<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997
REGISTRATION NO. 333-5023
REGISTRATION NO. 33-59870-FW
--------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------
AMENDMENT NO. 3
TO
FORM SB-2
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------
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>
--------------------------------------------------------------
Gerald K. Beckmann
President & CEO
8200 Springwood Drive, Suite 230 8200 Springwood Drive, Suite 230
Irving, Texas 75063 Irving, Texas 75063
(972) 444-8280 (972) 444-8280
(Address and telephone number (Name, address and telephone
of principal executive offices and number of agent for service)
principal place of business)
--------------------------------------------------------------
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.
--------------------
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>
1. Front of Registration Statement and Outside Front Cover Page of Registration Statement and
Cover 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
Persons....................................................... and Key Employees
11. Security Ownership of Certain Beneficial Owners and
Management.................................................... Principal and Selling 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
Management's Discussion and Analysis of
15. Organization Within Last Five Years........................... Financial Condition and Results of Operations
16. Description of Business....................................... Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of
Operation..................................................... Financial 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 APRIL 24, 1997
8,706,678 SHARES
INTEGRATED SECURITY
==================
ISSI
==================
SYSTEMS, INC.
COMMON STOCK
This Prospectus relates to the sale of 8,706,678 shares of Common Stock, $.01
par value (the "Common Stock"), of Integrated Security Systems, Inc. (the
"Company"). Of this amount, 3,045,000 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").
Each IPO Warrant currently entitles the registered holder to purchase 2.1
shares of Common Stock at an exercise price of $3.17 per share. The IPO
Warrants expire on April 20, 1998. 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 "Plan of
Distribution" and "Description of Securities."
This Prospectus also relates to the sale of 304,500 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 "Principal and Selling Stockholders," "Plan of Distribution,"
and "Description of Securities."
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. However, this could
change at any time if the price of the Common Stock rises to a level that is
near the respective exercise prices of the IPO Warrants or the Underwriter's
Warrant. In such case, the Company will be obligated by applicable securities
laws to have an effective registration statement filed with the Securities and
Exchange Commission relating to the Common Stock to be issued upon the exercise
of the IPO Warrants and the Underwriter's Warrant, and to deliver to all
exercising warrantholders a current prospectus relating to the Company.
This Prospectus also relates to the sale of 5,052,678 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 "Principal and Selling Stockholders," "Plan of
Distribution," and "Description of Securities."
Certain of the Company's officers, directors, and affiliates are Selling
Stockholders. Gerald K. Beckmann, the Company's President and CEO, proposes to
sell 673,692 shares of Common Stock hereunder, and the Company's officers,
directors, and affiliates, as a group, propose to sell a total of 1,082,347
shares of Common Stock hereunder. Such amounts constitute 5.4% and 8.7%,
respectively, of the total outstanding shares of Common Stock, assuming
exercise or conversion of outstanding warrants, options, and convertible
preferred stock.
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 April 21, 1997,
the last reported sale prices for the Common Stock and IPO Warrants as reported
on the Nasdaq Small Cap Market were $2.06 and $0.97,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 4.
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 Discounts Proceeds to Proceeds to
Price to Public and Commissions Company (1) Selling Stockholders
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $___________ $___________ $___________ $___________
- - ------------------------------------------------------------------------------------------------------------------------
Total................... $___________ $___________ $___________ $___________
========================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company of approximately $76,328.
THE DATE OF THIS PROSPECTUS IS ______________, 1997.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................................................................3
Risk Factors......................................................................................................4
Capitalization....................................................................................................6
Pro Forma Consolidated Statement of Operations....................................................................7
Use of Proceeds...................................................................................................8
Market for Company's Common Stock.................................................................................8
Dividend Policy...................................................................................................9
Principal and Selling Stockholders...............................................................................10
Management's Discussion and Analysis of Financial Condition and Results of Operations............................13
Business.........................................................................................................17
Management.......................................................................................................21
Certain Transactions.............................................................................................24
Description of Securities........................................................................................25
Plan of Distribution.............................................................................................27
Legal Matters....................................................................................................28
Experts..........................................................................................................28
Additional Information...........................................................................................28
Index to Financial Statements...................................................................................F-1
</TABLE>
2
<PAGE> 5
PROSPECTUS SUMMARY
THE COMPANY
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. The Company's executive offices are located at 8200
Springwood Drive, Suite 230, Irving, Texas 75063. The Company's telephone
number is (972) 444-8280.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered:............................ 8,706,678 shares of Common Stock.
Common Stock Outstanding:
Prior to this Offering................. 6,408,842 shares (1)(2)
After this Offering.................... 12,433,371 shares (1)(2)(3)
Net Proceeds of this Offering.................. $13,890,230 (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
- - ------- -------------- --------
<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, 2,682,149 shares are
currently outstanding.
(3) Assumes the exercise of all IPO Warrants, the Underwriter's Warrant,
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.
3
<PAGE> 6
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.
CONTINUING LOSSES
Certain of the Company's subsidiaries have reported net losses in
recent years which have, when combined with other profitable subsidiaries,
caused consolidated losses of $276,767 in 1996, $2,864,219 in 1995, $372,568 in
1994, $1,670,059 in 1993 and $1,352,133 in 1992. The Company did not experience
a negative cash flow in 1996 and 1993, but experienced negative cash flow of
$155,850 in 1995, $298,713 in 1994, and $50,916 in 1992. The subsidiary which
contributed the majority of losses in past years was discontinued in 1995.
However, the Company's Innovative Security Technologies, Inc. ("IST")
subsidiary continues to operate at a loss and, under existing loan covenants,
the other subsidiaries of the Company are limited in the amount of financial
support they can provide IST. Therefore, in order to continue operations of
this subsidiary, its losses will have to be reduced or eliminated or the
Company will be required to raise additional working capital that is available
to IST. If neither of these can be accomplished, the operations of IST may have
to be discontinued or sold. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
FUTURE CAPITAL NEEDS
The Company believes additional working capital and term financing
will be required to fund growth plans at all of the Company's major business
units. The amount required 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 obtain such additional financing, or
that any such financing will be available on terms that will be acceptable to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
LACK OF MARKET ACCEPTANCE OF INTELLI-SITE
The Company's marketing strategy includes the sale of sophisticated
integrated security 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
market will accept the Company's Intelli-Site products, or that the Company
will be able to successfully market its integrated security systems.
PAST DUE ACCOUNTS PAYABLE
As of March 31, 1997, the Company and certain of its subsidiaries (not
B&B Electromatic, Inc. or Golston Company, Inc.) had approximately $350,000 in
accounts payable that were more than 90 days past due. As a result of an
asset-based loan obtained on April 11, 1997, the Company was able to satisfy all
such accounts payable in April 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
ACQUISITION RISKS
The Company's strategy includes increasing its market penetration by
starting new, or acquiring existing, businesses to develop, manufacture or sell
products that enhance the safety and security of people and assets. The Company
has not reached any agreement or understanding with any acquisition candidate,
nor have any acquisition discussions reached the point where an acquisition is
probable. There can be no assurance that any new businesses can be acquired or
operated profitably. 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, none of which are assured.
4
<PAGE> 7
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 fiscal 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."
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.
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."
5
<PAGE> 8
CAPITALIZATION
The following table sets forth the capitalization of the Company on
December 31, 1996.
<TABLE>
<S> <C>
Notes Payable $ 8,080
Notes Payable - Related Party 7,110
Short-Term Debt 213,975
Long-Term Debt 6,784,582
------------
Total Debt 7,013,747
Stockholders' Equity
Convertible Preferred Stock, $.01 par value,
750,000 shares authorized;
59,168 shares issued and outstanding
at December 31, 1996 591
Common Stock, $.01 par value, 18,000,000 shares
authorized; 6,958,842 shares issued and outstanding at
December 31, 1996 69,588
Additional Paid In Capital 10,382,215
Treasury Stock (118,750)
Accumulated Deficit (6,206,501)
------------
Total Stockholders' Equity 4,127,143
------------
Total Capitalization $ 11,140,890
============
</TABLE>
6
<PAGE> 9
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1996, the Company acquired all the outstanding capital
stock of Golston Company, Inc. ("GCI"). The pro forma consolidated statement of
operations for the year ended December 31, 1996 is presented as if the Company
had acquired GCI on January 1, 1996, and gives effect to the related financing.
The pro forma consolidated statement of operations should be read in
conjunction with the financial statements of the Company and GCI, including the
related footnotes thereto, appearing elsewhere in this Prospectus. The pro
forma information is not necessarily indicative of the results that would have
been reported had such events actually occurred on January 1, 1996, nor is it
indicative of the Company's future results. The pro forma information also does
not reflect either the issuance of shares in connection with this Offering and
the contemplated use of proceeds therefrom, or the conversion or exercise of
any of the Company's outstanding convertible preferred stock or warrants.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY GCI ADJUSTMENTS CONSOLIDATED
----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Sales $ 9,054 $ 4,294 $ 13,348
Cost of Sales 5,184 1,535 432(1) 7,151
----------- --------- ----------- ------------
Gross Margin 3,870 2,759 (432) 6,197
Operating Expenses 3,929 2,077 (890)(2) 5,116
Income (Loss) from Operations (59) 682 458 1,081
Other Expense (252) (37) (552)(3) (841)
----------- --------- ----------- ------------
Income (Loss) from Continuing
Operations Before Tax (311) 645 (94) 240
Income Tax 12 (234) 234(4) 12
Discontinued Operations 23 -- -- 23
----------- --------- ----------- ------------
Net Income (Loss) $ (276) $ 411 $ 140 $ 275
=========== ========= =========== ============
Weighted Average Shares of 5,122,878 5,847,191
Common Stock Outstanding
Net Income (Loss) Per Share
Continued Operations $ (0.05) $ 0.05
Discontinued Operations 0.00 0.00
----------- -----------
Total $ (0.05) $ 0.05
=========== ===========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro
forma adjustments set forth above:
(1) Adjustment to depreciation of manufacturing fixed assets arising from
the GCI acquisition is based on useful lives varying from 3-7 years.
(2) Adjustment to depreciation of fixed assets arising from the GCI
acquisition is based on useful lives of 5 years and goodwill
amortization, reduced by employees terminated as of December 31, 1996
with consolidation of the businesses.
(3) Interest related to $6.1 million of indebtedness incurred by the
Company in connection with the acquisition, with interest rate of 9%
per annum.
(4) Adjustment from utilization of parent company losses to offset federal
income taxes.
7
<PAGE> 10
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.
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. However, this could
change at any time if the price of the Common Stock rises to a level that is
near the respective exercise prices of the IPO Warrants or the Underwriter's
Warrant. In such case, the Company will be obligated by applicable securities
laws to have an effective registration statement filed with the Securities and
Exchange Commission relating to the Common Stock to be issued upon the exercise
of the IPO Warrants and the Underwriter's Warrant, and to deliver to all
exercising warrantholders a current prospectus relating to the Company.
The principal reasons for this 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 March 31, 1997,
there were 6,908,842 shares of Common Stock and 2,320,000 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 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 3 1/2 1 13/16 1 11/16
Fourth Quarter 3 5/8 2 3/8 1 5/16 3/4
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
</TABLE>
On April 21, 1997, the last reported sales prices for the Common Stock
and the IPO Warrants as reported on the Nasdaq Small Cap Market were $2.06 and
$0.97, respectively.
8
<PAGE> 11
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 because any funds
available will most likely be reinvested in the Company's business and used to
repay outstanding debt.
9
<PAGE> 12
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the number and percentage of
outstanding shares of each class of the Company's capital stock beneficially
owned as of March 31, 1997 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 any class of capital stock of the Company, 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. With regard to shares of Common Stock, 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>
SHARES OF STOCK OWNED PRIOR TO OFFERING
--------------------------------------------------------------------
NO. OF SHARES NO. OF SHARES
NO. OF SHARES OF SERIES A OF SERIES C
OF COMMON % OF PREFERRED % OF PREFERRED % OF
NAME OF BENEFICIAL OWNER STOCK CLASS STOCK CLASS STOCK CLASS
- - -------------------------------- ------------- ----- ------------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Advisors Mktg Group, Inc. 2,779 * -- -- -- --
Andrew F. Nicoletta 14,000 * 500 1% -- --
Bathgate McColley Capital Group 326,000 2% -- -- -- --
Capital Acquisition Co., Inc. 60,000 * -- -- -- --
Caribou Bridge Fund, LLC 283,321 2% 5,668 12% 2,500 20%
Charles W. Martin 85,000 * -- -- -- --
Cherokee Trading Corp 2,222 * -- -- -- --
Comvest Partners 100,000 1% -- -- -- --
Craig A. Nichols 28,000 * 1,000 2% -- --
D&B Partners 28,000 * 1,000 2% -- --
Don Crosbie 185,953 1% -- -- -- --
Donald A. Dole 14,000 * 500 1% -- --
Doris Tinsley-Nadel 1,668 * -- * -- --
Doug Urquhart 56,000 * 2,000 4% -- --
Dudley L. Bailey 28,000 * 1,000 2% -- --
Edward Krupa 1,668 * -- -- -- --
Elizabeth R. McChesney 14,000 * 500 1% -- --
Equity Group 80,000 * -- -- -- --
Eugene C. McColley 42,000 * 1,500 3% -- --
Frank R. Marlow(1) 60,522 * -- -- -- --
George I. Gasior 1,668 * -- -- -- --
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
-----------------------
NO. OF SHARES
SHARES OF COMMON OF COMMON % OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD STOCK CLASS
- - -------------------------------- ---------------- --------------- -------
<S> <C> <C> <C>
Advisors Mktg Group, Inc. 2,779 -- --
Andrew F. Nicoletta 14,000 -- --
Bathgate McColley Capital Group 326,000 -- --
Capital Acquisition Co., Inc. 60,000 -- --
Caribou Bridge Fund, LLC 283,321 -- --
Charles W. Martin 85,000 -- --
Cherokee Trading Corp 2,222 -- --
Comvest Partners 100,000 -- --
Craig A. Nichols 28,000 -- --
D&B Partners 28,000 -- --
Don Crosbie 166,953 19,000 *
Donald A. Dole 14,000 -- --
Doris Tinsley-Nadel 1,668 -- --
Doug Urquhart 56,000 -- --
Dudley L. Bailey 28,000 -- --
Edward Krupa 1,668 -- --
Elizabeth R. McChesney 14,000 -- --
Equity Group 80,000 -- --
Eugene C. McColley 42,000 -- --
Frank R. Marlow(1) 8,463 52,059 *
George I. Gasior 1,668 -- --
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
--------------------------------------------------------------------
NO. OF SHARES NO. OF SHARES
NO. OF SHARES OF SERIES A OF SERIES C
OF COMMON % OF PREFERRED % OF PREFERRED % OF
NAME OF BENEFICIAL OWNER STOCK CLASS STOCK CLASS STOCK CLASS
- - -------------------------------- ------------- ----- ------------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Beckmann(1) 868,929 7% -- -- 5,000 40%
H. Dennison Parker 42,000 * 1,500 3% -- --
Hanifin Imhoff Trustee FBO 14,000 * 500 1% -- --
K.S. Bernstein
Harry J. Schmidt 56,000 * 2,000 4% -- --
Henry E. McGuffee 15,000 * -- -- -- --
Holly J. Burlage 13,128 * -- -- -- --
James Edgar McDonald, Trustee 98,250 * 1,500 3% 1,250 10%
James W. Casey(1) 157,873 1% -- -- -- --
Jeffrey Markowitz 28,000 * 1,000 2% -- --
John P. Manry & Hedy White Manry 14,000 * 500 1% -- --
Joseph A. Lavigne 7,000 * 250 1% -- --
Kiawah Capital Partners 112,500 2% -- -- 2,500 20%
Larry D. Brooks 14,000 * 500 1% -- --
Lawrence E. Bathgate PBO Del Charter 14,000 * 500 1% -- --
SEP
Lerter W. Erb Living Trust 14,000 * 500 1% -- --
Louis A. Davis 15,000 * -- -- -- --
Managerial Resources, Inc. 53,000 * -- -- -- --
McChesney Family LLC 21,000 * 750 2% -- --
McKee Securities, Inc. 18,000 * -- -- -- --
Michael A. Richarmond 15,000 * -- -- -- --
Michael Lang 5,555 * -- -- -- --
Nora Sherwood Parker 14,000 * 500 1% -- --
PAMB Investments 35,000 * 1,250 3% -- --
Philip J. Hempleman 224,000 2% 8,000 17% -- --
Philip R. Thomas 1,625,126 12% -- -- -- --
Quad Capital Partners 28,000 * 1,000 2% -- --
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
-----------------------
NO. OF SHARES
SHARES OF COMMON OF COMMON % OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD STOCK CLASS
- - -------------------------------- ---------------- --------------- -------
<S> <C> <C> <C>
Gerald K. Beckmann(1) 673,692 195,237 1%
H. Dennison Parker 42,000 -- --
Hanifin Imhoff Trustee FBO 14,000 -- --
K.S. Bernstein
Harry J. Schmidt 56,000 -- --
Henry E. McGuffee 15,000 -- --
Holly J. Burlage 10,494 2,634 *
James Edgar McDonald, Trustee 98,250 -- --
James W. Casey(1) 107,092 50,781 *
Jeffrey Markowitz 28,000 -- --
John P. Manry & Hedy White Manry 14,000 -- --
Joseph A. Lavigne 7,000 -- --
Kiawah Capital Partners 112,500 -- --
Larry D. Brooks 14,000 -- --
Lawrence E. Bathgate PBO Del Charter 14,000 -- --
SEP
Lerter W. Erb Living Trust 14,000 -- --
Louis A. Davis 15,000 -- --
Managerial Resources, Inc. 53,000 -- --
McChesney Family LLC 21,000 -- --
McKee Securities, Inc. 18,000 -- --
Michael A. Richarmond 15,000 -- --
Michael Lang 5,555 -- --
Nora Sherwood Parker 14,000 -- --
PAMB Investments 35,000 -- --
Philip J. Hempleman 224,000 -- --
Philip R. Thomas 240,008 1,385,118 10%
Quad Capital Partners 28,000 -- --
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
SHARES OF STOCK OWNED PRIOR TO OFFERING
--------------------------------------------------------------------
NO. OF SHARES NO. OF SHARES
NO. OF SHARES OF SERIES A OF SERIES C
OF COMMON % OF PREFERRED % OF PREFERRED % OF
NAME OF BENEFICIAL OWNER STOCK CLASS STOCK CLASS STOCK CLASS
- - -------------------------------- ------------- ----- ------------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Richard F. Cooper, Jr. 28,000 * 1,000 2% -- --
Richard Friedman 28,000 * 1,000 2% -- --
Richard M.H. Thompson 14,000 * 500 1% -- --
Robert M. Galecke(1) -- -- -- -- -- --
Richard P. Shortz 41,921 * -- -- -- --
Robert D. Goldstein 173,485 1% -- -- -- --
Robert M. Needer 28,000 * 1,000 2% -- --
Seabeach & Co. 1,120,000 8% -- -- -- --
Shanly B. Stach 14,000 * 500 1% -- --
Steffany Lea Martin 10,000 * -- -- -- --
Stephen L. Martin 10,000 * -- -- -- --
Steven M. Bathgate FBO Del Charter 56,000 * 2,000 4% -- --
Keogh Accountant
Summit Fund, LP 28,000 * 1,000 2% -- --
Teresa L. Luse 1,000 * -- -- -- --
Tony C. Lisotta 57,662 * -- -- -- --
Tracy H. Parker 7,000 * 250 1% -- --
Victor Kashner 28,000 * 1,000 2% -- --
Virginia Stevens McDonald, Trustee 98,250 * 1,500 3% 1,250 10%
Wayne Hamersly 28,000 * 1,000 2% -- --
William J. Macy 14,000 * 500 1% -- --
William S. Leftwich 22,003 * -- -- -- --
Underwriter's Warrants 609,000 5% -- -- -- --
Winter Haven Homes, Inc. 70,000 * 2,500 5% -- --
All Officers and Directors as a Group 1,200,035 6% -- -- 5,000 40%
(7 Persons)
<CAPTION>
SHARES OF COMMON
STOCK OWNED AFTER
OFFERING
-----------------------
NO. OF SHARES
SHARES OF COMMON OF COMMON % OF
NAME OF BENEFICIAL OWNER STOCK TO BE SOLD STOCK CLASS
- - -------------------------------- ---------------- --------------- -------
<S> <C> <C> <C>
Richard F. Cooper, Jr. 28,000 -- --
Richard Friedman 28,000 -- --
Richard M.H. Thompson 14,000 -- --
Robert M. Galecke(1) -- -- --
Richard P. Shortz 31,481 10,440 *
Robert D. Goldstein 173,485 -- --
Robert M. Needer 28,000 -- --
Seabeach & Co. 1,120,000 -- --
Shanly B. Stach 14,000 -- --
Steffany Lea Martin 10,000 -- --
Stephen L. Martin 10,000 -- --
Steven M. Bathgate FBO Del Charter 56,000 -- --
Keogh Accountant
Summit Fund, LP 28,000 -- --
Teresa L. Luse 1,000 -- --
Tony C. Lisotta 11,117 46,545 *
Tracy H. Parker 7,000 -- --
Victor Kashner 28,000 -- --
Virginia Stevens McDonald, Trustee 98,250 -- --
Wayne Hamersly 28,000 -- --
William J. Macy 14,000 -- --
William S. Leftwich 22,003 -- --
Underwriter's Warrants 609,000 -- --
Winter Haven Homes, Inc. 70,000 -- --
All Officers and Directors as a Group 842,339 357,696 3%
(7 Persons)
</TABLE>
- - --------------------------------
* Less than 1%.
(1) The address for this person is 8200 Springwood Drive, Suite 230,
Irving, Texas 75063.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Incorporated in Delaware on December 19, 1991, the Company is a
holding company that conducts its operations principally through four
wholly-owned subsidiaries: B&B Electromatic, Inc. ("B&B"), Golston Company,
Inc. ("GCI"), Innovative Security Technologies, Inc. ("IST"), and Tri-Coastal
Systems, Inc. ("TCSI").
On 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. On March 16, 1993, the
Company organized IST, which is a retail seller of security products and
microprocessor-based systems to large customers. On August 23, 1993, the
Company announced the development of its PC-based security network,
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. The first beta site installations
for this product were completed during the fourth quarter of 1994 and the first
quarter of 1995. On September 18, 1995, the Company purchased substantially all
of the assets and liabilities of TCSI. TCSI sells and installs security and
safety systems to end users.
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. The Company
discontinued the operations of AAC during 1995. Accordingly, AAC is reported as
a discontinued operation for all periods presented.
On December 31, 1996, the Company acquired all the outstanding stock
of GCI. GCI's primary business is the design, manufacture, and marketing of
pnuematic tube carriers for use in financial institutions and hospitals. In
addition, GCI manufactures modular buildings for financial institutions. The
purchase price was approximately $4.8 million in a combination of cash and
seller notes, and the assumption of an additional $650,000 in existing debt.
The Company funded this acquisition through the private placement of $4.6
million of convertible debentures to Renaissance Capital Fund, a private
investment fund. The debentures have a maturity of seven years and, until
converted, carry an annual interest rate of 9%. No principal payments are due
for the first three years and the debentures may be exchanged for the Company's
common stock at a conversion price of $1.05 per share. To complete the funding,
an additional $660,000 of Common Stock was privately placed at $1.10 per share.
R&D PARTNERSHIP
Effective September 1, 1996, the Company entered into an agreement
with I.S.T. Partners, Ltd., an unaffiliated limited partnership, whereby the
partnership will fund the sales, engineering, and order fulfillment expenses of
the Company's IST subsidiary. In exchange, the partnership receives, as
compensation from IST, 85% of the revenue generated from the sales of the
Company's Intelli-Site products until such time as the partnership has achieved
a return of at least 150% on its investment. After such time, the partnership
will dissolve. The Company retains full ownership of all other rights to the
Intelli- Site product, and also retains the responsibility for managing IST's
business activities, including customer relationships. As of December 31, 1996,
the Company had received $250,000 from the partnership, which was recorded as
income in the quarter ended September 30, 1996, for the initial sale of sales
leads and prospects, and the Company also received $200,000 during the fourth
quarter of 1996 as reimbursement for development and sales costs. As of April
1, 1997, the partnership has not received any return on its investment.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales. The Company experienced a $1.4 million (19%) increase in sales
from 1995 to 1996 from $7.6 million to $9 million. This increase was primarily
attributable to the inclusion of TCSI, acquired in
13
<PAGE> 16
September 1995, for the entire year of 1996. The Company experienced a 5%
increase in road and bridge and perimeter security sales during 1996; however,
over $1 million of anticipated fourth quarter shipments were delayed by
customer requests due to late construction projects and revised specifications.
Also contributing to the increase in sales for 1996 was the sale of the
Company's Intelli-Site software sales leads and prospects for $250,000 to a
limited partnership chartered to fund the acceleration of marketing and sales
efforts.
For the year ended December 31, 1996, approximately 78% of the
Company's revenues were generated from the sale of products manufactured by the
Company compared to 94% for 1995.
Cost of Sales and Gross Profit. Gross profit as a percent of sales
decreased to 43% in 1996 from 45% in 1995. This decrease was primarily due to a
less favorable product mix compared with the prior year. During 1996, the
Company experienced higher sales of perimeter security products which have
lower gross margins compared to road and bridge products. Also during 1996, in
accordance with FAS 86, the Company began to amortize capitalized software
development costs related to Intelli-Site as the product was brought to market.
Amortization expense of $127,381 was recognized in 1996.
Selling, General and Administrative. Selling, general and
administrative expenses decreased from $4.6 million in 1995 to $3.8 million in
1996. The majority of this decrease was due to one-time expenses in 1995 of
approximately $1 million for severance obligations to a former officer and the
write-off of $511,000 in acquisition fees relating to a discontinued
acquisition candidate. The decrease was offset by a 16% increase in expenses at
B&B and the inclusion of expenses at TCSI for the entire year of 1996 compared
to four months in 1995.
Research and Development. Research and development expenses increased
from $46,199 in 1995 to $152,239 in 1996. This increase was due to the
inclusion of expenses at IST related to the development of Intelli-Site
partially offset by reimbursement of development costs from the limited
partnership chartered to fund the development and sales of the Intelli-Site
product. Prior to 1996, the Company capitalized software development costs
related to Intelli-Site in accordance with FAS 86.
Interest Income. Interest income in 1996 decreased to $7,748 from
$14,957 in 1995. 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. Interest expense for 1996 decreased from $343,012 in
1995 to $260,471 in 1996. This decrease was primarily due to the repayment of
certain short-term notes.
Discontinued Operations. The discontinued operations reflect the
operations of AAC. AAC's operations were discontinued during the second quarter
of 1995. During 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.
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 Company anticipates a positive
trend to continue in 1997. This positive trend will continue to be boosted by
the sales of Intelli-Site, as well as the addition of GCI. These factors,
coupled with the current growth of the security industry, were considered
positive factors in this assessment. Since the net operating loss carry forward
does not begin to expire until 2007, the Company anticipates that all
recognized carry forward benefits will be fully utilized before this expiration
date arrives. As there are no significant temporary differences in the
Company's tax calculation, realization will be primarily achieved by increased
profitability. The Company anticipates that its move to profitability in 1997
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 90% of the deferred
tax asset as of December 31, 1996. 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 has been (and will
continue to be) reviewed on a quarterly basis. The income tax benefit for 1996
consists of state income taxes for the Company's subsidiary, B&B.
14
<PAGE> 17
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Sales. The Company experienced a $247,000 (3%) increase in sales from
1994 to 1995 from $7.4 million to $7.6 million, respectively. This increase is
primarily attributable to increased sales at B&B, net of the discontinuance of
the AAC operations. During the fourth quarter of 1995 sales increased to $3.5
million compared to $1.9 million for the comparable 1994 quarter. Record sales
at B&B accounted for this 84% increase over prior year.
For the period ended December 31, 1995, approximately 94% of the
Company's revenues were generated from the sale of products manufactured by the
Company compared to 82% for 1994.
Cost of Sales and Gross Profit. Gross profit as a percent of sales
decreased to 45% in 1995 from 53% in 1994. This decrease was due to a less
favorable product mix from the prior year. During 1994, the Company experienced
higher sales of road and bridge products compared to perimeter security
products which have higher gross margins. Also during 1995 obsolete inventory
totaling $125,000 was written off.
Selling, General and Administrative. Selling, general and
administrative expenses increased from $2.8 million for the 1994 12-month
period to $4.6 million for the comparable 1995 period. The majority of this
increase is due to one-time expenses of approximately $1 million for severance
obligations to a former officer and for the write-off of acquisition fees. The
remaining increase is caused by non-recurring expenses associated with employee
terminations, legal fees associated with litigation dating from 1994 and
amortization expense of origination fees for 1994 loans.
During 1995, the Company received notice from a target company that
was the subject of acquisition efforts that the target company no longer wished
to continue discussions. Although the Company continues to pursue an
acquisition strategy with other candidates in similar or complementary
industries, $511,000 of costs and fees previously incurred in connection with
this acquisition target and deferred at the time of being incurred, were
charged to operations in the quarter ended September 30, 1995.
Interest Expense. Interest expense increased $192,000 for the 12-month
period from $151,000 in 1994 to $343,000 in 1995. This increase is primarily
attributable to interest on bridge financing that was entered into during the
third and fourth quarters of 1994, amortization of debt discount pertaining to
the aforementioned bridge financing and higher interest costs for the accounts
receivable financing facility.
Discontinued Operations. The operations of the AAC subsidiary are
reflected as discontinued operations for all periods. During the second quarter
of 1995, the decision was made to discontinue the operations of this
subsidiary. The Company recorded a reserve of $425,000 during the second
quarter of 1995 for inventory and asset disposition, as well as office closings
and staff reductions. During the third and fourth quarters of 1995, the Company
reversed $65,000 of this accrual as actual costs became more determinable.
Income Taxes. In assessing the likelihood of realization of the
deferred tax asset, the Company primarily considered the trend of the Company's
operating results toward profitability. The 1995 operating results, net of
non-recurring expenses, were in line with 1994. The Company anticipates a
positive trend to develop in 1996 since all non-recurring amounts have been
recognized in 1995, except for an anticipated seasonal loss in the first
quarter of 1996. This positive trend will be boosted by the sales roll-out of
Intelli-Site. These factors, coupled with the current growth of the security
industry, were considered positive factors in this assessment. Since the net
operating loss carry forward does not begin to expire until 2007, the Company
anticipates that all recognized carry forward benefits will be fully utilized
before this expiration date arrives. As there are no significant temporary
differences in the Company's tax calculation, realization will be primarily
achieved by increased profitability. The Company anticipates that its move to
profitability in 1996 and beyond will be dependent on its success in three
areas: (i) sales - continued increases in sales at all subsidiaries plus a
positive response to the Intelli-Site product; (ii) profit margins - continued
focus on increasing margins at IST, while maintaining the current margins at
B&B; and (iii) cost control - continued cost control at all subsidiaries.
Notwithstanding the above positive factors, the Company has adopted a
conservative posture by providing a valuation reserve of 88% 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 has been (and will
continue to 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.
15
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased by $888,236 during 1996. The
Company used $1,190,861 for operations during 1996 compared to $720,846
provided by operations during 1995. Discontinued operations used $184,100 of
cash during 1996 compared to providing $1,018,324 in 1995.
During 1996, the Company financed its continuing operations from
operating cash flow, short-term borrowings in the approximate amount of
$512,000, and the private placement of its securities in the approximate amount
of $687,000. During 1996, the Company used a total of approximately $1,459,000
to pay interest and principal on indebtedness. For a description of the
financing for the GCI acquisition, see the subheading "General" above.
The Company has a factoring facility with Union Planters Bank, Baton
Rouge, Louisiana, pursuant to which it may factor accounts receivable (with
recourse) and receive a total of up to $700,000 in credit. This factoring
facility expires April 15, 1998 and has an adjustable factoring fee which
ranges from 3% to 3.5% of the total amount borrowed. As of March 31, 1997, the
Company had a $0 balance under this factoring facility.
On April 25, 1996, the Company obtained a $900,000 term loan facility
with Bank of Jackson, Jackson, Louisiana. The loan is due in 23 monthly
payments of $12,000 beginning June 1, 1996, and one final payment sufficient to
pay the balance. Interest on the loan is floating at the lending institution's
base lending rate (which was 10% at March 31, 1997) minus 1%. The loan is
secured by all real estate and equipment at B&B and is personally guaranteed by
an officer of the Company, with certain personal assets of such officer 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 was used
to repay a portion of Company notes due April 29, 1996. As of March 31, 1997,
$849,817 was outstanding under this loan facility.
On April 11, 1997, GCI entered into a $1.95 million asset-based loan
agreement with Finova Capital Corporation, of which $775,000 was borrowed at
the closing. The balance of the arrangement consists of $675,000 in additional
borrowing potential and a $500,000 revolving line of credit. The initial
$775,000 is due in 60 monthly principal and interest payments beginning May 1,
1997. The additional borrowing may take place over the next six to twelve
months for fixed asset additions, with principal and interest payments due over
60 months beginning May 1, 1998. Interest on the term borrowings is at prime
plus 2%, currently 10.5%. Although there are no principal payment requirements
on the line of credit, interest is due monthly at the prime rate plus 1.75%
based on the average daily borrowings during the prior month. To date, GCI has
not drawn against the line of credit. The financing arrangement is guaranteed
by the Company and is secured by certain tangible and intangible assets of GCI.
Historically, GCI has generated positive cash flow from operations.
The Company anticipates this trend to continue. This positive cash flow, in
conjunction with the existing factoring facility and the asset-based loan
described in the preceding paragraph, should position the Company to cover its
working capital needs. As the Company continues to operate, additional
financing will be necessary to fund growth plans at all of the Company's major
business units.
The information contained in the previous paragraph includes certain
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those projected by such forward-looking
statements. Important factors that could cause actual results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, the following: anticipated seasonal changes may not occur
or operations may not improve as projected.
CAPITAL EXPENDITURES
The Company has no commitments for capital expenditures during 1997.
The Company acquired approximately $96,983 and $52,416 of machinery and
equipment in 1996 and 1995, respectively, principally for its B&B manufacturing
facility.
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." As of December 31, 1995, the amount
capitalized was $636,906. The Company completed its first sale of the
16
<PAGE> 19
Intelli-Site system in March 1996 and began amortizing these costs in 1996 on a
straight-line basis over five years, the expected life of the product.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation
over the past few years has not had a significant impact on the Company's sales
or operating results.
SEASONALITY
Historically the Company has experienced seasonality in its business
due to fluctuations in the weather. The Company typically experiences a decline
in sales and operating results and expects to incur a loss during the first
quarter of the year due to winter weather conditions.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance with all applicable
environmental regulations. Compliance with these regulations has not had, and
is not anticipated to have, any material impact upon the Company's capital
expenditures, earnings or competitive position.
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.
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.
17
<PAGE> 20
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, the Company 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.
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.
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<PAGE> 21
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.
Pneumatic Carriers: Golston Company, Inc. ("GCI")
GCI manufactures and sells a variety of products, primarily to the
retail banking and health care industries and, through its plastic injection
molding operations, is a provider of carriers used in pneumatic tube systems in
both drive-up banking and hospital environments. GCI also manufactures and
markets modular buildings for financial institutions for use during new branch
construction or existing facility remodeling.
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
$3.1 million at March 31, 1997. The Company expects that the majority of this
backlog will be filled during 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.
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
There are currently three employees of the Company are dedicated to
research, development and product engineering. During fiscal 1996 and 1995, the
Company spent approximately $152,239 and $292,000 on research and development.
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
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<PAGE> 22
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 December 31, 1996, the Company employed 113 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. GCI owns its manufacturing and office
facility in Sanger, Texas. This facility consists of approximately 36,000
square feet of manufacturing and office space on 6.4 acres of land. 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
GCI, a wholly owned subsidiary of the Company, is a party to a lawsuit
filed in the 211th Judicial District Court of Denton County, Texas on September
13, 1996, entitled S. Webb Golston and Golston Company v. Evelyn Shaw, cause
no. 96-30642-211. In this suit, a former employee of GCI has alleged sexual
harassment, wrongful discharge and intentional infliction of emotional distress
against GCI and the former owner of GCI, requesting unspecified actual and
punitive damages. The alleged events giving rise to these claims occurred prior
to the Company's acquisition of GCI on December 31, 1996. Under the acquisition
agreement, the former owner agreed to indemnify GCI against any damages that
GCI may incur as a result of these claims. The former owner has elected,
pursuant to the terms of the acquisition agreement, to undertake the defense of
these claims and has retained counsel to defend both himself and GCI. GCI has
retained separate counsel in this matter to oversee prosecution of the defense
of the claims. The lawsuit is in the early stages of discovery. To date, no
information has become available that causes the Company to believe there is
any potential liability which is not fully covered by the indemnification
agreement with the former owner.
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<PAGE> 23
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 ............................. Vice President of IST
Tony C. Lisotta ............................... Vice President of IST
Holly J. Burlage .............................. Controller and Assistant Secretary
Robert M. Galecke (1)(2) ...................... Director
Frank R. Marlow (1)(2) ........................ 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.
Set forth below are descriptions of the backgrounds of the directors,
officers and key employees of the Company.
GERALD K. BECKMANN, 54, Director, Chairman, President and Chief
Executive Officer, has served as a director and Chief Technical Officer 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 an advisor to
the board of directors of Financial Data Systems, Inc., a banking software
developer. 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 1981 to 1984 Mr. Beckmann served as Chairman and Chief
Executive Officer of Threshold Technology, Inc., a publicly-held voice
recognition company. 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. 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, 33, 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, 55, Director, Vice President, Secretary and Chief
Financial Officer, has served as General Manager of B&B, 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.
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<PAGE> 24
ROBERT M. GALECKE, 55, Director, is Vice President for Finance and
Administration for the University of Dallas. Prior to that he was a principal
in the corporate consulting firm of Pate, Winters & Stone, Inc. from 1993 to
May 1996. He also served as Executive Vice President, Chief Operating Officer
and Chief Financial Officer of Southmark Corporation, a financial services
insurance and real estate holding company, from 1986 to 1992. From 1989 to
1995, Mr. Galecke served as Chairman of the Board, President and Chief
Executive Officer of National Heritage, Inc., one of the nation's largest
nursing home management companies with annual revenues exceeding $50 million.
Mr. Galecke was also Chairman of the Board, President and Chief Executive
Officer of USTrails, Inc., which owns and operates 66 campground and full
service resorts with total assets of $160 million and annual revenues exceeding
$80 million. Mr. Galecke continues to serve as a director of USTrails Inc. and
Thousand Trails Inc. 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.
TONY C. LISOTTA, 55, Vice President and General Manager of 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, 57, 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 Hogan Systems, 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, 42, 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.
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,
1996, 1995, and 1994 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, 1996 exceed $100,000 (the "named
executive officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------- ------------------------------------------------
OTHER ANNUAL RESTRICTED STOCK OPTION/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS
- - --------------------------------- ------- ----------- ---------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gerald K. Beckmann 1996 $ 281,875 --- --- --- ---
Chairman, CEO & President 1995 $ 114,583 --- --- $ 68,750(4) $ 14,473
1994 --- --- --- --- ---
James W. Casey 1996 $ 94,163 $ 6,812 --- --- $ 50,000
Vice President & CFO 1995 $ 115,145 $ 7,750 --- $ 33,333(4) $ 23,395
1994 $ 94,125 $ 17,125 --- --- $ 34,333
Ferdinand A. Hauslein, Jr.(1) 1996 $ 228,471 --- --- --- ---
former CEO & President 1995 $ 233,333 --- $ 32,845(3) --- $ 20,000
1994 $ 154,167 $ 56,250 --- $ 4,284(2) $ 16,271
Tony C. Lisotta 1996 $ 120,892 --- --- --- ---
Vice President, IST 1995 $ 116,000 $ 2,850 --- $ 3,550(4) $ 10,150
1994 $ 111,500 $ 16,900 --- --- $ 8,627
1996 $ 123,166 $ 8,400 --- --- $ 15,120
Richard P. Shortz 1995 $ 96,000 $ 3,000 --- $ 18,600(4) $ 2,880
Vice President, IST 1994 $ 64,000 --- --- --- $ 12,000
</TABLE>
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<PAGE> 25
- - --------------------
(1) No longer employed by the Company.
(2) Mr. Hauslein holds 2,448 shares of restricted common stock valued at
$8,874 at December 31, 1996.
(3) Outplacement services.
(4) 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, 1996 to the named executive
officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
GRANTED(1) IN FISCAL YEAR PRICE DATE
------------------------ ---------------------- ------------ -------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann -- -- -- --
James W. Casey 50,000 27% $ .81 11/3/03
Tony C. Lisotta -- -- -- --
Richard P. Shortz 15,120 8% $ 1.96 8/1/06
</TABLE>
- - --------------------
(1) The options for all listed 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.
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, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END AT FISCAL YEAR END
---------------------------------------- -------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Gerald K. Beckmann 177,237 -- $ 200,296 $ 9,046
James W. Casey 63,281 44,448 135,903 121,141
Ferdinand A. Hauslein, Jr. 184,212 -- 230,890 --
Tony C. Lisotta 46,545 7,232 69,509 12,626
Richard P. Shortz 10,440 19,560 $ 19,845 $ 34,383
</TABLE>
DIRECTOR COMPENSATION
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.
The Company entered into a five-year employment agreement (January
1994 through October 1999) with Mr. Ferdinand A. Hauslein, Jr. that provided
him with an annual salary of $200,000. Mr. Hauslein resigned on May 1, 1995.
Mr. Hauslein's employment agreement provided that he was eligible for an annual
cash bonus of up to 50% of his base salary. Pursuant to the terms of that
23
<PAGE> 26
employment agreement, upon the termination of his employment, the Company was
obligated to pay Mr. Hauslein $100,000, 12 months of severance pay at his
then-current salary, a $50,000 allowance for outplacement services, a
three-month consulting agreement and accelerated vesting of all outstanding
options granted to Mr. Hauslein. In addition, the Company changed the
beneficiary of the key-man life insurance from the Company to Mr. Hauslein.
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 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. (both former
executive officers of the Company), 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. James W. Casey (a director and
executive officer of the Company), Mr. Tony C. Lisotta (Vice President of IST),
Mr. Richard P. Shortz (Vice President of IST), Ms. Holly J. Burlage (Controller
of the Company), and Mr. Frank R. Marlow (a director of the Company), 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
$400,000. As of December 31, 1996, no loans 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. During the second and third quarters of 1996,
Mr. Beckmann loaned the Company $90,000 and Mr. Casey loaned the Company
$75,000. Both of these loans have been repaid. In 1996, Mr. Beckmann guaranteed
loans to the Company in the aggregate amount of $1,050,000.
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<PAGE> 27
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.
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 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. As a result of the Company's issuance of warrants, options, and
convertible preferred stock after the IPO, the exercise prices for the IPO
Warrants and the Underwriter's Warrant were adjusted, effective January 15,
1997. After giving effect to the adjustments, the IPO Warrants may now be
exercised for 2.1 shares of Common Stock (for a total of 3,045,000 shares of
Common Stock) at an exercise price of $3.17 per share, and the Underwriter's
Warrant may now be exercised for a total of 304,500 Units (relating to 609,000
shares of Common Stock) at an exercise price of $3.00 per Unit. Prior to such
adjustment, the exercise price of the IPO Warrants was $6.75.
During the period from 1994 through 1996, the Company (i) granted
non-qualified compensatory options to purchase Common Stock to its current and
former employees, (ii) issued Common Stock in connection with acquisitions, and
(iii) issued convertible preferred stock, Common Stock, and warrants to
purchase Common Stock in connection with financing transactions, the settlement
of litigation, and to pay for consulting services. All such securities were
issued in private placements exempt from registration under applicable
securities laws. Such securities (totaling an aggregate of 5,052,678 shares of
Common Stock, upon full exercise or conversion) are being offered for sale
pursuant to this Prospectus by the Selling Stockholders.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, $.01 par value per share, 6,908,842 of which are
outstanding, and 750,000 shares of Convertible Preferred Stock, $.01 par value
per share, issuable in series. As of the date hereof, there are 46,668 shares
of Series A $20 Convertible Preferred Stock outstanding, 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
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 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.
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<PAGE> 28
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 46,668 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 the Series C Preferred Stock.
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.
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 3,045,000 shares of Common Stock (the "IPO Warrants"). Each
IPO Warrant entitles the holder to purchase 2.1 shares of Common Stock at $3.17
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 304,500 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 $3.00 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
2,658,000 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 $2.40.
26
<PAGE> 29
Stock Options. The Company has issued options to employees and
consultants to purchase an aggregate of 874,000 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 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 to the
registered holders of such warrants. The Company does not intend to compensate
any underwriter or dealer in connection with such exercise and issuance. 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
27
<PAGE> 30
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.
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.
However, this could change at any time if the price of the Common Stock rises
to a level that is near the respective exercise prices of the IPO Warrants or
the Underwriter's Warrant. In such case, the Company will be obligated by
applicable securities laws to have an effective registration statement filed
with the Securities and Exchange Commission relating to the Common Stock to be
issued upon the exercise of the IPO Warrants and the Underwriter's Warrant, and
to deliver to all exercising warrantholders a current prospectus relating to
the Company.
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 Company's financial statements as of December 31, 1996 and 1995
and for each of the two years in the period ended December 31, 1996 included in
this Prospectus, and GCI's financial statements as of June 30, 1996 and 1995
and for each of the two years in the period ended June 30, 1996 included in
this Prospectus, have been so included in reliance on the reports 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 be obtained at prescribed rates from the Public Reference Section of
the Commission, 450 fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's World Wide Web site on the Internet at http://www.sec.gov. 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 of 1933 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.
28
<PAGE> 31
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL PAGES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Integrated Security Systems, Inc. Report of Independent Accountants.............................................F-2
Integrated Security Systems, Inc.
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................................F-3
Integrated Security Systems, Inc.
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995......................................................................................F-4
Integrated Security Systems, Inc.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995......................................................................................F-5
Integrated Security Systems, Inc.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995......................................................................................F-6
Integrated Security Systems, Inc. Notes to
Consolidated Financial Statements........................................................................F-7 - F-20
Golston Company, Inc. Report of Independent Accountants........................................................F-21
Golston Company, Inc. Balance Sheets as of
June 30, 1996 and 1995.........................................................................................F-22
Golston Company, Inc. Statements of Operations for the years ended
June 30, 1996 and 1995.........................................................................................F-23
Golston Company, Inc. Statements of Stockholders' Equity for the years ended
June 30, 1996 and 1995.........................................................................................F-24
Golston Company, Inc. Statements of Cash Flows for the years ended
June 30, 1996 and 1995.........................................................................................F-25
Golston Company, Inc. Notes to Financial Statements.....................................................F-26 - F-31
Golston Company, Inc.
Consolidated Statements of Operations for the six months ended
December 31, 1996..............................................................................................F-32
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Integrated Security Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Integrated Security Systems, Inc., and its subsidiaries (the "Company") at
December 31, 1996 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 18, 1997
F-2
<PAGE> 33
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 1,097,891 $ 209,655
Accounts receivable, net of allowance for doubtful accounts
of $65,687 and $54,558, respectively 2,629,909 1,761,701
Inventories 1,086,985 854,888
Restricted cash 8,232 157,851
Other current assets 193,960 15,831
Net assets of discontinued operations 25,760 76,807
--------------- --------------
Total current assets 5,042,737 3,076,733
Property and equipment, net 5,502,284 1,068,123
Intangible assets, net 1,598,632 136,116
Capitalized software development costs, net 591,505 787,816
Deferred income taxes 205,384 205,384
Other assets 31,325 33,333
--------------- --------------
Total assets $ 12,971,867 $ 5,307,505
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 881,221 $ 1,308,650
Accrued liabilities 691,208 1,041,567
Deferred revenue 209,296 152,948
Notes payable 8,080 950,947
Notes payable to related parties 7,110 29,437
Current portion of long-term debt 213,975 96,451
Net liabilities of discontinued operations 49,252 332,866
--------------- --------------
Total current liabilities 2,060,142 3,912,866
--------------- --------------
Long-term debt 6,784,582 213,899
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 750,000 shares authorized,
59,168 and 34,166, respectively, shares issued
and outstanding 591 342
Common stock, $0.01 par value, 18,000,000 shares authorized,
6,958,842 and 3,730,738, respectively, shares issued and
6,908,842 and 3,680,738, respectively, shares outstanding 69,588 37,307
Additional paid-in-capital 10,382,215 7,191,575
Accumulated deficit (6,206,501) (5,929,734)
Treasury stock, 50,000 shares (118,750) (118,750)
--------------- --------------
Total stockholders' equity 4,127,143 1,180,740
--------------- --------------
Total liabilities and stockholders' equity $ 12,971,867 $ 5,307,505
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE> 34
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Sales $ 9,054,145 $ 7,622,219
Cost of sales 5,184,321 4,200,723
----------- ------------
Gross margin 3,869,824 3,421,496
----------- ------------
Operating expenses:
Selling, general and administrative 3,776,798 4,634,963
Research and product development 152,239 46,199
----------- ------------
3,929,037 4,681,162
----------- ------------
Loss from operations (59,213) (1,259,666)
Other income (expense):
Interest income 7,748 14,957
Interest expense (260,471) (343,012)
Other 389 209
----------- ------------
Loss from continuing operations before income taxes (311,547) (1,587,512)
Benefit (provision) for income taxes 11,991 (62,102)
----------- ------------
Loss from continuing operations (299,556) (1,649,614)
Discontinued operations:
Loss from discontinued operations -- (720,043)
Gain (loss) on disposal of discontinued operations 22,789 (494,562)
----------- ------------
Income (loss) from discontinued operations 22,789 (1,214,605)
----------- ------------
Net loss $ (276,767) $ (2,864,219)
=========== ============
Weighted average common and common equivalent shares 5,122,878 4,014,108
outstanding
Net loss per share:
Continuing operations $ (0.05) $ (.41)
Discontinued operations -- (.30)
Total $ (0.05) $ (.71)
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE> 35
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Stockholder
Preferred Common Paid In Accumulated Receivable, Treasury
Shares Amount Shares Amount Capital Deficit Net Stock
-------- ---------- ----------- ----------- ----------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 3,519,290 $ 35,192 $ 6,047,883 $ (3,065,515) $ (144,062) $ --
Preferred stock issuance 34,166 342 683,011
Shares issued to officer 2,448 25 4,259
Warrant issuance 102,557
Warrant exercise 138,000 1,380 112,808
Common stock issuance 71,000 710 179,165
Stockholder settlement 61,892 144,062 (118,750)
Net loss (2,864,219)
Balance at December 31, 1995 34,166 $ 342 3,730,738 $ 37,307 $ 7,191,575 $ (5,929,734) $ -- $(118,750)
Preferred stock issuance 60,168 601 1,050,169
Preferred stock conversion (35,166) (352) 1,039,919 10,399 (10,047)
Warrant issuance 82,471
Warrant exercise 599,230 5,992 513,497
Common stock issuance 1,588,955 15,890 1,554,550
Net loss (276,767)
-------- ---------- ----------- ---------- ------------ ------------- ------------ ---------
Balance at December 31, 1996 59,168 $ 591 6,958,842 $ 69,588 $ 10,382,215 $ (6,206,501) $ -- $(118,750)
======== ========== =========== ========== ============ ============= ============ =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE> 36
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------------
1996 1995
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (276,767) $ (2,864,219)
Adjustments to reconcile net loss to net cash (used) provided
by operating activities:
Depreciation 189,042 175,428
Amortization 358,295 345,533
Bad debt expense 18,976 17,096
Provision for warranty reserve 188,344 137,700
Provision for inventory reserve 4,601 17,909
Non-cash (income) expenses (173,281) 24,521
Net change in assets and liabilities from discontinued operations (184,100) 1,018,324
Changes in operating assets and liabilities, net of effects from
acquisition of Golston Company:
Accounts receivable (543,992) 459,212
Inventories 81,006 (112,328)
Restricted cash 149,619 (157,851)
Other assets (109,045) 227,939
Accounts payable (344,141) 806,872
Accrued liabilities (605,766) 471,762
Deferred revenue 56,348 152,948
-------------- ---------------
Net cash (used) provided by operating activities (1,190,861) 720,846
-------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (96,983) (52,416)
Sale of property and equipment 5,000 --
Intangible assets (71,951) --
Capitalized software costs -- (245,799)
Acquisition of Golston Company (4,851,406) --
Net cash used by investing activities (5,015,340) (298,215)
-------------- ---------------
Cash flows from financing activities:
Issuance of preferred stock, net 687,406 --
Issuance of common stock, net 1,863,487 143,738
Net borrowings (payments) on line of credit -- (847,317)
Payments on notes payable and long-term debt (1,459,051) (151,373)
Proceeds from notes payable and long-term debt 6,012,545 278,417
Other (9,950) (1,946)
Net cash provided (used) by financing activities 7,094,437 (578,481)
-------------- ---------------
Increase (decrease) in cash 888,236 (155,850)
Cash at beginning of year 209,655 365,505
Cash at end of year $ 1,097,891 $ 209,655
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE> 37
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed
in December 1991 to leverage highway traffic control and security core
businesses into turnkey security solutions for "middle market" commercial and
industrial businesses. The middle market is defined as commercial, industrial
and institutional companies or government agencies which budget $50,000 to
$600,000 annually to meet their security needs. The two types of security
targeted by ISSI are asset protection and personal safety.
In order to provide turnkey security solutions to the middle market,
several key operating components and technologies have been vertically
integrated into the Company. To date, ISSI created internally, or acquired, a
gate and barrier engineering and manufacturing facility, B&B Electromatic, Inc.
("B&B"), a developer and retail seller of PC-based control systems which
integrate discrete security devices, Innovative Security Technologies, Inc.
("IST"), an installation and service company, Tri-Coastal Systems, Inc.
("TCSI"), and a manufacturer of specialty products for the financial and health
care industries, Golston Company, Inc. ("GCI"). ISSI also has a subsidiary that
was a distributor of commercial and industrial perimeter security products,
Automatic Access Controls, Inc. ("AAC"). The operations of this subsidiary were
discontinued during 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, B&B, IST, TCSI, GCI and AAC. All significant
intercompany transactions and balances have been eliminated.
CASH
Cash is comprised of highly liquid instruments with maturities of
three months or less. At December 31, 1996 and 1995, restricted cash of $8,232
and $157,851, respectively, was recorded related to a factoring arrangement
(see Note 6).
INVENTORIES
Inventories are primarily carried at the lower of cost or market using
the first-in, first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line and
accelerated methods. Estimated useful lives range from 3 to 31 years.
Depreciation expense includes amortization of assets recorded as capital
leases.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulted from the acquisitions and is amortized using the
straight-line method over a period of ten years.
Amortization expense for goodwill for the years ended December 31,
1996 and 1995, respectively, was $26,797 and $1,144.
F-7
<PAGE> 38
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
It is the Company's policy to periodically review the net realizable
value of its intangible assets, including goodwill, through an assessment of
the estimated future cash flows related to such assets. Each business unit to
which these intangible assets relate is reviewed to determine whether future
cash flows over the remaining estimated useful life of the assets provide for
recovery of the carrying value of the assets. If assets are being carried at
amounts in excess of estimated gross future cash flows, then the assets are
adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Under the liability method, deferred
taxes are provided for tax effects of differences in the basis of assets and
liabilities arising from differing treatments for financial reporting and
income tax purposes using currently enacted tax rates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of customers in
the traffic and security products market. No single customer accounted for 10%
or more of revenues in the years ended December 31, 1996 or 1995.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs pursuant to
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("FAS 86"). As
of December 31, 1995, $636,906 in software development costs qualified for
capitalization pursuant to FAS 86. The Company began amortizing its capitalized
software costs in 1996 using the straight-line method over a period of five
years. $127,381 in amortization expense was recorded in 1996.
During 1993, the Company entered into a license and distribution
agreement for certain proprietary technology. In connection with this agreement
(see Note 9), the Company paid $250,000 to an affiliate controlled by the
Company's former parent for the right to use the technology, which is being
amortized over a period of five years from the acquisition date. For the years
ended December 31, 1996 and 1995, $68,930 and $57,426, respectively, was
recorded as amortization expense. Accumulated amortization at December 31, 1996
and 1995 was $168,020 and $99,090, respectively.
The Company expenses all other research and product development costs
as they are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, note payable and other debt instruments
approximate the fair values of such financial instruments.
NET LOSS PER SHARE
Net loss per common share for each year is computed using the weighted
average number of common and common equivalent shares outstanding during the
respective years.
F-8
<PAGE> 39
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest expense $ 153,428 $ 295,469
Cash paid for income taxes $ 51,866 $ 63,615
</TABLE>
During 1995, accounts payable to unrelated parties of $139,141 and
notes and accrued liabilities to related parties of $469,212 were converted by
the Company's creditors into convertible preferred stock. During 1996, notes to
unrelated parties of $304,051 and related parties of $100,000 were converted by
the Company's creditors into convertible preferred stock and common stock.
RECLASSIFICATION
Certain reclassifications of prior year amounts have been made to
conform to the fiscal 1996 presentation.
3. I.S.T. PARTNERS, LTD.
Effective September 1, 1996, the Company entered into an agreement
with I.S.T. Partners, Ltd., an unaffiliated limited partnership, whereby the
partnership will fund the sales, engineering and order fulfillment expenses of
IST. In exchange, the partnership receives, as compensation from IST, 85% of
the revenue generated from Intelli-Site sales until a specified investor return
has been achieved. The Company retains full ownership of Intelli-Site during
the agreement period and retains responsibility for managing IST's business
activities, including customer relationships. As of December 31, 1996, $250,000
had been received by the Company and recorded as income in the quarter ended
September 30, 1996 for the initial sale of the sales leads and prospects.
F-9
<PAGE> 40
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
4. ACQUISITIONS
On December 31, 1996, the Company acquired GCI with approximate
revenues of $3.9 million, a vertically integrated manufacturer of specialty
products for the financial and health care industries. This acquisition has
been accounted for as a purchase. ISSI purchased 100% of GCI stock for
approximately $4.8 million of combined cash and seller notes and assumed
approximately $650,000 in debt. The real estate and facilities occupied by GCI
were also acquired for an additional $1.5 million in cash. To fund the
transactions, $4.6 million of convertible debentures were placed. The
debentures have a maturity of seven years, and, until converted, carry an
annual interest rate of nine percent. No principal payments are due on the
debentures during the first three years. The debentures may be exchanged for
ISSI Common Stock at a conversion price of $1.05 per share. To complete the
funding, an additional $660,000 of ISSI Common Stock was privately placed on
December 31, 1996 at $1.10 per share. The excess of the purchase price over the
fair value of the assets acquired of $1,319,628 has been recorded as goodwill.
If the acquisition of GCI had been effective as of January 1, 1996, pro forma
net sales would have amounted to approximately $13.3 million and pro forma net
income from continuing operations would have been approximately $252,000.
In September 1995, the Company acquired substantially all of the
assets and liabilities of TCSI, an unrelated company, in exchange for the
Company's common stock valued at $156,375. The excess of the purchase price
over the fair value of the assets acquired of $296,945 was recorded as
goodwill. If the acquisition of TCSI had been effective as of January 1, 1995,
pro forma net sales would have amounted to approximately $8.6 million and pro
forma net loss from continuing operations would have been approximately $1.6
million.
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Inventories:
Raw materials $ 714,106 $ 586,237
Work-in-process 267,015 223,052
Finished goods 105,864 45,599
-------------- -------------
$ 1,086,985 $ 854,888
============== =============
Property and Equipment:
Land $ 905,264 $ 5,264
Building 1,177,168 577,168
Rental Units 2,311,033 --
Leasehold improvements 48,769 48,769
Office furniture and 855,002 575,257
Manufacturing equipment 2,952,930 533,167
Vehicles 48,503 68,304
Construction 153,425 153,425
-------------- -------------
8,452,094 1,961,354
Less: accumulated depreciation 2,949,810) (893,231)
-------------- -------------
$ 5,502,284 $ 1,068,123
============== =============
</TABLE>
F-10
<PAGE> 41
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
6. NOTES PAYABLE AND LONG-TERM DEBT
On April 11, 1995, the Company entered into a Business Manager
factoring facility with a bank to factor accounts receivable with recourse.
This factoring facility expires April 15, 1997, has an adjustable factoring fee
which ranged from 3.13% to 3% during 1996, and a maximum borrowing amount of
$1,400,000. As of December 31, 1996 and 1995, $36,413 and $1,103,275 was
utilized, $8,232 and $157,851 of restricted cash was held, and $36,413 and
$1,103,275 of factored accounts receivable were subject to recourse.
NOTES PAYABLE
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C>
Bridge loans payable to unrelated individual investors;
interest at 16%; due April 30, 1996, net of debt
discount of $0 and $46,766, respectively -- $ 736,285
Note payable due in monthly principal installments of
various amounts until paid in full by June 1996, net
of debt discount of $0 and $6,000, respectively; no
interest; personally guaranteed by an officer -- 57,646
Note payable, interest at 3.3%, due on April 1, 1996 -- 7,016
Note payable to a bank due on June 24, 1996; interest
at 11%; secured by second mortgage on real estate -- 150,000
Note payable to unrelated individual investor; no
interest; due in one lump sum payment in January $ 8,080 --
1997
---------- ----------
$ 8,080 $ 950,947
========== ==========
</TABLE>
F-11
<PAGE> 42
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Term note payable to a bank; due in monthly principal
and interest installments of $3,720 through August 2002;
interest at the lender's prime plus .5% (10.75% at
December 31, 1995 and 10.25% at December 31, 1994);
guaranteed by principal stockholder -- $ 234,365
Note payable to a bank due in monthly principal and interest
installments of $4,060 through March 1997 when the balance is
due; interest at 9.75% secured by equipment and accounts
receivable -- 53,265
Note payable due in monthly principal and interest installments
of $576 through May 1997 when the balance is due; interest at
8.75%; secured by equipment -- 9,188
Note payable due in monthly principal and interest installments of
$366 through August 1997 when the balance
is due; interest at 11%; secured by equipment -- 6,243
Note payable due in monthly principal and interest installments of
$477 through May 1997 when the balance is
due; interest at 11%; secured by equipment -- 7,289
Term note payable to a bank; due in monthly principal and interest
installments of $793 through May 2001; interest at
10.2503%; secured by equipment 33,692 --
Term note payable to a bank; due in monthly principal and interest
installments of $12,000 through April 1998 and one balloon payment in
May 1998; interest at the lender's prime less 1% (10% at December 31,
1996); secured by first mortgage on real estate, equipment and certain
personal
assets of an officer; personally guaranteed by an officer 864,865 --
Term note payable to an unrelated third party due in monthly principal
and interest installments of $24,134 through
January 2004; interest at 9%; secured by equipment 1,500,000 --
Convertible note payable to an unrelated fund; interest at 9% due in
monthly installments of $34,500 through December 2003; no principal
installments due until December 1999; secured by equity, assets and
future contracts; guaranteed
by all subsidiaries of ISSI 4,600,000 --
----------- ----------
6,998,557 310,350
Less current portion (213,975) (96,451)
----------- ----------
Long-term portion $ 6,784,582 $ 713,899
=========== ==========
</TABLE>
F-12
<PAGE> 43
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTES PAYABLE TO RELATED PARTIES
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable to executive officers and members of Board
of Directors; non-interest bearing; due on demand $ -- $ 4,000
Note payable to an employee; due in monthly principal and 7,110 25,437
interest installments of $2,412 through March 1997; interest
at 10.53%
-------- --------
$ 7,110 $ 29,437
Less: current portion (7,110) (29,437)
-------- --------
Long-term portion $ -- $ --
======== ========
</TABLE>
Payments required under all notes payable and long-term debt
outstanding at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 229,124
1998 986,433
1999 245,154
2000 769,943
2001 784,806
Thereafter 3,998,286
$ 7,013,746
===========
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Current:
Federal $ -- $ --
State (11,991) 62,102
$(11,991) $ 62,102
-------- --------
Deferred:
Federal $ -- $ --
State -- --
-------- --------
Tax expense (benefit) $(11,991) $ 62,102
======== ========
</TABLE>
F-13
<PAGE> 44
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
A reconciliation of the income tax provision and the amount computed
by applying the federal statutory benefit rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Federal statutory benefit rate (34%) (34%)
State income tax (benefit) provision, net of federal tax benefit (4%) 4%
Installment sale gain -- 2%
Net operating loss not benefited 24% 31%
Non-deductible amortization 9% 1%
Other 1% --
------------ -------------
(4%) 4%
============ ============
</TABLE>
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities) are
comprised of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Amortization $ (213,196) $ (39,915)
Depreciation (964) --
Gross deferred tax liability (214,160) (39,915)
------------ -------------
Litigation reserve 6,047 57,120
Depreciation -- 3,343
Warranty reserve 31,609 24,733
Bad debt reserve 43,855 49,970
Net operating loss carryforward 2,205,531 1,895,091
Gross deferred tax asset 2,287,042 2,030,257
------------ -------------
Net deferred tax asset 2,073,846 1,990,342
Valuation allowance (1,868,462) (1,784,958)
------------ -------------
Net deferred tax asset $ 205,384 $ 205,384
============ =============
</TABLE>
Should a cumulative change in ownership of more than 50% occur within
a three year period, there could be an annual limitation on the use of the net
operating loss carryforward. The Company has unused net operating loss
carryforwards of $6.5 million and $5.6 million at December 31, 1996 and 1995,
respectively, that begin to expire in the year 2007. The Company increased the
valuation allowance because it does not expect to realize the benefit of net
operating losses, except to the extent of the $205,384 deferred tax asset, in
the foreseeable future.
F-14
<PAGE> 45
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under leases accounted for
as operating leases. The Company currently does not have any capital leases.
Future minimum payments for years subsequent to December 31, 1996 under capital
and non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
---------------------
<S> <C> <C>
1997 $ 115,340
1998 5,256
1999 5,256
2000 --
2001 --
---------------------
Total minimum payments $ 125,852
=====================
</TABLE>
Rent expense for operating leases was $103,253 and $85,836 for the
years ended December 31, 1996 and 1995, respectively.
CONTINGENCIES
The Company is subject to certain legal actions and claims arising in
the ordinary course of business. Management recognizes the uncertainties of
litigation; however, based upon the nature of and management's understanding of
the facts and circumstances which give rise to such actions and claims,
management believes that such litigation and claims will be resolved without
material effect on the Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
SOFTWARE LICENSE
During 1993, the Company entered into a license and distribution
agreement for certain proprietary technology to be utilized as the basis for
the Intelli-Site products. This license was purchased for $250,000 from
COMTRAC, a company controlled at that time by ISSI's largest stockholder. This
license is being amortized over five years from the acquisition date.
10. DISCONTINUED OPERATIONS
During the second quarter of 1995, the Company adopted a plan to
discontinue the operations of the wholesale distribution subsidiary, Automatic
Access Controls, Inc. ("AAC"). The operations of this subsidiary were
discontinued during July 1995. Provisions totaling $560,000 were recorded for
estimated losses during the phase-out period, and for writedown of assets to
net realizable value. During the fourth quarter of 1995, this provision was
decreased by $65,000 due to better receipts than anticipated on certain assets.
Current assets and current liabilities related to this action totaled $25,760
and $76,807, respectively, at December 31, 1996 and $76,807 and $49,252,
respectively, at December 31, 1995. These assets and liabilities consist of
accounts receivable and a note payable.
F-15
<PAGE> 46
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Where appropriate, the financial statements reflect the operating
results and balance sheet items of the discontinued operations separately from
continuing operations. Prior years have been restated.
Operating results for the discontinued operations were:
<TABLE>
<CAPTION>
For the Period Ended
December 31,
------------------------------------------
1996 1995
------------------- -------------------
($ in thousands)
<S> <C> <C>
Operating Revenue -- $ 1,389
Loss from Operations -- $ (720)
Loss Per Share -- $ (.30)
</TABLE>
11. BENEFIT PLANS
The Company has established a 401(k) savings and profit sharing plan.
Participants include all employees who have completed six months of service and
are at least 21 years of age. Employees can contribute up to 15% of
compensation. Vesting on the Company's contribution occurs over a five-year
period. The Company made no contributions in 1996 and 1995.
12. STOCK OPTIONS AND WARRANTS
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" was implemented in January 1996. As permitted by the
Standard, ISSI retained its prior method of accounting for stock compensation.
As required by the Standard, the following information represents pro forma net
income (loss) and earnings (loss) per share as if the Company had accounted for
its employee stock options under the fair value method prescribed by the
Standard.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively; no dividend
yield, expected volatility of approximately 80% and 55%, risk-free interest
rates of approximately 6.5% and 7%, and expected lives of ten years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
information for the Company follows in thousands (except per share amounts):
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ------------------------------
As reported Pro forma As reported Pro forma
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (276) $ (307) $ (2,864) $ (2,874)
Income (Loss) per Common Share $ (.05) $ (.05) $ (.71) $ (.71)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as SFAS No. 123 does not apply to awards prior
to 1995 and additional awards are anticipated in future years.
F-16
<PAGE> 47
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
STOCK OPTIONS
In February 1993, the Company established a stock option plan whereby
options to purchase up to 250,000 shares of common stock may be granted (the
"1993 Stock Option Plan"). In December 1994, the shareholders of the Company
increased the number of shares of common stock which may be granted under this
plan to 500,000. The plan is administered by the Company's Board of Directors
which has the authority to establish the terms of each option grant. Under the
plan, incentive stock options must be granted with an exercise price not less
than the fair market value on the date of grant.
A summary of stock option transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 738 $ 2.21 687 $ 2.20
Granted 188 1.22 115 2.07
Forfeited (52) 1.95 (64) 1.90
---------------- ---------------
Outstanding at end of year 874 $ 2.01 738 $ 2.21
================ ===============
Exercisable at end of year 663 $ 2.18 556 $ 2.26
Weighted-average fair value of
options granted during the year $ 1.06 $ 1.40
</TABLE>
The following table summarizes information about the fixed-price stock
options outstanding at December 31, 1996 (share amounts in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------------
Range of Shares Weighted-Average Weighted- Shares Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
-------------- -------------- --------------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.687-1.50 159 8.7 years $ 1.02 50 $ 1.09
$ 1.563-2.50 705 7.5 years 2.22 609 2.26
$ 2.719-3.53 10 9.1 years 2.77 4 2.72
-------------- --------------
874 2.01 663 2.18
============== ==============
</TABLE>
F-17
<PAGE> 48
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
WARRANTS
On April 20, 1993, in connection with the Company's initial public
offering, the Company issued 1,450,000 Redeemable Common Stock Purchase
Warrants. Each warrant entitles the holder to purchase one share of common
stock at a price of $5.40 per share during the first 30 months, and $6.75 per
share during the second 30 months. The warrants are subject to redemption by
the Company at $0.25 per warrant upon 30 days prior written notice with the
consent of the underwriters, Thomas James Associates, Inc. ("Underwriters"). As
of December 31, 1996, all warrants issued remain outstanding. The warrants
expire on April 20, 1998. Management believes that the exercise price of the
warrants at the date of grant approximated market value. On June 17, 1996, the
Company repriced these warrants to $4.15 due to obligations under the original
warrant agreement. The holder is also now entitled to purchase 1.6 shares of
common stock. Again, on January 15, 1997, these warrants were repriced to $3.17
under the same obligation and the holder is now entitled to purchase 2.1 shares
of common stock.
Also, in connection with the initial public offering, the Company
issued a warrant to the Underwriters for the purchase of up to 145,000 units at
a price of $6.30 per unit. A unit consists of a share of common stock and a
warrant to purchase an additional share of common stock. This warrant is
exercisable over a period of four years commencing April 20, 1994. Management
believes that the exercise price of the warrant at the date of grant
approximated market value. On June 17, 1996, the Company repriced these
warrants to $3.51 due to obligations under the original warrant agreement. The
holder is also now entitled to purchase 1.6 units. Again, on January 15, 1997,
these warrants were repriced to $3.17 under the same obligation. The holder is
now entitled to purchase 2.1 units.
In connection with bridge financing obtained in 1993, the Company
issued warrants to purchase 246,000 shares of common stock at an exercise price
of $1.00 per share and warrants to purchase 18,000 shares of common stock at an
exercise price of $2.40. As of December 31, 1996, 51,000 warrants issued remain
outstanding. The warrants expire in 1998. No value has been assigned to
warrants as management believed such value to be insignificant at the time of
issuance.
The Company issued warrants to purchase 211,800 shares of common stock
at exercise prices of $1.06, in connection with the bridge financing obtained
in 1994. As of December 31, 1996, 154,800 warrants remain outstanding and have
expiration dates in 1999. Value was assigned to these warrants totaling $90,000
at December 31, 1994. Such value was amortized over the one year term of the
bridge loans. During 1995 and 1996, the Company issued an additional 50,376 and
37,301 warrants, respectively, in exchange for an additional extension of the
bridge loans' due date to April 30, 1996. Value was assigned to these warrants
totaling $87,677. Such value was amortized over the five-month extension term
of the bridge loans.
During 1995, in connection with a payable to a former director, the
Company issued warrants to purchase 10,000 shares of common stock at an
exercise price of $.75 per share. Value assigned to these warants of $7,500 was
amortized over the 5-month term of the note. In connection with the convertible
preferred stock sale completed in December 1995, the Company issued 136,677
warrants in 1996. These warrants are exercisable at $.67 per share and expire
in 2000. The value of the warrants was recorded as part of the convertible
preferred stock offering.
During 1996, the Company issued warrants to purchase 13,201 shares of
common stock at an exercise price of $1.18. Value assigned to these warrants
totaling $13,210 was recorded during 1996.
During 1996, the Company issued 832,844 warrants in connection with
the convertible Series A and Series C preferred stock sales. These warrants are
exercisable at $1.00 per share and expire in 2001. The value of the warrants
was recorded as part of the convertible preferred stock offering.
F-18
<PAGE> 49
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
During 1996, the Company issued 500,000 warrants in connection with
the sale of common stock to unrelated investors. The value of the warrants was
recorded as part of the equity sale. As of December 31, 1996, 116,000 of these
warrants remain outstanding.
The Company issued warrants to purchase 70,000 shares of common stock
to investors in I.S.T. Partners, Ltd. These warrants are exercisable at $2.40
per share and expire in 2001. Value was assigned to these warrants totaling
$40,000 and was expensed in 1996.
A summary of warrant transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,218 $ 3.38 2,296 $ 3.32
Granted 1,590 1.05 60 .13
Exercised (599) .87 (138) 1.01
Repriced 1,044 4.04 -- --
---------------- ---------------
Outstanding at end of year 4,253 $ 3.03 2,218 $ 3.38
================ ===============
Exercisable at end of year 4,199 $ 3.03 2,218 $ 3.38
Weighted-average fair value of
options granted during the year $ 1.57 $ .76
</TABLE>
The following table summarizes information about the warrants outstanding
at December 31, 1996 (share amounts in thousands):
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
------------------------------------------- --------------------------------
Range of Shares Weighted-Average Weighted- Shares Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
-------------- -------------- --------------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$ .01-1.00 1,129 3.7 years $ .94 1,129 $ .94
$ 1.06-2.00 268 3.4 years 1.42 268 1.42
$ 2.40-4.15 2,856 2.4 years 4.00 2,802 4.03
---------- --------
4,253 3.03 4,199 3.03
========== ========
</TABLE>
F-19
<PAGE> 50
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
13. CONVERTIBLE PREFERRED STOCK
The Company's outstanding convertible preferred stock consists of
750,000 authorized shares of $.01 par value convertible preferred stock.
Series A $20 Convertible Preferred Stock. The Company currently has
outstanding 46,668 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 34,166 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.
F-20
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Golston Company, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Golston Company, Inc. at June 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
September 30, 1996
F-21
<PAGE> 52
GOLSTON COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 124,901 $ 255,302
Accounts receivable 481,045 357,070
Interest receivable from related party 42,329 --
Inventories 409,839 508,724
Other current assets 61,216 36,306
---------- ----------
Total current assets 1,119,330 1,157,402
Property and equipment, net 2,048,720 1,836,652
Intangible assets, net 3,833 4,500
Note receivable from related party 671,824 --
Other assets 150 1,560
Total assets $3,843,857 $3,000,114
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,090 $ 8,908
Accrued liabilities 169,576 208,630
Deferred revenue 135,515 144,267
Current portion of long-term debt 170,624 120,084
Total current liabilities 520,805 481,889
---------- ----------
Long term liabilities:
Deferred tax liability 148,504 112,923
Long-term debt 594,857 464,965
Total long term liabilities 743,361 577,888
---------- ----------
Stockholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Retained earnings 2,578,691 1,939,337
---------- ----------
Total stockholders' equity 2,579,691 1,940,337
Total liabilities and stockholders' equity $3,843,857 $3,000,114
========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-22
<PAGE> 53
GOLSTON COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales and revenues:
Product sales $ 2,203,029 $ 2,074,110
Service revenues 1,688,313 1,492,776
----------- -----------
3,891,342 3,566,886
----------- -----------
Cost of sales and revenues:
Product sales 879,572 793,752
Service revenues 666,618 559,161
-----------
1,546,190 1,352,913
----------- -----------
Gross margin 2,345,152 2,213,973
----------- -----------
Operating expenses:
Selling, general and administrative 1,290,244 1,254,421
1,290,244 1,254,421
----------- -----------
Income from operations 1,054,908 959,552
Other income (expense):
Interest income from related party 42,329 --
Interest income 1,997 1,506
Interest expense (86,922) (79,635)
Other (23,765) (46,559)
----------- -----------
Income before income taxes 988,547 834,864
Provision for income taxes (349,193) (298,120)
Net income $ 639,354 $ 536,744
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-23
<PAGE> 54
GOLSTON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 1,000 $ 1,000 $ 1,402,593 $ 1,403,593
Net income 536,744 536,744
-----------------------------------------------------
Balances at June 30, 1995 1,000 $ 1,000 $ 1,939,337 $ 1,940,337
Net income 639,354 639,354
-----------------------------------------------------
Balances at June 30, 1996 1,000 $ 1,000 $ 2,578,691 $ 2,579,691
=====================================================
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-24
<PAGE> 55
GOLSTON COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 639,354 $ 536,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 214,047 175,130
Amortization 667 667
Deferred income taxes 35,581 7,445
Changes in operating assets and liabilities:
Accounts receivable (123,975) (32,638)
Inventories 98,885 (45,470)
Other assets (23,500) (3,855)
Accounts payable 36,182 (54,687)
Accrued liabilities (39,054) (86,651)
Deferred revenue (8,752) 37,430
Net cash provided by operating activities 829,435 534,115
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (426,115) (206,941)
Loan to related party (671,824) --
Interest receivable from related party (42,329) --
----------- -----------
Net cash used by investing activities (1,140,268) (206,941)
----------- -----------
Cash flows from financing activities:
Payments on notes payable and long-term debt (169,608) --
Proceeds from notes payable and long-term debt 350,040 (201,423)
Net cash provided (used) by financing activities 180,432 (201,423)
----------- -----------
Increase (decrease) in cash and cash equivalents (130,401) 125,751
Cash and cash equivalents at beginning of year 255,302 129,551
Cash and cash equivalents at end of year $ 124,901 $ 255,302
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-25
<PAGE> 56
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Golston Company, Inc. ("Golston" or the "Company") was founded in 1976
and incorporated as a Texas corporation in 1979. Its primary business has been
to design, manufacture, and supply pneumatic tube carriers to the financial
industry for use in the retail drive-up banking centers for commercial banks,
savings and loans, and credit unions. More recently, the Company has expanded
its pneumatic tube carrier business to the medical services industry, supplying
a proprietary line of carriers to hospitals and other medical facilities. The
Company distributes its products through sales to original equipment
manufacturers of pneumatic carrier systems, to dealers and distributors, and,
through telemarketing, directly to end-users.
The Company's sales are primarily to the banking and hospital
industries. Sales are dependent on customer orders and requests.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of highly liquid instruments
with maturities of three months or less.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of customers in
the financial and medical services industries. Based on management's analysis
of accounts receivable, including consideration of the Company's historical
collection experience, no allowance for doubtful accounts is necessary at June
30, 1996 or 1995. During 1996 and 1995, respectively, a single customer
accounted for greater than 10% of the Company's revenues ($600,000 and
$650,000).
The Company records deferred revenue related to a service to provide
the use of temporary facilities in the event of a disaster by the retail
banking industry. Revenues related to these services is recognized ratably over
the term of the agreement.
INVENTORIES
Inventories consist of the costs of raw materials, work-in-process and
finished goods and are carried at the lower of cost using the first-in,
first-out method or market. Labor and overhead costs are allocated to
work-in-process and finished goods inventories based on total labor and
overhead costs divided by the number of units produced.
OTHER ASSETS
Other assets consist of certain prepaid expenses and the cash value of
a life insurance policy for an officer of the Company. The cash value of the
policy was $35,822 and $32,618 at June 30, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line method.
Estimated useful lives range from 3 to 20 years.
F-26
<PAGE> 57
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulting from the acquisition of MPA Systems ("MPA") in 1987
is amortized using the straight-line method over a period of fifteen years.
Goodwill amortization for the years ended June 30, 1996 and 1995, was $667 and
$667, respectively. Accumulated amortization at June 30, 1996 and 1995 was
$6,167 and $5,500, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, and long-term debt approximate the fair values of
such financial instruments.
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest expense $ 86,922 $ 70,728
Cash paid for income taxes $ 391,013 $ 311,904
</TABLE>
F-27
<PAGE> 58
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at
June 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Inventories:
Raw materials $ 40,046 $ 94,686
Work-in-process 250,491 253,156
Finished goods 119,302 160,882
$ 409,839 $ 508,724
=========== ===========
Property and Equipment:
Building and leasehold $ 509,273 $ 509,273
Automotive 5,477 14,060
Machinery and equipment 1,198,166 1,166,459
Office equipment 112,060 109,676
MPA Equipment and fixtures 62,686 48,823
MPA Units 1,320,275 917,067
MPA Unit in construction -- 16,590
Molds in progress 3,769 3,642
----------- -----------
3,211,706 2,785,590
Less: accumulated depreciation (1,162,986) (948,938)
$ 2,048,720 $ 1,836,652
=========== ===========
Accrued liabilities:
Federal income taxes payable $ 91,218 $ 154,407
Accrued compensation 42,342 12,185
Customer damage deposits 23,060 24,145
Other 12,956 17,893
$ 169,576 $ 208,630
=========== ===========
</TABLE>
F-28
<PAGE> 59
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Term note payable to a bank; due in monthly principal and interest
installments of $7,397 through February 2000; interest at 10.24% at
June 30, 1996 and 1995; secured by equipment;
guaranteed by principal stockholder $ 207,364 $ 269,429
Term note payable to a bank; due in monthly principal and interest
installments of $1,945 through April 1999; interest at 11.31% at June
30, 1996 and 1995; secured by equipment;
guaranteed by principal stockholder 58,301 74,066
Term note payable to a bank; due in monthly principal and interest
installments of $1,673 through October 2002; interest at the lender's
prime rate plus 1% (10.25% at June 30, 1996); secured by buildings;
guaranteed by principal stockholder
93,259 --
Term note payable to a bank; due in monthly principal and interest
installments of $1,673 through October 2002; interest at the lender's
prime rate plus 1% (10.25% at June 30, 1996); secured by buildings;
guaranteed by principal stockholder
93,259 --
Term note payable to a bank; due in monthly principal and interest
installments of $1,669 through November 2002; interest at the lender's
prime rate plus 1% (10.25% at June 30, 1996); secured by buildings and
accounts receivables; guaranteed by
principal stockholder 92,843 --
Term note payable to a bank; due in monthly principal and interest
installments of $7,448 through July 1998; interest at the lender's
prime rate plus .5% (10.5% at June 30, 1996 and 9.87 % at June 30,
1995); secured by buildings; guaranteed by
principal stockholder 171,204 241,554
Term note payable to a bank; due in monthly principal and interest
installments of $825 through April 2003; interest at the lender's
prime rate plus 1% (10.25% at June 30, 1996); secured
by buildings; guaranteed by principal stockholder 49,251 --
--------- ---------
765,481 589,049
Less current portion (170,624) (120,084)
--------- ---------
Long-term portion $ 594,857 $ 464,965
========= =========
</TABLE>
F-29
<PAGE> 60
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Payments required under all long-term debt outstanding at June 30,
1996 are as follows:
Fiscal years ended June 30:
<TABLE>
<S> <C> <C>
1997 $ 170,624
1998 209,206
1999 141,279
2000 101,213
2001 57,478
Thereafter 85,681
------------------
$ 765,481
==================
</TABLE>
5. INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $295,218 $290,675
State 18,394 --
$313,612 $290,675
-------- --------
Deferred:
Federal $ 35,581 $ 7,445
State -- --
-------- --------
35,581 7,445
Tax expense $349,193 $298,120
======== ========
</TABLE>
A reconciliation of the income tax provision and the amount computed
by applying the federal statutory tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Tax expense at federal statutory rate $ 345,991 $ 292,202
State income tax provision, net of federal tax benefit 12,140 --
Permanent differences 4,037 1,380
Other (12,975) 4,538
$ 349,193 $ 298,120
========= =========
</TABLE>
F-30
<PAGE> 61
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities) are
comprised of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Gross deferred tax liability - Depreciation $(226,472) $(173,166)
--------- ---------
Inventory 21,693 11,193
Deferred income 46,075 49,050
Bonus Accrual 10,200 --
Gross deferred tax asset 77,968 60,243
Valuation allowance -- --
--------- ---------
Net deferred tax liability $(148,504) $(112,923)
========= =========
</TABLE>
6. CONTINGENCIES
An officer of the Company has alleged that the Company has breached an
oral agreement to sell the Company to the officer and has asserted a claim for
emotional distress. The Company is disputing these claims. Management believes
that the maximum loss contingency is immaterial.
7. RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 1996, a note receivable in the
amount of $671,824 resulted from a transaction between the Company and Golston
Family Partners Ltd. for the purpose of Golston Family Partners Ltd. purchasing
the MPA Modular, L.L.C. manufacturing business. The Company's shareholder and
President owns an interest in Golston Family Partners Ltd. and MPA Modular,
L.L.C. Accrued interest receivable of $42,329 is recorded at June 30, 1996. The
note bears interest at 10.25% and is scheduled for repayment, including accrued
interest, upon the sale of Golston. The note is unsecured.
8. PENDING SALE OF COMPANY
The Company's Board of Directors has approved the sale of the Company
to Integrated Security Systems, Inc. ("ISSI") effective October 24, 1996. ISSI
is purchasing all of the stock of the Company and the real estate and property
currently leased by the Company from Golston Family Partners Ltd.. These
financial statements do not reflect any adjustments arising from this pending
acquisition.
F-31
<PAGE> 62
GOLSTON COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Sales $ 2,084
Cost of sales 902
Gross margin 1,181
Operating expenses:
Selling, general and administrative 726
Income from operations 455
Other income (expense) (2)
---------
Income before income taxes 453
Income tax provision (150)
Net income $ 303
=========
</TABLE>
Note: These financial statements have been prepared on a consistent basis with
the June 30, 1996 and June 30, 1995 financial statements.
F-32
<PAGE> 63
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 .............................................. 30,000
Accounting Fees and Expenses ......................................... 20,000
Blue Sky Fees and Expenses ........................................... 2,000
Printing and Engraving Expenses ...................................... 100
-------
Total ....................................................... $76,328
=======
</TABLE>
II-1
<PAGE> 64
Item 26. Recent Sales of Unregistered Securities
The following table specifies securities sold by the Registrant within
the past three years and not registered under the Securities Act of 1933. All
such sales were carried out in reliance on the exemption 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>
CONSIDERATION UNDERWRITING DISCOUNT
DATE SOLD TITLE AND AMOUNT OF SECURITIES PURCHASER RECEIVED OR COMMISSIONS PAID
- - -------------- -------------------------------------- ---------------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
October 1993 Warrants to purchase 80,000 The Equity Group, Inc. Investor relation
shares of Common Stock services
September-
November 1994 Promissory Notes and warrants to Accredited bridge financial An aggregate of
purchase 211,800 shares of Common investors $1,059,000
Stock
October 1995-
March 1996 Warrants to purchase 105,677 A group of 9 investors Extension of loan
shares of Common Stock terms
December 1995 45,000 shares of Common Stock Managerial Resources, Inc. Financial advisory
and warrants to purchase 28,000 and Steffany Lea Martin services
shares of Common Stock
January 1996 34,168 Series B Convertible A group of 11 accredited Conversion of an
Preferred Stock and warrants to investors primarily consisting aggregate of $683,000
purchase 136,669 shares of Common of officers and directors owed by the Company
Stock
January 1996 Warrants to purchase 13,201 Philip R. Thomas Consulting services
shares of Common Stock
March 1996 Warrants to purchase 326,000 Bathgate McColley Capital Investment banking
shares of Common Stock Group LLC fees
March 1996 Warrant to purchase 100,000 shares ComVest Partners Placement Agent fee
of Common Stock
March 1996 15,000 shares of Common Stock Louis A. Davis Shares of Tri-Coastal
Systems, Inc.
March 1996 15,000 shares of Common Stock Henry E. McGuffee Shares of Tri-Coastal
Systems, Inc.
March 1996 15,000 shares of Common Stock Michael A. Richmond Shares of Tri-Coastal
Systems, Inc.
March 1996 800,000 Shares of Common Stock and Seabeach & Co. $800,000 $40,000
warrants to purchase 320,000 shares
of Common Stock
March-May 1996 47,968 Series A Convertible A group of 38 accredited $640,000 $78,000
Preferred Stock and warrants to investors
purchase 381,344 shares of Common
Stock
June 1996 12,500 Series C Convertible A group of 5 investors $250,000
Preferred Stock and warrants to including an officer
purchase 187,500 shares of Common and director
Stock
July-September Warrant to purchase 70,000 I.S.T. Partners,Ltd. R&D Partnership
1996 shares of Common Stock
December 31, Convertible Debentures (9%) Renaissance Capital Fund $4,600,000
1996
December 31, 600,000 shares of Common Stock ProFutures Special Equity $600,000 $60,000
1996 Fund
</TABLE>
II-2
<PAGE> 65
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, or have been previously
filed with this registration statement.
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.
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.
II-3
<PAGE> 66
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).
II-4
<PAGE> 67
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).
10.63 Stock Purchase Agreement, dated November 7, 1996, between the
Company and S. Webb Golston.
10.64 Subscription Agreement, dated December 31, 1996, between the
Company and ProFutures Special Equity Fund, L.P.
10.65 Convertible Loan Agreement, dated December 31, 1996, between
the Company (and its subsidiaries) and Renaissance Capital
Growth & Income Fund III, Inc. and Renaissance US Growth &
Income Trust PLC.
10.66 Management Agreement, dated August 29, 1996, between the
Company and I.S.T. Partners, Ltd.
10.67 Marketing and Development Agreement, dated July 29, 1996,
between the Company, IST, and I.S.T. Partners, Ltd.
10.68 Employment Agreement, dated January 2, 1997, between Gerald
K. Beckmann and the Company.
10.69 Employment Agreement, dated January 2, 1997, between James W.
Casey and the Company.
10.70 Real Estate Purchase Agreement, dated September 5, 1996,
between the Company and Golston Family Partners, Ltd.
*11.1 Computation of earnings per share.
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).
- - -------------------
* Filed herewith.
(b) Reports filed on Form 8-K.
Form 8-K, filed January 10, 1997, reporting the acquisition of
GCI.
Form 8-K/A, filed March 11, 1997, reporting the acquisition of
GCI, together with financial statements.
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-5
<PAGE> 68
(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.
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 (ss.ss. 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> 69
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 April 23, 1997.
INTEGRATED SECURITY SYSTEMS, INC.
By: /s/ GERALD K. BECKMANN
--------------------------------------
Gerald K. Beckmann
President and Chief Executive Officer
II-7
<PAGE> 70
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 April 23, 1997.
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/ FRANK R. MARLOW
------------------------------------------
Frank R. Marlow
Director
II-8
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Page
-------------- ----
<S> <C> <C>
11.1 Computation of earnings per share.
23.1 Consent of Price Waterhouse LLP.
</TABLE>
II-9
<PAGE> 1
Exhibit 11.1
Statement related to computation of per common share earnings.
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
PRIMARY AND FULLY DILUTED:
Shares and share equivalents:
Weighted average number of shares of common stock
outstanding during period 5,122,878 3,506,488
Add incremental shares:
Shares potentially issuable upon the assumed exercise
of the stock options, net of assumed repurchases using
the Treasury Stock Method -- 507,620
Total 5,122,878 4,014,108
Net earnings (loss) from continuing operations $ (299) $ (1,650)
Net earnings (loss) from discontinued operations 22 (1,215)
----------- -----------
Net earnings (loss) $ (277) $ (2,864)
=========== ===========
Per share continuing operations $ (.05) $ (0.41)
Per share discontinued operations -- $ (0.30)
----------- -----------
Per share $ (.05) $ (0.71)
=========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Amendment No. 3 to the Registration Statement on Form SB-2 of our report
dated February 18, 1997 relating to the consolidated financial statements of
Integrated Security Systems, Inc., and our report dated September 30, 1996
relating to the financial statements of Golston Company, Inc., which appear in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
April 23, 1997
