<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) DECEMBER 31, 1996
INTEGRATED SECURITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DE 1-11900 75-2422983
State or other Commission I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
8200 SPRINGWOOD DRIVE, SUITE 230, IRVING, TX 75063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 444-8280
(Former name or former address, if changed since last report.)
Page 1 of 16
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On December 31, 1996, Integrated Security Systems, Inc. (the "Company")
acquired Golston Company, Inc. ("GCI") with approximate revenues of $3.9
million, a vertically integrated manufacturer of specialty products for the
financial and health care industries. This acquisition was accounted for as a
purchase and the Company's consolidated financial statements will be included
in Form 10-KSB for the year ended December 31, 1996. 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 purchase price was arrived at by
negotiation to achieve improved revenue, profits and liquidity for the company,
and retirement from the business for the seller. 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 with
two funds advised by Dallas-based Renaissance Capital Group, Inc. 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
through Perry, Nestman & Doshier, L.L.C., a financial advisory firm, at $1.10
per share. The Company intends to continue GCI operations as previously
conducted.
Item 7. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Integrated Security Systems, Inc.
Consolidated Pro Forma Statement of Operations for the years ended December 31, 1996 3
Report of Independent Accountants 4
Golston Company, Inc. Balance Sheets as of June 30, 1996 and 1995 5
Golston Company, Inc. Statements of Operations for the years ended June 30, 1996 and 1995 6
Golston Company, Inc. Statements of Stockholders' Equity for the years ended June 30, 1996 and 1995 7
Golston Company, Inc. Statements of Cash Flows for the years ended June 30, 1996 and 1995 8
Notes to Financial Statements 9-14
Golston Company, Inc.
Consolidated Statements of Operations for the six months ended December 31, 1996 15
</TABLE>
Page 2 of 16
<PAGE> 3
INTEGRATED SECURITY SYSTEMS, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(Unaudited)
($ in thousands, except per share amounts)
On December 31, 1996, the Company acquired all the outstanding capital stock of
GCI. The pro forma consolidated statement of operations for the year ended
December 31, 1996 is presented as if the Company had acquired GCI on January 1,
1996, and gives effect to the related financing. The pro forma consolidated
statement of operations should be read in conjunction with the financial
statements of the Company and GCI, including the related footnotes thereto,
appearing elsewhere in this Prospectus. The pro forma information is not
necessarily indicative of the results that would have been reported had such
events actually occurred on January 1, 1996, nor is it indicative of the
Company's future results. The pro forma information also does not reflect
either the issuance of shares in connection with this Offering and the
contemplated use of proceeds therefrom, or the conversion or exercise of any of
the Company's outstanding convertible preferred stock or warrants.
<TABLE>
<CAPTION>
Pro Forma
ISSI Golston Adjustments Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 9,054 $ 4,294 $ 13,348
Cost of Sales 5,184 1,535 432(A) 7,151
----------- ----------- ----------- -----------
Gross Margin 3,870 2,759 (432) 6,197
Operating Expenses 3,929 2,077 (890)(B) 5,116
----------- ----------- ----------- -----------
Income (loss) from Operations (59) 682 458 1,081
Other Income (Expense) (252) (37) (552)(C) (841)
----------- ----------- ----------- -----------
Income (loss) from Continuing
Operations Before Tax (311) 645 (94) 240
Income Tax 12 (234) 234(D) 12
Discontinued Operations 23 -- -- 23
----------- ----------- ----------- -----------
Net Income $ (276) $ 411 $ 140 $ 275
=========== =========== =========== ===========
Weighted Average Shares Outstanding 5,122,878 5,847,191
Net Income Per Share
Continued Operations $ (.05) $ 0.05
Discontinued Operations .00 0.00
----------- -----------
Total $ (.05) $ 0.05
=========== ===========
</TABLE>
NOTES TO CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro forma
adjustments necessary to give effect on a pro forma basis to the transaction
described above:
(A) Adjustment to depreciation of fixed assets arising from the Golston
acquisition based on useful lives varying from 3-7 years.
(B) Adjustment to depreciation of fixed assets arising from the Golston
acquisition based on useful lives of 5 years and goodwill amortization
reducted by an adjustment to operating expense for employees terminated
as of December 31, 1996 with consolidation of the businesses.
(C) Interest related to $6.1 million of obligation incurred in connection
with the acquisition with interest rate of 9%.
(D) Adjustment from utilization of parent company losses to offset federal
income taxes.
Page 3 of 16
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
September 30, 1996
To the Board of Directors and
Shareholders of Golston Company, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and stockholders' equity and of cash flow present fairly, in all
material respects, the financial position of Golston Company, Inc. at June 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Dallas, Texas
PRICE WATERHOUSE LLP
Page 4 of 16
<PAGE> 5
GOLSTON COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 124,901 $ 255,302
Accounts receivable 481,045 357,070
Interest receivable from related party 42,329 --
Inventories 409,839 508,724
Other current assets 61,216 36,306
---------- ----------
Total current assets 1,119,330 1,157,402
Property and equipment, net 2,048,720 1,836,652
Intangible assets, net 3,833 4,500
Note receivable from related party 671,824 --
Other assets 150 1,560
---------- ----------
Total assets $3,843,857 $3,000,114
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,090 $ 8,908
Accrued liabilities 169,576 208,630
Deferred revenue 135,515 144,267
Current portion of long-term debt 170,624 120,084
---------- ----------
Total current liabilities 520,805 481,889
---------- ----------
Long term liabilities:
Deferred tax liability 148,504 112,923
Long-term debt 594,857 464,965
---------- ----------
Total long term liabilities 743,361 577,888
---------- ----------
Stockholders' equity:
Common stock, $1.00 par
value, 100,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Retained earnings 2,578,691 1,939,337
---------- ----------
Total stockholders' equity 2,579,691 1,940,337
---------- ----------
Total liabilities and stockholders' equity $3,843,857 $3,000,114
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 5 of 16
<PAGE> 6
GOLSTON COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales and revenues:
Product sales $ 2,203,029 $ 2,074,110
Service revenues 1,688,313 1,492,776
----------- -----------
3,891,342 3,566,886
----------- -----------
Cost of sales and revenues:
Product sales 879,572 793,752
Service revenues 666,618 559,161
----------- -----------
1,546,190 1,352,913
----------- -----------
Gross margin 2,345,152 2,213,973
----------- -----------
Operating expenses:
Selling, general and administrative 1,290,244 1,254,421
----------- -----------
1,290,244 1,254,421
----------- -----------
Income from operations 1,054,908 959,552
Other income (expense):
Interest income from related party 42,329 --
Interest income 1,997 1,506
Interest expense (86,922) (79,635)
Other (23,765) (46,559)
----------- -----------
Income before income taxes 988,547 834,864
Provision for income taxes (349,193) (298,120)
----------- -----------
Net income $ 639,354 $ 536,744
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 6 of 16
<PAGE> 7
GOLSTON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
-----------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 1,000 $ 1,000 $1,402,593 $1,403,593
Net income 536,744 536,744
-----------------------------------------------
Balances at June 30, 1995 1,000 $ 1,000 $1,939,337 $1,940,337
Net income 639,354 639,354
-----------------------------------------------
Balances at June 30, 1996 1,000 $ 1,000 $2,578,691 $2,579,691
===============================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 7 of 16
<PAGE> 8
GOLSTON COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 639,354 $ 536,744
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 214,047 175,130
Amortization 667 667
Deferred income taxes 35,581 7,445
Changes in operating assets and liabilities:
Accounts receivable (123,975) (32,638)
Inventories 98,885 (45,470)
Other assets (23,500) (3,855)
Accounts payable 36,182 (54,687)
Accrued liabilities (39,054) (86,651)
Deferred revenue (8,752) 37,430
----------- -----------
Net cash provided by operating activities 829,435 534,115
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (426,115) (206,941)
Loan to related party (671,824) --
Interest receivable from related party (42,329) --
----------- -----------
Net cash used by investing activities (1,140,268) (206,941)
----------- -----------
Cash flows from financing activities:
Payments on notes payable and long-term debt (169,608) --
Proceeds from notes payable and long-term debt 350,040 (201,423)
----------- -----------
Net cash provided (used) by financing activities 180,432 (201,423)
----------- -----------
Increase (decrease) in cash and cash equivalents (130,401) 125,751
Cash and cash equivalents at beginning of year 255,302 129,551
----------- -----------
Cash and cash equivalents at end of year $ 124,901 $ 255,302
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 8 of 16
<PAGE> 9
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Golston Company, Inc. ("Golston" or the "Company") was founded in 1976
and incorporated as a Texas corporation in 1979. Its primary business
has been to design, manufacture, and supply pneumatic tube carriers to
the financial industry for use in the retail drive-up banking centers
for commercial banks, savings and loans, and credit unions. More
recently, the Company has expanded its pneumatic tube carrier business
to the medical services industry, supplying a proprietary line of
carriers to hospitals and other medical facilities. The Company
distributes its products through sales to original equipment
manufacturers of pneumatic carrier systems, to dealers and distributors,
and, through telemarketing, directly to end-users.
The Company's sales are primarily to the banking and hospital
industries. Sales are dependent on customer orders and requests.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of highly liquid instruments with
maturities of three months or less.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue from sales at the time of shipment. The
Company's accounts receivable are generated from a large number of
customers in the financial and medical services industries. Based on
management's analysis of accounts receivable, including consideration of
the Company's historical collection experience, no allowance for
doubtful accounts is necessary at June 30, 1996 or 1995. During 1996 and
1995, respectively, a single customer accounted for greater than 10% of
the Company's revenues ($600,000 and $650,000).
The Company records deferred revenue related to a service to provide the
use of temporary facilities in the event of a disaster by the retail
banking industry. Revenues related to these services is recognized
ratably over the term of the agreement.
INVENTORIES
Inventories consist of the costs of raw materials, work-in-process and
finished goods and are carried at the lower of cost using the first-in,
first-out method or market. Labor and overhead costs are allocated to
work-in-process and finished goods inventories based on total labor and
overhead costs divided by the number of units produced.
OTHER ASSETS
Other assets consist of certain prepaid expenses and the cash value of a
life insurance policy for an officer of the Company. The cash value of
the policy was $35,822 and $32,618 at June 30, 1996 and 1995,
respectively.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method. Estimated useful lives range from 3 to 20 years.
Page 9 of 16
<PAGE> 10
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill resulting from the acquisition of MPA Systems ("MPA") in 1987
is amortized using the straight-line method over a period of fifteen
years. Goodwill amortization for the years ended June 30, 1996 and 1995,
was $667 and $667, respectively. Accumulated amortization at June 30,
1996 and 1995 was $6,167 and $5,500, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's accounts receivable, notes
receivable, accounts payable, and long-term debt approximate the fair
values of such financial instruments.
ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual amounts could differ from these estimates.
STATEMENT OF CASH FLOWS
Supplemental cash flow information for the year ended June 30:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash paid for interest expense $ 86,922 $ 70,728
Cash paid for income taxes $ 391,013 $ 311,904
</TABLE>
Page 10 of 16
<PAGE> 11
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of certain balance sheet accounts is as follows at June
30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Inventories:
Raw materials $ 40,046 $ 94,686
Work-in-process 250,491 253,156
Finished goods 119,302 160,882
----------- -----------
$ 409,839 $ 508,724
=========== ===========
Property and Equipment:
Building and leasehold $ 509,273 $ 509,273
Automotive 5,477 14,060
Machinery and equipment 1,198,166 1,166,459
Office equipment 112,060 109,676
MPA Equipment and fixtures 62,686 48,823
MPA Units 1,320,275 917,067
MPA Unit in construction -- 16,590
Molds in progress 3,769 3,642
----------- -----------
3,211,706 2,785,590
Less: accumulated depreciation (1,162,986) (948,938)
----------- -----------
$ 2,048,720 $ 1,836,652
=========== ===========
Accrued liabilities:
Federal income taxes payable $ 91,218 $ 154,407
Accrued compensation 42,342 12,185
Customer damage deposits 23,060 24,145
Other 12,956 17,893
----------- -----------
$ 169,576 $ 208,630
=========== ===========
</TABLE>
Page 11 of 16
<PAGE> 12
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Term note payable to a bank; due in monthly principal
and interest installments of $7,397 through February
2000; interest at 10.24% at June 30, 1996 and 1995;
secured by
equipment; guaranteed by principal stockholder $ 207,364 $ 269,429
------------ ------------
Term note payable to a bank; due in monthly principal
and interest installments of $1,945 through April 1999;
interest at 11.31% at June 30, 1996 and 1995; secured
by
equipment; guaranteed by principal stockholder 58,301 74,066
Term note payable to a bank; due in monthly principal
and interest installments of $1,673 through October
2002; interest at the lender's prime rate plus 1%
(10.25% at June 30, 1996); secured by buildings;
guaranteed by
principal stockholder 93,259 --
Term note payable to a bank; due in monthly principal
and interest installments of $1,673 through October
2002; interest at the lender's prime rate plus 1%
(10.25% at June 30, 1996); secured by buildings;
guaranteed by principal stockholder 93,259 --
Term note payable to a bank; due in monthly principal
and interest installments of $1,669 through November
2002; interest at the lender's prime rate plus 1%
(10.25% at June 30, 1996); secured by buildings and
accounts receivables; guaranteed by principal stockholder 92,843 --
Term note payable to a bank; due in monthly principal
and interest installments of $7,448 through July 1998;
interest at the lender's prime rate plus .5% (10.5% at
June 30, 1996 and 9.87 % at June 30, 1995); secured by
buildings; guaranteed by principal stockholder 171,204 241,554
Term note payable to a bank; due in monthly principal
and interest installments of $825 through April 2003;
interest at the lender's prime rate plus 1% (10.25% at
June 30, 1996); secured by buildings; guaranteed
by principal 49,251 --
------------ ------------
stockholder
765,481 589,049
Less current portion (170,624) (120,084)
------------ ------------
Long-term portion $ 594,857 $ 464,965
============ ============
</TABLE>
Page 12 of 16
<PAGE> 13
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Payments required under all long-term debt outstanding at June 30, 1996
are as follows:
<TABLE>
<CAPTION>
Fiscal years ended June 30:
<S> <C> <C>
1997 $ 170,624
1998 209,206
1999 141,279
2000 101,213
2001 57,478
Thereafter 85,681
--------------
$ 765,481
==============
</TABLE>
5. INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal $295,218 $290,675
State 18,394 --
-------- --------
$313,612 $290,675
-------- --------
Deferred:
Federal $ 35,581 $ 7,445
State -- --
-------- --------
35,581 7,445
-------- --------
Tax expense $349,193 $298,120
======== ========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the federal statutory tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Tax expense at federal statutory rate $ 345,991 $ 292,202
State income tax provision, net of federal tax 12,140 --
benefit
Permanent differences 4,037 1,380
Other (12,975) 4,538
--------- ---------
$ 349,193 $ 298,120
========= =========
</TABLE>
Page 13 of 16
<PAGE> 14
GOLSTON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets are subject to a valuation allowance if their
realization is less likely than not. Deferred tax assets (liabilities)
are comprised of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Gross deferred tax liability - Depreciation $(226,472) $(173,166)
--------- ---------
Inventory 21,693 11,193
Deferred income 46,075 49,050
Bonus Accrual 10,200 --
--------- ---------
Gross deferred tax asset 77,968 60,243
Valuation allowance -- --
--------- ---------
Net deferred tax liability $(148,504) $(112,923)
========= =========
</TABLE>
6. CONTINGENCIES
An officer of the Company has alleged that the Company has breached an
oral agreement to sell the Company to the officer and has asserted a
claim for emotional distress. The Company is disputing these claims.
Management believes that the maximum loss contingency is immaterial.
7. RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 1996, a note receivable in the
amount of $671,824 resulted from a transaction between the Company and
Golston Family Partners Ltd. for the purpose of Golston Family Partners
Ltd. purchasing the MPA Modular, L.L.C. manufacturing business. The
Company's shareholder and President owns an interest in Golston Family
Partners Ltd. and MPA Modular, L.L.C. Accrued interest receivable of
$42,329 is recorded at June 30, 1996. The note bears interest at 10.25%
and is scheduled for repayment, including accrued interest, upon the
sale of Golston. The note is unsecured.
8. PENDING SALE OF COMPANY
The Company's Board of Directors has approved the sale of the Company to
Integrated Security Systems, Inc. ("ISSI") effective October 24, 1996.
ISSI is purchasing all of the stock of the Company and the real estate
and property currently leased by the Company from Golston Family
Partners Ltd.. These financial statements do not reflect any adjustments
arising from this pending acquisition.
Page 14 of 16
<PAGE> 15
GOLSTON COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months ended December 31, 1996
($ in thousands)
<TABLE>
<S> <C>
Sales $ 2,084
Cost of sales 902
-------
Gross profit 1,181
Operating expenses:
Selling, general and administrative 726
-------
Net Operating Income 455
Other income (expense) (2)
-------
Net income before tax 453
Income tax provision (150)
-------
Net income $ 303
=======
</TABLE>
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Integrated Security Systems, Inc.
(Registrant)
March 10, 1997 /s/ Gerald K. Beckmann
- ------------------ ------------------------------------
(Date) Gerald K. Beckmann
Chairman, President and CEO
Page 16 of 16
