Notwithstanding anything contained in the Section 8 (B), the aggregate
of all redemptions hereunder with respect to any particular Securities Issuance
shall not exceed the net proceeds to the Corporation from such particular
Securities Issuance. If such net proceeds are not sufficient to make all
requested redemptions, then the redemptions shall be made pro rata among all
requesting holders of Series B, based upon the number of shares of Series B for
which redemption is requested.
If on or before the redemption date all funds necessary for such
redemption (including a redemption described in the previous paragraph) shall
have been set aside by the Corporation, separate and apart from its other
funds, in trust for the pro rata benefit of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then,
notwithstanding that any certificate for such shares shall not have been
surrendered for cancellation, on and after such redemption date all shares to
be redeemed shall no longer be deemed outstanding and all rights with respect
to such shares shall forthwith on such redemption date cease and terminate,
except only the right of the holders thereof to receive the amount payable on
redemption thereof, without interest.
Any funds so set aside or deposited by the Corporation which shall not
be required for such redemption because of the exercise of any right of
conversion by the holder thereof pursuant to paragraph (C) of Section 4
subsequent to the date of such deposit shall be released or repaid to the
Corporation forthwith. Any funds so set aside or deposited, as the case may
be, and unclaimed at the end of three years from such redemption date shall, to
the extent permitted by law, be released or repaid to the Corporation, after
which time the holders of the shares so called for redemption shall look only
to the Corporation for payment thereof.
Section 9. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B unless, prior thereto, the holders
of shares of Series B shall have received the Liquidation Amount with respect
to such shares. "Liquidation Amount" with respect to any share of Series B on
any date shall mean the sum of (i) $20 and (ii) the amount of any
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<PAGE> 7
accrued and unpaid dividends with respect to such share on such date.
Following the payment of the full amount of the Liquidation Amount, no
additional distributions shall be made to the holders of shares of Series B.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Liquidation Amount and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series B, then (subject to Section 11 hereof) such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 10. Consolidation, Merger, etc. In the event the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or other securities, cash or any other property, then in any
such event the shares of Series B shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 29.85 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the issuance of the Series
B (i) declare any dividend on the Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series B shall be adjusted by multiplying such
amount by the Adjustment Number. The consolidation, merger, combination or
other transaction of the Corporation with one or more other corporations shall
not constitute a liquidation, dissolution or winding up of the Corporation
within the meaning of paragraph (A) of Section 9.
Section 11. Security Interest. In order to secure payment of
dividends and any liquidation proceeds that may become due with respect to
shares of Series B, an undivided security interest in a number of shares of the
common stock of B&B Electromatic, Inc., a Delaware corporation (such stock
being referred to as the "B&B Stock") is hereby granted to all holders of
Series B. The aggregate number of shares of B&B Stock in which this security
interest is granted will be equal to one share of B&B Stock for every 500
shares of Series B that are outstanding from time to time.
An agent shall be appointed by the Corporation to hold the B&B Stock
as security for the payment of dividends and/or liquidation proceeds to which
the holders of the Series B are entitled. Holders of Series B will be notified
of the name and address of the agent within 30 days of the issuance of the
shares of Series B.
The Corporation hereby grants to the agent the right to demand from
the Corporation at any time after the Corporation has failed to pay a dividend
as described herein and such failure continues for 30 days, or, at any time
after the holders of Series B have become entitled to receive liquidation
proceeds as described above and such proceeds have not been received for a
period of 30 days, that the Corporation place additional Corporation-owned B&B
Stock with the escrow agent such that the total stock held by the escrow agent
is more than 50% of the total outstanding B&B Stock, and such agent is
authorized by the Corporation to sell or otherwise convert all such B&B Stock
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<PAGE> 8
into cash or other assets which are acceptable to a majority of the holders of
the Series B, and to use the proceeds for the benefit of such holders until
they have received all liquidation proceeds plus any accrued but unpaid
dividends to which they are entitled. Any proceeds remaining after payment of
all obligations to the holders of Series B, and the agent's fees (if any),
shall be paid to the Corporation.
Section 12. Ranking. Subject to Section 11 hereof, the Series B
shall rank on a parity with the Corporation's Series A $20 Convertible
Preferred Stock, and with all other series of the Corporation's Preferred Stock
as to the distribution of assets, unless the terms of any such series shall
provide otherwise.
Section 13. Definitions. As used herein with respect to Series
B, the following terms shall have the following meanings:
(A) The term "junior stock" shall mean the Common Stock and any
other class or series of stock of the Corporation hereafter authorized over
which Series B has preference or priority in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
(B) The term "accrued dividends," with respect to any share of
Series B shall mean an amount computed at the annual dividend rate from the
date on which dividends on such share became cumulative to and including the
date to which such dividends are to be accrued, less the aggregate amount of
all dividends theretofore paid thereon.
Section 13. Other Rights. The shares of Series B shall not have
any powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
IN WITNESS WHEREOF, I have executed and subscribed this Certificate
and do affirm the foregoing as true as of April 18, 1996.
----------------------------------------
Name: Gerald K. Beckmann
Title: President
8
<PAGE> 1
CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES C $20 CONVERTIBLE PREFERRED STOCK
OF
INTEGRATED SECURITY SYSTEMS, INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
The undersigned, President of Integrated Security Systems, Inc., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), in accordance with the provisions of
Section 103 thereof DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Corporation, the said Board of
Directors on March 4, 1996, adopted the following resolutions creating a series
of shares of Preferred Stock, par value $.01 per share, designated as Series C
$20 Convertible Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation
be, and it hereby is, created, and that the designations and amounts thereof
and the voting powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series C $20 Convertible Preferred Stock" and the number of
shares constituting such series shall be 12,500.
Section 2. Dividends. The Series C $20 Convertible Preferred Stock
shall not be entitled to any dividends.
Section 3. Voting. The holders of shares of Series C $20 Convertible
Preferred Stock shall not, by virtue of their ownership thereof, be entitled to
vote upon any matter except as required by the General Corporation Laws of the
State of Delaware.
Section 4. Conversion.
(A) Each share of Series C $20 Convertible Preferred Stock may be
converted at the option of the Board of Directors of the Corporation, as a
whole or in part, at any time and from time to time, into thirty (30) times the
"Adjustment Number" of shares of Common Stock, par value $.01, of the
Corporation ("Common Stock"). The initial Adjustment Number shall be one (1),
and shall be subject to adjustment from time
<PAGE> 2
to time as provided in paragraph (C) of this Section 4. Upon the action by the
Board of Directors authorizing the conversion of Series C $20 Convertible
Preferred Stock, the Corporation shall send notice of such conversion to each
holder of Series C $20 Convertible Preferred Stock whose shares are to be so
converted.
(B) Each share of Series C $20 Convertible Preferred Stock shall
be convertible, at the option of the holder thereof, as a whole or in part, at
any time and from time to time, by written notice to the Corporation, into
thirty (30) times the Adjustment Number of shares of Common Stock, subject to
adjustment as provided in paragraph (C) of this Section 4. Before any holder
of Series C $20 Convertible Preferred Stock shall be entitled to convert the
same into shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation.
(C) In the event the Corporation shall at any time after the date
of issuance of the Series C $20 Convertible Preferred Stock (i) declare any
dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the number of shares of
Common Stock into which holders of shares of Series C $20 Convertible Preferred
Stock were entitled to convert their shares or into which the Corporation could
convert their shares pursuant to paragraph (B) or paragraph (A), respectively,
of this Section 4 immediately prior to such event shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (such fraction, the "Adjustment
Number").
Section 5. Registration Rights. Within six (6) months of issue, the
Corporation will file, and use its best efforts to have declared effective, one
(1) registration statement pursuant to the Securities Act of 1933, as amended,
registering resales of the shares of Common Stock into which the Series C $20
Convertible Preferred Stock may be converted (the "Registrable Stock"). This
registration right is subject to any and all registration rights granted and
outstanding as of the date hereof. Such resales need not be underwritten. No
such registration shall be required if all of the Registrable Stock may be sold
pursuant to Rule 144 or any successor rule.
At least thirty (30) days prior to the filing of such registration
statement, the Corporation will notify all registered holders of the Series C
$20 Convertible Preferred Stock (or the Registrable Stock, if the Series C $20
Convertible Preferred Stock has been converted under the provisions of Section
4) by first class mail at their last known addresses as such shall appear on
the stock transfer books of the Corporation of the Corporation's intention to
file, and each registered holder shall have fifteen (15) days from the date the
notice was mailed to the holders to notify the Corporation in writing stating
what portion of the Registrable Stock such holder desires to have covered by
such registration statement. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given when mailed
whether or not the holder receives the notice. If the registered holder fails
to so notify the Corporation, then the
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<PAGE> 3
Corporation shall have no further obligation to register such shares. Any
registered holder of the Series C $20 Convertible Preferred Stock (or the
Registrable Stock, if the Series C $20 Convertible Preferred Stock has been
exercised) shall cooperate with the Corporation in the registration of the
shares, and shall deliver such agreements as are customary or appropriate to
facilitate the registration of such shares, including, but not limited to, the
execution of an underwriting agreement with the underwriters, if any, selected
by the Corporation.
If requested by the Corporation and an underwriter of Common Stock of the
Corporation, a holder shall not sell or otherwise transfer or dispose of any
Common Stock or Series C $20 Convertible Preferred Stock of the Corporation
held by such holder (other than those included in the registration statement)
during the 180-day period following the effective date of a registration
statement of the Corporation filed under the Securities Act of 1933, as
amended.
Section 6. Expenses. For purposes of this Section 6, "Registration
Expenses" shall mean any and all expenses, except Selling Expenses as defined
below, incurred by the Corporation in complying with Section 5, including
without limitation, (a) all Securities and Exchange Commission and stock
exchange or National Association of Securities Dealers registration and filing
fees, (b) all fees and expenses of complying with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the underwriters in
connection with blue sky qualifications of the registered securities), (c) all
printing, messenger and delivery expenses, (d) the fees and disbursements of
counsel for the Corporation and of its independent public accountants,
including the expenses of any special audits and/or "cold comfort" letters
required by or incident to such performance and compliance and (e) any
reasonable fees and expenses of any special experts retained in connection with
the registration, but excluding underwriting discounts and commissions and
transfer taxes, if any. "Selling Expenses" shall mean all underwriting
discounts selling commissions and stock transfer taxes applicable to the
Registrable Stock registered by the holders and, except as set forth in the
definition of Registration Expenses, all reasonable fees and disbursements of
one (1) counsel for the holders whose Registrable Stock is included in such
registration as chosen by a simple majority of such holders.
All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 5 shall be borne by the
Corporation. All Selling Expenses relating to Registrable Stock registered on
behalf of the holders whose Registrable Stock is included in any registration,
qualification or compliance pursuant to Section 5 shall be borne by the holders
pro rata based on the number of shares of Registrable Stock to be registered.
Section 7. Reacquired Shares. Any shares of Series C $20 Convertible
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred
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<PAGE> 4
Stock and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein.
Section 8. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series C $20 Convertible Preferred Stock
unless, prior thereto, the holders of shares of Series C $20 Convertible
Preferred Stock shall have received $20.00 per share (the "Liquidation
Preference"). Following the payment of the full amount of the Liquidation
Preference, no additional distributions shall be made to the holders of shares
of Series C $20 Convertible Preferred Stock.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series C $20 Convertible Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 9. Consolidation, Merger, etc. In the event the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or other securities, cash or any other property, then in any such event the
shares of Series C $20 Convertible Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to thirty (30) times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time after the
issuance of the Series C $20 Convertible Preferred Stock (i) declare any
dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series C $20 Convertible Preferred Stock shall be adjusted by multiplying such
amount by the Adjustment Number. The consolidation, merger, combination or
other transaction of the Corporation with one or more other corporations shall
not constitute a liquidation, dissolution or winding up of the Corporation
within the meaning of paragraph (A) of Section 8.
Section 10. Ranking. The Series C $20 Convertible Preferred Stock shall
rank on a parity with the Corporation's Series A $20 Convertible Preferred
Stock, and with all other series of the Corporation's Preferred Stock as to the
distribution of assets, unless the terms of any such series shall provide
otherwise.
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IN WITNESS WHEREOF, I have executed and subscribed this Certificate and
do affirm the foregoing as true as of April 19, 1996.
--------------------------------------------
Name: Gerald K. Beckmann
Title: President
5
<PAGE> 1
EXHIBIT 5.1
[HAYNES AND BOONE, LLP LETTERHEAD]
July 15, 1996
Integrated Security Systems, Inc.
8200 Springwood Drive, Suite 230
Irving, Texas 75063
Gentlemen:
We have acted as counsel to Integrated Security Systems, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of (i)
Amendment No. 1 to the Registration Statement on Form SB-2, registration number
333-5023 ("Amendment No. 1"), and (ii) and Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2, registration number 33-59870-FW
("Post-Effective Amendment No. 1"), to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Such
registration statements are collectively referred to as the "Registration
Statements."
Amendment No. 1 relates to the registration of 5,072,670 shares of Common
Stock, par value $.01 per share (the "Common Stock") of the Company, and
Post-Effective Amendment No. 1 relates to the registration of 2,784,000 shares
of Common Stock. All such shares of Common Stock are collectively referred to
as the "Shares."
As described in the Amendment No. 1 and Post-Effective Amendment No. 1, certain
of the Shares are currently outstanding, other Shares will be issued upon the
exercise of outstanding warrants and options to purchase Common Stock, and
other Shares will be issued upon the conversion of outstanding shares of the
Company's convertible preferred stock.
For the purposes of the opinions below, we have assumed that the Shares to be
issued upon exercise of the warrants and options referred to in the
Registration Statements, and the Shares to be issued upon conversion of the
convertible preferred stock referred to in the Registration Statements, will be
issued in accordance with the terms of such warrants, options, and preferred
stock.
In connection with the preparation of the Registration Statements, we have
examined (i) the Certificate of Incorporation and the Bylaws of the Company,
each as amended; (ii) minutes and records of the corporate proceedings of the
Company with respect to issuance of the Common Stock by the Company; (iii) the
Registration Statements and any and all exhibits thereto; and (iv) such other
documents as we have deemed necessary for the expression of the opinions
contained herein.
<PAGE> 2
In making the foregoing examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies. As to questions of fact material to this
opinion, where such facts have not been independently established, and as to
the content and form of the Certificate of Incorporation, Bylaws, minutes and
resolutions and other documents we have relied, to the extent we deemed
reasonably appropriate, upon representations or certificates of officers and
directors of the Company, and certificates of governmental officials, without
independent check or verification of their accuracy.
Based upon the foregoing, and having due regard for such legal considerations
as we deem relevant, we are of the opinion that (i) the currently outstanding
Shares are duly authorized, fully paid and nonassessable, and (ii) upon the
issuance of the Shares which will be issued upon exercise of the warrants and
options referred to in the Registration Statements, and the conversion of the
convertible preferred stock referred to in the Registration Statements, such
Shares will be duly authorized, fully paid, and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statements and to the
reference to our firm under the caption "Legal Opinion" in the Prospectus
forming part of such Registration Statements, and any amendment thereto.
Very truly yours,
/s/ HAYNES AND BOONE, L.L.P.
HAYNES AND BOONE, L.L.P.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form SB-2 of our report dated
March 14, 1996 relating to the consolidated financial statements of Integrated
Security Systems, Inc., which appears in such Prospectus. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
August 9, 1996
