<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Paid).
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required).
For Fiscal Year Ended June 30, 1997
Commission File Number: 1-11900
INTEGRATED SECURITY SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2422983
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TEXAS 75063 (972) 444-8280
(Address including zip code, area code and telephone number of
Registrant's executive offices.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ----------------------------- -----------------------------------------
Common stock, $.01 par value Boston Stock Exchange
Warrants for common stock Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $6,470,842
As of September 19, 1997, 8,039,825 shares of the Registrant's common stock
were outstanding and 1,450,000 warrants were outstanding.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: as of September 19, 1997, $13,098,000. This amount was computed by
reference to the average close price of registrant's common stock.
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TABLE OF CONTENTS
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Item No. Page
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Part I
1. Description of Business 3-5
2. Description of Properties 5
3. Legal Proceedings 6
Part II
5. Market for Company's Common Equity and Related Stockholder Matters 6-7
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
7. Financial Statements 12-32
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 33
10. Executive Compensation 33
11. Security Ownership of Certain Beneficial Owners and Management 33
12. Certain Relationships and Related Transactions 33
Part IV
13. Exhibits, Lists and Reports on Form 8-K 33-35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Integrated Security Systems, Inc. ("ISSI" or 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 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.
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to June 30. References to fiscal years 1996 and earlier refer to
the twelve months ended December 31 of such year. References to fiscal 1997
refer to the six month transition period ended June 30, 1997.
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
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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 Innovative
Security Technologies, Inc. ("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. IST continues to expand its sales activities to include
leveraged channel distribution as well as its own direct sales force. IST's
strategy is to exploit industry outsourcing trends by proliferating sales of
its proprietary Intelli-Site integrated turnkey system to end users through
multiple distribution channels.
In 1993, IST began developing and testing a proprietary hardware and
software product called Intelli-Site, a user-defined, PC-based systems
integration platform. The two industry-unique features of Intelli-Site are its
ability to integrate any vendor's security devices or subsystem (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.
Pneumatic Carriers: Golston Company, Inc. ("GCI")
GCI manufactures and sells a variety of products, primarily to the retail
banking and healthcare 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
million at June 30, 1997. The Company expects that the majority of this backlog
will be filled during the second half of 1997 and the first half of 1998.
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."
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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 EFT 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 dedicated to research,
development and product engineering. During fiscal 1995 and 1996, and the first
six months of 1997, the Company spent approximately $292,000, $152,239, and
$34,138, respectively, on research and development, primarily related to the
development of Intelli-Site.
COMPETITION
Many large system integration consultants and engineering firms compete
directly with the Company for large security contracts. Large, complex projects
usually receive bids for the design of a custom system, or multiple
side-by-side systems, to meet their requirements. System integrators bid these
design contracts not only for the design effort but also to place themselves in
a most favored position to become the prime contractor during the
implementation phase. During the design phase, system integrators survey the
market for components of the specified system and define how they can be
integrated together. Finally, if awarded the implementation phase, the system
integrator acts as a prime contractor and subcontracts the component suppliers,
and supervises the integration.
Depending on the contract, the Company will either become a subcontractor
for the majority of the systems or bid the project as a vertically integrated
system integrator and prime contractor. By combining both the first and second
phase into a proposal from a single vendor, the Company eliminates several
third party profit tiers and can reduce the time and overall costs to the
customer.
The Company faces intense competition in the security industry. Certain of
the Company's competitors are large, well-financed and established companies
that have greater name recognition and resources for research and development,
manufacturing and marketing than the Company has and, therefore, may be better
able than the Company to compete for a share of the market.
EMPLOYEES
As of June 30, 1997, the Company employed 89 people, all in full-time
positions. None of the Company's employees is subject to collective bargaining
agreements. The Company believes that relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
B&B owns its manufacturing and office facility in Norwood, Louisiana. This
facility consists of approximately 26,000 square feet of manufacturing and
office space on five acres of land. 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 December 31, 1997, with monthly rent of $6,790, plus
the costs of utilities, property taxes, insurance, repair/maintenance expenses
and common area utilities.
The Company believes that the properties, equipment, fixtures and other
assets of the Company located within the Company's facilities are adequately
insured against loss, that suitable alternative facilities are readily
available if the lease agreements described above are not renewed, and that its
existing facilities are adequate to meet current requirements.
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ITEM 3. 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.
PART II
ITEM 5. 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 June 30, 1997,
there were 7,905,212 shares of Common Stock outstanding and 1,450,000 IPO
Warrants outstanding entitling holders to purchase 3,045,000 shares of Common
Stock. 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.
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Common Stock Warrants
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$ High $ Low $ High $ Low
<S> <C> <C> <C> <C>
Fiscal 1997
First Quarter 3 1/2 1 3/16 1 5/8 15/16
Second Quarter 2 3/16 11/4 1 5/16 11/16
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
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On September 19, 1997, the last reported sales prices for the Common Stock
and the IPO Warrants as reported on the Nasdaq Small Cap Market were $2.31 and
$1.19, respectively.
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.
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DATE SOLD TITLE AND AMOUNT OF SECURITIES PURCHASER CONSIDERATION RECEIVED UNDERWRITING
--------- ------------------------------ --------- ---------------------- DISCOUNTS
------------
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September-November Promissory Notes and Accredited bridge An aggregate of
1994 warrants to purchase financial investors $1,059,000
211,800 shares of Common
Stock
October 1995- Warrants to purchase A group of 9 investors Extension of loan
March 1996 105,677 shares of Common terms
Stock
December 1995 45,000 shares of Common Managerial Resources, Financial advisory
Stock and warrants to Inc. and Steffany Lea services
purchase 28,000 shares of Martin
Common Stock
January 1996 34,168 Series B Convertible A group of 11 Conversion of an
Preferred Stock and accredited investors aggregate of $683,000
warrants to purchase primarily consisting of owed by the Company
136,669 shares of Common officers and directors
Stock
January 1996 Warrants to purchase 13,201 Philip R. Thomas Consulting services
shares of Common Stock
March 1996 Warrants to purchase Bathgate McColley Investment banking
326,000 shares of Common Capital Group LLC fees
Stock
March 1996 Warrant to purchase 100,000 ComVest Partners Placement Agent fee
shares of Common Stock
March 1996 15,000 shares of Common Louis A. Davis Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 15,000 shares of Common Henry E. McGuffee Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 15,000 shares of Common Michael A. Richmond Shares of Tri-Coastal
Stock Systems, Inc.
March 1996 800,000 Shares of Common Seabeach & Co. $800,000 $40,000
Stock and warrants to
purchase 320,000 shares of
Common Stock
March-May 1996 47,968 Series A Convertible A group of 38 $640,000 $78,000
Preferred Stock and accredited investors
warrants to purchase
381,344 shares of Common
Stock
June 1996 12,500 Series C Convertible A group of 5 investors $250,000
Preferred Stock and including an officer
warrants to purchase and director
187,500 shares of Common
Stock
July-September 1996 Warrant to purchase 70,000 I.S.T. Partners, Ltd. R&D Partnership
shares of Common Stock
December 31, 1996 Convertible Debentures (9%) Renaissance Capital Fund $4,600,000
December 31, 1996 600,000 shares of Common ProFutures Special $600,000 $60,000
Stock Equity Fund
</TABLE>
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Incorporated 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").
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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, 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. 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.
On 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
pneumatic 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 real estate and facilities occupied by GCI were also acquired for an
additional $1.5 million in cash. 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. During fiscal 1997, the Company recorded
additional acquisition costs and non-compete agreements of $691,745.
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to June 30. References to fiscal years 1996 and earlier refer to
the twelve months ended December 31 of such year. References to fiscal 1997
refer to the six month transition period ended June 30, 1997.
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 Company is a Delaware corporation.
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
IST. In exchange, the Partnership will receive, as compensation from IST, 85%
of the revenue generated from IST's Intelli-Site sales until the Partnership
has achieved at least a 150% return on its investment. After such time, the
Partnership will dissolve. 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 June 30, 1997, the
Partnership had not received any return on its investment. Also, during the
year ended December 31, 1996, the Company received $250,000 from the
Partnership related to the Partnership's purchase of sales leads and prospects.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This
statement establishes a new methodology for reporting earnings per share for
interim financial information and annual financial statements with periods
ending after December 15, 1997. For the six months ended June 30, 1997 and the
years ended December 31, 1996 and 1995, the pro forma basic and diluted loss
per share amounts calculated assuming adoption of this statement would be the
same as the loss per share presented on the consolidated statements of
operations.
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RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Sales. The Company's sales increased by $2.3 million (55%) from $4.2
million during the six months ended June 30, 1996 to $6.5 million during the
six months ended June 30, 1997. The increase was primarily attributable to the
inclusion of GCI, acquired on December 31, 1996, for the six months ended June
30, 1997, with no equivalent revenue during the comparable 1996 period. Also
contributing to the increase were sales at TCSI and IST during the six months
ended June 30, 1997, due to larger contracts and increased business.
For the six months ended June 30, 1997, approximately 74% of the Company's
revenues were generated from the sale of products manufactured by the Company
compared to 78% for the comparable six month period during 1996.
Cost of Sales and Gross Margin. Gross margin as a percent of sales
increased to 42% from 38% for the six months ended June 30, 1997 and 1996,
respectively. This increase was primarily due to a favorable change in the
Company's product mix compared to the prior year. With the inclusion of GCI
results during the six months ended June 30, 1997, the Company experienced
higher sales of products manufactured by the Company, which have higher gross
margins. The Company also incurred $63,691 in software cost amortization during
each of the 1997 and 1996 periods.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $2.7 million during the six months ended June 30, 1997
from $1.8 million during the comparable 1996 period. The increase was primarily
attributable to the inclusion of GCI expenses during the six months ended June
30, 1997.
Research and Development. Research and development expenses decreased from
$152,239 in fiscal 1996 to $34,138 in fiscal 1997. This decrease was due
primarily to the completion of the initial development of Intelli-Site.
Interest Expense. Interest expense increased to $389,540 during the six
months ended June 30, 1997 from $174,215 during the comparable 1996 period due
to the financing related to the acquisition of GCI.
Gain on sale of assets. The Company recorded a $23,408 gain on the sale of
assets during the six months ended June 30, 1997, primarily from the sale of
modular buildings at GCI.
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. 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 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 GCI; 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 91% of the deferred
tax asset as of June 30, 1997. 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.
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 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.
Page 9 of 43
<PAGE> 10
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 Margin. Gross margin 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. 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 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 GCI; 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased by $483,300 during the six months
ended June 30, 1997. The Company used $95,195 of cash for operations during
this period.
During the six months ended June 30, 1997, the Company financed its
continuing operations from long-term borrowings of $816,291 and operations. The
Company used $193,277 to pay principal on indebtedness and $101,798 to secure
financing.
Page 10 of 43
<PAGE> 11
The Company's $1.4 million factoring facility with Union Planters Bank,
Baton Rouge, Louisiana, expired on August 15, 1997. The Company is currently
negotiating a $300,000 line of credit with the same institution to replace this
facility, which had not been utilized since the fourth quarter of 1996.
On April 11, 1997, GCI entered into a $1.95 million financing arrangement
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 48 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 financing arrangement
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 committed to purchase additional modular buildings and
toolmaking machinery at its GCI subsidiary during fiscal 1998. The total amount
of the investment is anticipated to be approximately $800,000, funded through a
combination of secured debt, equipment leasing and working capital.. During the
six months ended June 30, 1997, the Company acquired $149,549 of property and
equipment and received proceeds of $135,953 from the sale of property during
the period.
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 quarter
ended March 31 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.
Page 11 of 43
<PAGE> 12
INTEGRATED SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS Page
-------------------- ----
<S> <C>
Report of Independent Accountants................................................................................13
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995...................................14
Consolidated Statements of Operations for the six months ended June 30, 1997
and for the years ended December 31, 1996 and 1995...............................................................15
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995........................16
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995........................17
Notes to Consolidated Financial Statements....................................................................18-32
</TABLE>
Page 12 of 43
<PAGE> 13
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 subsidiaries (the "Company") at June 30,
1997 and December 31, 1996 and 1995, and the results of their operations and
their cash flows for the six month period ended June 30, 1997 and the years
ended December 31, 1996 and 1995 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
August 8, 1997
Page 13 of 43
<PAGE> 14
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
ASSETS ------------------ ----------------- ------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,581,191 $ 1,097,891 $ 209,655
Accounts receivable, net of allowance for doubtful
accounts of $54,733, $65,687 and $54,555, 2,457,596 2,629,909 1,761,701
respectively
Inventories 867,898 1,086,985 854,888
Restricted cash 54,928 8,232 157,851
Other current assets 312,234 193,960 15,831
Net assets from discontinued operations -- 25,760 76,807
------------------ ----------------- ------------------
Total current assets 5,273,847 5,042,737 3,076,733
Property and equipment, net 5,278,689 5,502,284 1,068,123
Intangible assets, net 2,283,970 1,598,632 136,116
Capitalized software development costs, net 493,350 591,505 787,816
Deferred income taxes 205,384 205,384 205,384
Other assets 18,295 31,325 33,333
------------------ ----------------- ------------------
Total assets $ 13,553,535 $ 12,971,867 $ 5,307,505
================== ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 690,712 $ 881,221 $ 1,308,650
Accrued liabilities 672,340 691,208 1,041,567
Deferred revenue 116,028 209,296 152,948
Notes payable -- 8,080 950,947
Notes payable to related parties -- 7,110 29,437
Current portion of long-term debt
and other liabilities 495,737 213,975 96,451
Net liabilities from discontinued operations -- 49,252 332,866
------------------ ----------------- ------------------
Total current liabilities 1,974,817 2,060,142 3,912,866
------------------ ----------------- ------------------
Long-term debt and other liabilities 7,630,956 6,784,582 213,899
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares
authorized; 17,250, 59,168 and 34,166 shares,
respectively, issued and outstanding 172 591 342
Common stock, $.01 par value, 30,000,000 shares
authorized; 7,955,212, 6,958,842 and 3,730,738
shares, respectively, issued; and 7,905,212,
6,908,842 and 3,680,738 shares, respectively,
outstanding 79,552 69,588 37,307
Additional paid in capital 10,523,546 10,382,215 7,191,575
Accumulated deficit (6,536,758) (6,206,501) (5,929,734)
Treasury stock, 50,000 shares (118,750) (118,750) (118,750)
------------------ ----------------- ------------------
Total stockholders' equity 3,947,762 4,127,143 1,180,740
------------------ ----------------- ------------------
Total liabilities and stockholders' equity $ 13,553,535 $ 12,971,867 $ 5,307,505
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 14 of 43
<PAGE> 15
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
June 30, December 31,
------------------------------------- -------------------------------------
1997 1996 1996 1995
---------------- ----------------- ---------------- -----------------
Unaudited
<S> <C> <C> <C> <C>
Sales $ 6,470,842 $ 4,225,419 $ 9,054,145 $ 7,622,219
Cost of sales 3,772,714 2,617,433 5,184,321 4,200,723
---------------- ----------------- ---------------- -----------------
Gross margin 2,698,128 1,607,986 3,869,824 3,421,496
Operating expenses:
Selling, general
and administrative 2,643,134 1,809,271 3,776,798 4,634,963
Research and product
development 34,138 108,611 152,239 46,199
---------------- ----------------- ---------------- -----------------
2,677,272 1,917,882 3,929,037 4,681,162
---------------- ----------------- ---------------- -----------------
Income (loss) from operations 20,856 (309,896) (59,213) (1,259,666)
Other income (expense):
Interest income 15,900 5,805 7,748 14,957
Interest expense (389,540) (174,215) (260,471) (343,012)
Gain on sale of assets 23,408 -- -- --
Other 6,132 5,686 389 209
---------------- ----------------- ---------------- -----------------
Loss from continuing operations
before income taxes (323,244) (472,620) (311,547) (1,587,512)
(Provision) benefit for income taxes (7,013) 14,326 11,991 (62,102)
---------------- ----------------- ---------------- -----------------
Loss from continuing operations (330,257) (458,294) (299,556) (1,649,614)
Discontinued operations:
Loss from discontinued
operations -- -- -- (720,043)
Gain (loss) on disposal of
discontinued operations -- 22,789 22,789 (494,562)
---------------- ----------------- ---------------- -----------------
Income (loss) from
discontinued operations -- 22,789 22,789 (1,214,605)
---------------- ----------------- ---------------- -----------------
Net loss $ (330,257) $ (435,505) $ (276,767) $(2,864,219)
================ ================= ================ =================
Weighted average common and
common equivalent shares
outstanding 7,188,764 7,615,087 5,122,878 4,014,108
Net loss per share:
Continuing operations $ $ $ (0.05) $
(0.05) (0.06) (.41)
Discontinued operations -- -- -- (.30)
---------------- ----------------- ---------------- -----------------
Total $ (0.05) $ (0.06) $ (0.05) $ (.71)
================ ================= ================ =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 15 of 43
<PAGE> 16
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, -- $ -- 3,519,290 $ 35,192 $ 6,047,883 $(3,065,515) $ (144,062) $ --
1994
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, 34,166 $ 342 3,730,738 $ 37,307 $ 7,191,575 $(5,929,734) $ -- $(118,750)
1995
Preferred stock issuance 60,168 601 1,050,169
Preferred stock (35,166) (352) 1,039,919 10,399 (10,047)
conversion
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, 59,168 $ 591 6,958,842 $ 69,588 $10,382,215 $(6,206,501) $ -- $(118,750)
1996
Preferred stock (41,918) (419) 928,370 9,284 (8,864)
conversion
Warrant issuance 80,000
Warrant exercise 68,000 680 70,195
Net loss (330,257)
======== ========= ========== ========== ============ ============= ============ ===========
Balance at June 30, 1997 17,250 $ 172 7,955,212 $79,552 $10,523,546 $(6,536,758) $ -- $(118,750)
======== ========= ========== ========== ============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 16 of 43
<PAGE> 17
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------------- --------------------------------------
1997 1996 1995
-------------------------- ----------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (330,257) $ (276,767) $ (2,864,219)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Depreciation 277,476 189,042 175,428
Amortization 206,360 358,295 345,533
Bad debt expense -- 18,976 17,096
Provision for warranty reserve 69,300 188,344 137,700
Provision for inventory reserve -- 4,601 17,909
Deferred revenue (93,268) 56,348 152,948
Gain on sale of assets (23,408) -- --
Other non-cash expenses (income) 163,610 (173,281) 24,521
Net change in assets and liabilities from
discontinued operations (29,821) (184,100) 1,018,324
Changes in operating assets and liabilities,
net of effects from acquisition of Golston
Company, Inc.:
Accounts receivable 153,567 (543,992) 459,212
Inventories 214,586 81,006 (112,328)
Restricted cash (46,696) 149,619 (157,851)
Other assets (189,744) (109,045) 227,939
Accounts payable (190,509) (344,141) 806,872
Accrued liabilities (276,391) (605,766) 471,762
----------------------- ----------------- ------------------
Net cash (used) provided by
operating activities (95,195) (1,190,861) 720,846
----------------------- ----------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment (149,549) (96,983) (52,416)
Sale of property and equipment 135,953 5,000 --
Intangible assets -- (71,951) --
Capitalized software costs -- -- (245,799)
Acquisition of Golston Company, Inc. -- (4,851,406) --
----------------------- ----------------- ------------------
Net cash used by investing activities (13,596) (5,015,340) (298,215)
----------------------- ----------------- ------------------
Cash flows from financing activities:
Issuance of preferred stock, net -- 687,406 --
Payments on line of credit -- -- (847,317)
Issuance of common stock, net 70,875 1,863,487 143,738
Payments on debt and other liabilities (193,277) (1,459,051) (151,373)
Proceeds from notes payable and long-term debt 816,291 6,012,545 278,417
Loan origination fees (101,798) (9,950) (1,946)
----------------------- ----------------- ------------------
Net cash provided (used) by
financing activities 592,091 7,094,437 (578,481)
----------------------- ----------------- ------------------
Increase (decrease) in cash and cash equivalents 483,300 888,236 (155,850)
Cash and cash equivalents at beginning of period 1,097,891 209,655 365,505
======================= ================= ==================
Cash and cash equivalents at end of period $ 1,581,191 $ 1,097,891 $ 209,655
======================= ================= ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 17 of 43
<PAGE> 18
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Integrated Security Systems, Inc. ("ISSI" or the "Company") was formed
in December 1991 to leverage highway traffic control and security core
businesses into turnkey security solutions for "middle market"
commercial and industrial businesses. The middle market is defined as
commercial, industrial and institutional companies or government
agencies which budget $50,000 to $600,000 annually to meet their
security needs. The two types of security targeted by ISSI are asset
protection and personal safety.
In order to provide turnkey security solutions to the middle market,
several key operating components and technologies have been vertically
integrated into the Company. To date, ISSI created internally, or
acquired, a gate and barrier engineering and manufacturing facility, B&B
Electromatic, Inc. ("B&B"), a 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 healthcare industries, Golston
Company, Inc. ("GCI"). The operations of Automatic Access Controls, Inc.
("AAC"), a 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.
CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to June 30. References to fiscal years 1996 and earlier
refer to the twelve months ended December 31 of such year. References to
fiscal 1997 refer to the six month transition period ended June 30,
1997.
CASH AND CASH EQUIVALENTS
Cash is comprised of highly liquid instruments with maturities of three
months or less. At June 30, 1997, restricted cash of $54,928 was related
to a letter of credit obtained to secure a surety bond. 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, of $1,818,385 at June 30, 1997, resulted from the acquisitions
of TCSI and GCI and is amortized using the straight-line method over
periods of ten and twenty years, respectively. Amortization expense for
goodwill for the six months ended June 30, 1997 was $52,883.
Amortization expense for goodwill for the years ended December 31, 1996
and 1995 was $26,797 and $1,144, respectively.
Page 18 of 43
<PAGE> 19
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Loan origination fees, of $111,725 at June 30, 1997, were incurred to
secure financing. These fees are being amortized using the straight-line
method over a period of five years. Amortization expense for the six
months ended June 30, 1997 was $6,329. Amortization expense for the
years ended December 31, 1996 and 1995 was $0 and $156,319,
respectively.
Non-compete agreements were executed in conjunction with the GCI
acquisition. These are being amortized using the straight-line method
over a period of five years. Amortization expense and interest expense
for the six months ended June 30, 1997 was $48,993 and $13,406,
respectively. There was no amortization expense or interest expense
related to such agreements during the years ended December 31, 1996 and
1995.
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." 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 either the time of shipment
or by percentage of completion for installations of security systems.
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 during the six months
ended June 30, 1997 or the years ended December 31, 1996 and 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."
The Company began amortizing its capitalized software costs in 1996
using the straight-line method over a period of five years. Amortization
expense for the six months ended June 30, 1997 and the year ended
December 31, 1996 was $63,691 and $127,381, respectively. Accumulated
amortization at June 30, 1997 and December 31, 1996 was $191,072 and
$127,381, respectively.
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 six months ended June 30, 1997, $34,464
was recorded as amortization expense. Amortization expense for the years
ended December 31, 1996 and 1995 was $68,930 and $57,426, respectively.
Accumulated amortization was $202,484 at June 30, 1997 and $168,020 and
$99,090, respectively, at December 31, 1996 and 1995.
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.
Page 19 of 43
<PAGE> 20
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NET LOSS PER SHARE
Net loss per common share for each period is computed using the weighted
average number of common and common equivalent shares outstanding during
the respective periods.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financing Accounting Standards No. 128, "Earnings Per
Share." This statement establishes a new methodology for reporting
earnings per share for interim financial information and annual
financial statements issued with periods ending after December 15, 1997.
For the six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, the pro forma basic and diluted loss per share amounts
calculated assuming adoption of this statement would have been the same
as the loss per share amounts presented on the consolidated statements
of operations.
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.
STATEMENTS OF CASH FLOWS
Supplemental cash flow information for the six months ended June 30,
1997 and the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest expense $ 344,540 $ 153,428 $ 295,469
Cash paid for income taxes $ 10,000 $ 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 1997 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 will receive, as
compensation from IST, 85% of the revenue generated from IST's
Intelli-Site sales until the partnership has achieved at least a 150%
return on its investment. After such time, the partnership will
dissolve. 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 June 30, 1997, the
partnership had not received any return on its investment. Also, during
the year ended December 31, 1996, the Company received $250,000 from the
partnership related to the partnership's purchase of sales leads and
prospects.
Page 20 of 43
<PAGE> 21
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 healthcare 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 was recorded as goodwill, and is being
amortized using the straight-line method over a period of 20 years.
During the six months ended June 30, 1997, intangible assets related to
this acquisition increased by $691,745 to $2,011,373 related to
additional acquisition costs and non-compete agreements. 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, which is being amortized using the straight-line
method over a period of ten years.
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Inventories:
Raw materials $ 506,539 $ 714,106 $ 586,237
Work-in-process 313,940 267,015 223,052
Finished goods 47,419 105,864 45,599
-------------------- --------------------- ---------------------
$ 867,898 $ 1,086,985 $ 854,888
==================== ===================== =====================
Property and Equipment:
Land $ 939,264 $ 905,264 $ 5,264
Building 1,177,168 1,177,168 577,168
Rental Units 2,234,089 2,311,033 --
Leasehold improvements 48,769 48,769 48,769
Office furniture and equipment 767,416 855,002 575,257
Manufacturing equipment 3,048,288 2,952,930 533,167
Vehicles 39,919 48,503 68,304
Construction 153,425 153,425 153,425
-------------------- --------------------- ---------------------
8,408,338 8,452,094 1,961,354
Less: accumulated depreciation (3,129,649) (2,949,810) (893,231)
-------------------- --------------------- ---------------------
$ 5,278,689 $ 5,502,284 $ 1,068,123
==================== ===================== =====================
</TABLE>
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 expired August 15, 1997, had an adjustable factoring
fee of 3%, and had a maximum borrowing amount of $1.4 million. At June
30, 1997, $0 of this facility was utilized. At December 31, 1996 and
1995, respectively, $36,413 and $1,103,275 was utilized,
Page 21 of 43
<PAGE> 22
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$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.
On April 11, 1997, the Company secured a $500,000 revolving line of
credit facility from an unrelated third party. There are no principal
payment requirements on the line of credit; however, interest is due
monthly at Citibank's prime rate plus 1.75% based on the average daily
borrowings during the prior month. In addition, a fee equal to 1/2% of
the line of credit facility is due annually. As of June 30, 1997, the
Company had not drawn against this line of credit.
NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <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 to a bank due on June 24, 1996;
interest at 11%; secured by second mortgage
on real estate -- -- 150,000
Notes 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 to unrelated individual
investor; no interest; due in one lump sum
payment in January 1997 -- 8,080 --
Note payable, due on April 1, 1996; interest
at 3.3% -- -- 7,016
-------- -------- --------
$ -- $ 8,080 $950,947
======== ======== ========
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of the following:
June 30, December 31, December 31,
1997 1996 1995
-------- -------- --------
Notes payable to an employee; due in
monthly principal and interest
installments of $2,412 through March 1997;
interest at 10.53% $ -- $ 7,110 $ 25,437
Note payable to an officer; due upon
demand; no interest -- -- 4,000
-------- -------- --------
$ -- $ 7,110 $ 29,437
======== ======== ========
</TABLE>
Page 22 of 43
<PAGE> 23
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt and other liabilities consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
---------------- -------------------- --------------------
<S> <C> <C> <C>
Convertible note payable to unrelated
funds; 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 ISSI and all
subsidiaries. The outstanding balance
of the note can be converted into
ISSI's common stock based upon $1.05
per share. At June 30, 1997, the
Company is not in compliance with the
Debt Service Coverage financial
standard under this agreement. The
Company has obtained a waiver related
to this non-compliance $ 4,600,000 $ 4,600,000 $ --
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 1,434,609 1,500,000 --
Term note payable to a bank; due in
monthly principal and interest
installments of $12,000 through
November 2000; interest at the
lender's prime rate less 1% (10% at
June 30, 1997 and December 31, 1996);
secured by first mortgage on real
estate and equipment; personally
guaranteed by an officer 834,904 864,865 --
Term note payable to an unrelated
third party; due in monthly principal
installments of $12,917 plus interest
through April 2002; interest at
Citibank's Base Rate plus 2% (10.5%
at June 30, 1997); secured by certain
assets of the Company; guaranteed by
ISSI 744,767 -- --
Non-compete agreements to prior
owners of GCI; due in equal monthly
installments of $8,166 plus interest
at 10% through January 2002 440,940 -- --
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); guaranteed by principal stockholder -- -- 234,365
</TABLE>
Page 23 of 43
<PAGE> 24
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
---------------- -------------------- --------------------
<S> <C> <C> <C>
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
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
30,598 33,692 --
Term note payable to an unrelated
third party; interest at Citibank's
Base Rate plus 2% (10.5% at June 30,
1997) due in monthly installments
through April 2002; no principal
installments due until May 1998;
secured by equipment
30,422 -- --
Term note payable to a bank; due in
monthly principal and interest
installments of $497 through April
1999; interest at 9%; secured by
equipment
10,453 -- --
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
---------------- -------------------- --------------------
8,126,693 6,998,557 310,350
Less current portion (495,737) (213,975) (96,451)
================ ==================== ====================
Long-term portion $7,630,956 $ 6,784,582 $ 213,899
================ ==================== ====================
</TABLE>
Page 24 of 43
<PAGE> 25
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Payments required under long-term debt and other liabilities outstanding
at June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 495,737
1999 572,301
2000 1,098,431
2001 1,663,537
2002 972,806
Thereafter 3,323,881
====================
$ 8,126,693
====================
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended For the Year Ended
June 30, 1997 December 31, 1996 December 31, 1995
-------------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 7,013 (11,991) 62,102
-------------------------- ----------------------- ------------------------
$ 7,013 $ (11,991) $ 62,102
-------------------------- ----------------------- ------------------------
Deferred:
Federal $ -- $ -- $ --
State -- -- --
-------------------------- ----------------------- ------------------------
-- -- --
========================== ======================= ========================
Tax expense (benefit) $ 7,013 $ (11,991) $ 62,102
========================== ======================= ========================
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory benefit rate to loss before income taxes
are as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
------------------ --------------------- ---------------------
<S> <C> <C> <C>
Federal statutory benefit rate (34%) (34%) (34%)
State income tax provision,
net of federal tax benefit 2% (4%) 4%
Installment sale gain -- -- 2%
Net operating loss not benefited 32% 24% 31%
Non-deductible amortization and other 2% 10% 1%
------------------ --------------------- ---------------------
2% (4%) 4%
================== ===================== =====================
</TABLE>
Page 25 of 43
<PAGE> 26
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED 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:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
------------------ -------------------- ---------------------
<S> <C> <C> <C>
Amortization $ (188,372) $ (213,196) $ (39,915)
Depreciation (1,994) (964) --
------------------ -------------------- ---------------------
Gross deferred tax liability (190,366) (214,160) (39,915)
------------------ -------------------- ---------------------
Non-compete covenant 14,711 -- --
Litigation reserve -- 6,047 57,120
Depreciation -- -- 3,343
Warranty reserve 37,830 31,609 24,733
Bad debt reserve 40,131 43,855 49,970
Net operating loss carryforward 2,278,571 2,205,531 1,895,091
------------------ -------------------- ---------------------
Gross deferred tax asset 2,371,243 2,287,042 2,030,257
------------------ -------------------- ---------------------
Net deferred tax asset 2,180,877 2,072,882 1,990,342
Valuation allowance (1,975,493) (1,867,498) (1,784,958)
------------------ -------------------- ---------------------
Net deferred tax asset $ 205,384 $ 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 an unused net operating
loss carryforward of $6.7 million at June 30, 1997. At December 31, 1996
and 1995, the Company had unused net operating loss carryforwards of
$6.5 million and $5.6 million, respectively. These carryforwards begin
to expire in the year 2007. The Company increased the valuation
allowance each year 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.
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 fiscal years subsequent to June 30,
1997 under capital and non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
-----------------------
<S> <C>
1998 $ 40,352
1999 12,331
2000 7,133
2001 --
2002 --
-----------------------
Total minimum payments $ 59,816
=======================
</TABLE>
Rent expense for operating leases was $46,360 for the six months ended
June 30, 1997. For the years ended December 31, 1996 and 1995, rent
expense for operating leases was $103,253 and $85,836, respectively.
Under a five year license agreement dated March 16, 1993, the Company
has committed to pay DesignTech, Inc. a royalty of 1% of revenues
derived from products using the licensed technology. To date, no
royalties have been paid.
Page 26 of 43
<PAGE> 27
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 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 product. 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. The unamortized balance was $47,516 at June 30, 1997.
At December 31, 1996 and 1995, the unamortized balance was $81,980 and
$150,910, respectively.
10. DISCONTINUED OPERATIONS
During the second quarter of 1995, the Company adopted a plan to
discontinue the operations of AAC. 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. At June 30, 1997, current assets and
current liabilities related to this action were not material. Current
assets and current liabilities totaled $25,760 and $49,252,
respectively, at December 31, 1996 and $76,807 and $332,866,
respectively, at December 31, 1995.
Where appropriate, the financial statements reflect the operating
results and balance sheet items of the discontinued operations
separately from continuing operations. Prior years have been restated.
Operating results for the discontinued operations were:
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
June 30, December 31,
--------------------------- -----------------------------------------
1997 1996 1995
--------------------------- ------------------- ------------------
($ in thousands)
<S> <C> <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 during the six
months ended June 30, 1997 or the years ended December 31, 1996 and
1995.
12. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123") was implemented in January 1996.
As permitted by FAS 123, ISSI retained its prior method of accounting
for stock compensation. As required by FAS 123, the following
information represents pro forma net income (loss)
Page 27 of 43
<PAGE> 28
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 during the six months ended June 30,
1997: no dividend yield, expected volatility of approximately 84%,
risk-free interest rates of approximately 6.5%, and expected lives of
approximately 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>
For the Six Months Ended For the Year Ended For the Year Ended
June 30, 1997 December 31, 1996 December 31, 1995
--------------------------- ----------------------- ------------------------
As Pro As Pro forma As Pro forma
reported forma reported reported
----------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $ (330) $ (368) $ (276) $ (307) $ (2,864) $ (2,874)
Loss
per Common Share $ (.05) $ (.05) $ (.05) $ (.05) $ (.71) $ (.71)
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not apply to awards prior
to 1995 and as additional awards are anticipated in future years.
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 1993 Stock Option 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.
In May 1997, the Company established the 1997 Omnibus Stock Plan (the
"Omnibus Plan") which provides for the grant of incentive stock options
("ISO's") within the meaning of the Internal Revenue Code, non-statutory
stock options ("NSO's"), stock appreciation rights ("SAR's"), awards of
stock ("Awards") and stock purchase opportunities ("Purchase Rights") to
directors, employees and consultants of the Company and its present and
future subsidiaries. The Omnibus Plan will remain in effect until May 1,
2007, subject to the Board's right to terminate it earlier.
Under the Omnibus Plan, ISO's may only be granted to employees or
directors of the Company; NSO's, SAR's, Awards and Purchase Rights may
be granted to any director, employee or consultant of the Company.
Recipients of ISO's, Awards and Purchase Rights are selected by the
Compensation Committee.
Page 28 of 43
<PAGE> 29
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A summary of stock option transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended For the Year Ended
June 30, 1997 December 31, 1996 December 31, 1995
---------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 874 $2.01 738 $2.21 687 $2.20
Granted 75 1.63 188 1.22 115 2.07
Forfeited (21) 2.02 (52) 1.95 (64) 1.90
----------- --------- ----------
Outstanding at
end of period 928 $1.98 874 $2.01 738 $2.21
=========== ========= ==========
Exercisable at
end of period 721 $2.11 663 $2.18 556 $2.26
Weighted-average fair
value of options
granted during the
period $1.14 $1.06 $1.40
</TABLE>
The following table summarizes information about the fixed-price stock
options outstanding at June 30, 1997 (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 6/30/97 Contractual Life Exercise Price At 6/30/97 Exercise Price
- -------------- -------------- --------------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.687-1.50 206 8.8 years $1.11 85 $1.05
$1.563-2.50 711 7.6 years 2.22 631 2.25
$2.719-3.53 11 9.6 years 2.74 5 2.72
-------------- --------------
928 $1.98 721 $2.11
============== ==============
</TABLE>
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 underwriter, Thomas James
Associates, Inc. ("Underwriter"). As of June 30, 1997, 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 of the underlying common stock. On
June 17, 1996, the Company repriced these warrants to $4.15 due to
obligations under the original warrant agreement. The holders are also
now entitled to purchase 1.6 shares of common stock per warrant held.
Again, on January 15, 1997, these warrants were repriced to $3.17 under
the same obligation and the holders are now entitled to purchase 2.1
shares of common stock per warrant held.
Also, in connection with the initial public offering, the Company issued
a warrant to the Underwriter 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
Page 29 of 43
<PAGE> 30
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
commencing April 20, 1994. Management believes that the exercise price
of the warrant at the date of grant approximated market value of the
underlying common stock. 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 per
warrant held. 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 per warrant held.
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 June 30, 1997, 33,000
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 June 30, 1997, 108,800 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 warrants 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 $13,201 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.
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.
The Company issued warrants to purchase 111,000 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, and 2002. Value was assigned to
these warrants totaling $40,000 which was expensed in 1996 and $45,000
which was expensed in 1997.
During 1997, the Company issued warrants for consulting and director
fees to purchase 21,334 shares of common stock at an exercise price of
$.01. Value was assigned to these warrants totaling $35,000 and was
expensed in 1997.
Page 30 of 43
<PAGE> 31
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of warrant transactions is as follows (share amounts in
thousands):
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended For the Year Ended
June 30, 1997 December 31, 1996 December 31, 1995
----------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 4,253 $3.03 2,218 $3.38 2,296 $3.32
Granted 66 1.63 1,590 1.05 60 .13
Exercised (68) .60 (599) .87 (138) 1.01
Repriced 870 3.14 1,044 4.04 -- --
----- ----- -----
Outstanding at
end of period 5,121 $3.07 4,253 $3.03 2,218 $3.38
===== ===== =====
Exercisable at
end of period 5,008 $3.08 4,199 $3.03 2,218 $3.38
Weighted-average
fair value of
warrants granted
during the period $.93 $1.57 $.76
</TABLE>
The following table summarizes information about the warrants
outstanding at June 30, 1997 (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 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
-------------- -------------- --------------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ .01-1.00 1,114 3.0 years $ .95 1,114 $ .95
$1.06-2.00 222 2.87 years 1.49 222 1.49
$2.40-4.15 3,785 2.0 years 3.78 3,672 3.82
----- -----
5,121 $3.07 5,008 $3.08
===== =====
</TABLE>
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 13,750 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
Page 31 of 43
<PAGE> 32
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 34,166
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 currently has
outstanding 3,500 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.
Page 32 of 43
<PAGE> 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning any matter of accounting
principle or financial statements disclosure between the Company and its
independent accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to
disclosure in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report ("Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Proxy Statement.
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits.
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.11 Amendment to Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.11 to the
Company's Form 10-KSB for the year ended December 31, 1994).
*3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen certificate for common stock of the Company.
*4.2 Specimen certificate for Redeemable Common Stock Purchase
Warrant.
*4.3 Warrant Agreement among the Company, American Stock Transfer
& Trust Company, and Thomas James Associates, Inc.
*4.4 Underwriter's Warrant.
**4.5 Certificate of Designation for Series A $20 Convertible
Preferred Stock.
**4.6 Certificate of Designation for Series B $20 Convertible
Preferred Stock.
**4.7 Certificate of Designation for Series C $20 Convertible
Preferred Stock.
**10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan
dated September 7, 1993, as amended on December 30, 1994.
Page 33 of 43
<PAGE> 34
*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.
*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).
Page 34 of 43
<PAGE> 35
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).
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.
***23.1 Consent of Price Waterhouse LLP.
***27 Financial Data Schedule
- -------------------
* Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-59870-FW) and
incorporated herein by reference.
** Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 333-5023) and
incorporated herein by reference.
*** Filed herewith.
(b) Reports filed on Form 8-K.
Form 8-K, filed May 15, 1997, reporting a change in the Company's
fiscal year.
Page 35 of 43
<PAGE> 36
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
INTEGRATED SECURITY SYSTEMS, INC.
------------------------------------------
(Registrant)
Date: September 25, 1997 /s/ GERALD K. BECKMANN
-------------------------- ------------------------------------------
Gerald K. Beckmann
Director, Chairman of the Board, President
and Chief Executive Officer
Page 36 of 43
<PAGE> 37
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
INTEGRATED SECURITY SYSTEMS, INC.
------------------------------------------
(Registrant)
Date: September 25, 1997 /s/ GERALD K. BECKMANN
-------------------------- ------------------------------------------
Gerald K. Beckmann
Director, Chairman of the Board, President
and Chief Executive Officer
Date: September 25, 1997 /s/ HOLLY J. BURLAGE
-------------------------- ------------------------------------------
Holly J. Burlage
Vice President, Principal Financial
Officer, Principal Accounting Officer,
Secretary and Treasurer
Date: September 25, 1997 /s/ JAMES W. CASEY
-------------------------- ------------------------------------------
James W. Casey
Director and Vice President
Date: September 25, 1997 /s/ ROBERT M. GALECKE
-------------------------- ------------------------------------------
Robert M. Galecke
Director
Date: September 25, 1997 /s/ JAMES E. JACK
-------------------------- ------------------------------------------
James E. Jack
Director
Date: September 25, 1997 /s/ FRANK R. MARLOW
-------------------------- ------------------------------------------
Frank R. Marlow
Director
Page 37 of 43
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.11 Amendment to Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.11 to the
Company's Form 10-KSB for the year ended December 31, 1994).
*3.2 Amended and Restated Bylaws of the Company.
*4.1 Specimen certificate for common stock of the Company.
*4.2 Specimen certificate for Redeemable Common Stock Purchase
Warrant.
*4.3 Warrant Agreement among the Company, American Stock Transfer
& Trust Company, and Thomas James Associates, Inc.
*4.4 Underwriter's Warrant.
**4.5 Certificate of Designation for Series A $20 Convertible
Preferred Stock.
**4.6 Certificate of Designation for Series B $20 Convertible
Preferred Stock.
**4.7 Certificate of Designation for Series C $20 Convertible
Preferred Stock.
**10.1 Integrated Security Systems, Inc. 1993 Stock Option Plan
dated September 7, 1993, as amended on December 30, 1994.
</TABLE>
Page 38 of 43
<PAGE> 39
<TABLE>
<S> <C>
*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.
*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).
</TABLE>
Page 39 of 43
<PAGE> 40
<TABLE>
<S> <C>
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).
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.
***23.1 Consent of Price Waterhouse LLP.
***27 Financial Data Schedule
</TABLE>
- -------------------
* Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-59870-FW) and
incorporated herein by reference.
** Filed as the similarly numbered exhibit to the Company's
Registration Statement on Form SB-2 (No. 333-5023) and
incorporated herein by reference.
*** Filed herewith.
Page 40 of 43
<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 Six Months For the Year
Ended June 30, Ended December 31,
------------------ ----------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Shares and share equivalents:
Weighted average number of shares of
common stock outstanding during period 7,188,764 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 7,188,764 5,122,878 4,014,108
============ ============ ============
Net earnings (loss) from continuing
operations $ (330) $ (299) $ (1,650)
Net earnings (loss) from discontinued
operations -- 22 (1,215)
------------ ------------ ------------
Net earnings (loss) $ (330) $ (277) $ (2,864)
============ ============ ============
Per share continuing operations $ (.05) $ (.05) $ (.41)
Per share discontinued operations -- -- (.30)
------------ ------------ ------------
Per share $ (.05) $ (.05) $ (.71)
============ ============ ============
</TABLE>
Page 41 of 43
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Company.
B&B Electromatic, Inc.
Golston Company, Inc.
Tri-Coastal Systems, Inc.
Innovative Security Technologies, Inc.
Automatic Access Controls, Inc.
Page 42 of 43
<PAGE> 1
Exhibit 23.1
Consent of Price Waterhouse LLP.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-89218) and
in the Registration Statement on Form S-8 (No. 33-59870-S) of Integrated
Security Systems, Inc. of our report dated August 8, 1997 appearing on page 13
of this Form 10-KSB.
PRICE WATERHOUSE LLP
Dallas, Texas
September 25, 1997
Page 43 of 43
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,581,191
<SECURITIES> 0
<RECEIVABLES> 2,457,596
<ALLOWANCES> 0
<INVENTORY> 867,898
<CURRENT-ASSETS> 5,273,847
<PP&E> 5,278,689
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,553,535
<CURRENT-LIABILITIES> 1,974,817
<BONDS> 0
0
172
<COMMON> 79,552
<OTHER-SE> 3,868,038
<TOTAL-LIABILITY-AND-EQUITY> 13,553,535
<SALES> 6,470,842
<TOTAL-REVENUES> 6,470,842
<CGS> 3,772,714
<TOTAL-COSTS> 3,772,714
<OTHER-EXPENSES> 2,677,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 389,540
<INCOME-PRETAX> (323,244)
<INCOME-TAX> 7,013
<INCOME-CONTINUING> (330,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (330,257)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
